The Public Company Accounting Oversight Board’s (PCAOB) NOCLAR proposal aims to expand auditor requirements for public companies to evaluate potential noncompliance with laws and regulations. The amendments, proposed in early 2023, were open for a two-month comment period that closed in early August.
The proposal essentially expands the requirement of auditors for public companies to identify any noncompliance with laws and regulations with likely material impact on the financial statements. This will involve a judgment call by the auditors as to what is in fact material to the financial statements.
The proposed NOCLAR amendments received substantial feedback and spurred conversations on long-term impact on organizations and internal control processes. There is also the question of conflicts between the proposal and existing rules and regulations by the Securities and Exchange Commission (SEC). If the proposal is issued as a final standard by the PCAOB, then the SEC will also review the broadened scope for auditors and will need to approve the standard before it is effective.
If the proposal is finalized, then one significant effect will likely be additional time and effort on the part of auditors to examine material impacts and potential noncompliance with laws and regulations.
Additionally, it is presumed that management will need to provide information that could encompass documentation of processes, documentation, flowcharts, risk identification, and control/monitoring evidence, which will be subject to audit. This will ultimately increase both auditing fees and internal control and compliance efforts for companies.
Currently, the PCAOB is reviewing feedback received during the comment period, and the timeline and subsequent steps for implementing NOCLAR are unclear. However, likely impact, developments, and conversations need to be on the radar.
