Facing a backlash from audit firms over its proposal to toughen the standards for failing to detect noncompliance with laws and regulations, the Public Company Accounting Oversight Board has decided to delay action on the standard this year.

The PCAOB proposed the so-called NOCLAR standard in June, with the goal of strengthening its requirements for auditors to identify, evaluate and communicate possible or actual noncompliance with laws and regulations, including fraud. However, the proposed standard provoked resistance from a number of auditing firms and state CPA societies like the Pennsylvania Institute of CPAs and spurred a comment letter-writing campaign organized by the Center for Audit Quality and the U.S. Chamber of Commerce that was supported by prominent business trade groups like the American Bankers Association, the Business Roundtable, the Retail Industry Leaders Association and more. 

Earlier this week, the PCAOB issued staff guidance outlining the existing responsibilities of auditors to detect, evaluate and communicate about illegal acts. The PCAOB was slated to finalize the NOCLAR standard by the end of this year, but after the election it has put the standard on hold for now, anticipating the upcoming change in the administration in Washington, D.C.

“Following the recent issuance of staff guidance, the PCAOB will not take additional action on NOCLAR this year,” said a PCAOB spokesperson. “We will continue engaging with stakeholders, including the SEC, as we determine potential next steps. As our process has demonstrated, the PCAOB is committed to listening to all stakeholders and getting it right.”

One reason for the change of plans is that the PCAOB anticipates changes in the regulatory environment under the Trump administration, especially in the Securities and Exchange Commission, which would have to approve the final standard before it could be adopted. The Trump administration is likely to replace SEC chairman Gary Gensler, who has spearheaded many of the increased regulatory efforts at the Commission and encouraged the PCAOB to update its older standards and take a tougher stance on enforcement and inspections. President-elect Trump, in contrast, has promised to eliminate regulations, and Gensler’s push for increased regulation has attracted the ire of many in the financial industry.

According to a person familiar with the PCAOB process, no further action is expected until further consultation with the SEC under the incoming administration can take place. 

Questions have arisen over whether the PCAOB might decide to repropose the standard with modifications given the amount of opposition it has attracted. That is to be determined pending review of the comment letters that have been received, as well as a roundtable from earlier this year, along with responses from targeted inquiries from firms in their approach relating to NOCLAR. 

PCAOB board members Christina Ho and George Botic were asked about the NOCLAR proposal on Wednesday at Financial Executives International’s Current Financial Reporting Insights Conference, and Ho acknowledged the pushback. 

“We’ve heard strong opposition from the auditing profession, public companies, audit committees, investors, academics and others,” said Ho. “The PCAOB has received 189 individualized comments to date on that proposal. This proposal now has the third highest number of comment letters in the history of PCAOB. That did get a lot of attention. Commenters overwhelmingly called for a reproposal or withdrawal of the proposed standard so that that is definitely something that I am looking at a lot, and I also voted against the proposal. I have spoken to various stakeholders, including investors, audit committee chairs and members, and some preparers as well. The question I got asked repeatedly was, what problem is PCAOB trying to solve? And the people I spoke to believe that there have been improvements in financial reporting quality over the past 20 years, and that obviously is consistent with the CAQ study noting a consistent decline in restatements. While there’s always room for improvement, they noted that a balance is necessary between increased investor protection and increased auditor implementation costs that are ultimately passed on to issuers, and that the NOCLAR proposal lacks such a balance. That is what I have heard from the comment letters, so that pretty much summarizes what I have seen, and I’m still obviously thinking about it.”

Botic noted that the proposal came before he joined the board, but he referred to the staff guidance that had been issued earlier in the week by the PCAOB on the existing requirements.

Last week, the PCAOB updated its standard-setting and rulemaking agendas before the outcome of the election was known. Now with the uncertainty over the regulatory environment, the PCAOB is mindful of the difficulty of having the SEC decide on whether to approve it, especially if the five-member commission becomes evenly split among two Republican members and the two Democrats if Gensler departs or is ousted. The PCAOB feels the SEC needs adequate time to review and educate itself on the proposed standard, rather than having to jam it through a two-two commission, especially with the amount of engagement that will need to take place given such an important standard, according to a person familiar with the matter.

The PCAOB expects it to remain on the docket for 2025 but doesn’t want to try to jam it through this year. However, the PCAOB announced Friday that it has scheduled an open board meeting next Thursday, Nov. 21, on another proposed standard on firm and engagement metrics, which has also provoked pushback from many commenters, but is still slated to be finalized this year.

Accountants are increasingly being asked to deal with sustainability issues as more businesses are called upon by investors to report on how they are dealing with issues like climate change and carbon emissions.

This week, amid the United Nations COP29 climate change conference in Azerbaijan, business leaders have been playing a larger role, including fossil fuel companies, prompting an open letter on Friday from environmental groups calling for reforms in the COP process. 

ESG standard-setters have also been playing a role at COP, with groups like the Global Reporting Initiative and the Carbon Disclosure Project signing a memorandum of understanding to deepen their collaboration on making their standards interoperable as the International Sustainability Standards Board reported progress on growing acceptance of its standards by 30 jurisdictions around the world.

Last month, the Institute of Management Accountants released a report on why business sustainability depends on the competencies of management accountants. The report discusses the critical areas in which management accountants are crucial to ensuring sustainability within their organizations, along with how existing accounting capabilities support sustainable business.

“The main focus and the main attention right now in the ESG field is going to compliance, to the reporting parts,” said Brigitte de Graaff, who chaired the IMA committee that authored the report. “There are a lot of rules and regulations out there.” 

For right now, those rules and regulations are mostly voluntary in the U.S., especially with the Securities and Exchange Commission’s climate disclosure rule on hold. But in the European Union, where de Graaff is based in Amsterdam, companies have to comply with the Corporate Sustainability Reporting Directive. 

“In Europe, of course, there is not a lot of voluntary reporting for the larger companies anymore, but it’s all mandatory with a huge amount of data points and aspects that they need to report, so there’s a lot of focus right now on how to comply with these rules and regulations,” said de Graaff. “However, there’s also a lot of discussion going on about whether it should be about compliance. What’s the reason for reporting all these aspects? For us what was really important was that there is a lot of opportunity for management accountants to work with this kind of information.”

She sees value beyond purely disclosing ESG information. “If you use this information, and you integrate this in your organization, there’s much more value that you can get out of it, and it’s also much more part of what kind of value you are creating as an organization, and it’s much more aligned with what you were doing,” said de Graaff. 

The report discusses the benefits of the information, and how management accountants can play an important role. “You can use and integrate this in your FP&A and your planning processes,” said de Graaff. “You can integrate this kind of information in your strategy, something that management accountants are very well equipped for, but also to track performance and see how you’re actually achieving your goals, not only on financial aspects, but also on these nonfinancial aspects that are much broader than the E, S and G factors.”

The report discusses how to go beyond the generic environmental, social and governance parts of ESG to understand how they relate to a business’s core operations and make it more sustainable.

Management accountants can even get involved in areas such as biodiversity. “Even though, as a management accountant, you might not be an expert on marine biology and what the impact of your organization is underwater, you are able to tell what are the checks that have been performed on this,” said de Graaf. “Is this a common standard? Is this information that is consistently being monitored throughout the organization? Or is it different and what are the benchmarks? What are the other standards? These kinds of processes are something that management accountants are well aware of, and how they can check the quality of this information without being a subject matter expert on every broad aspect that may entail in this ESG journey that an organization is on.”

ESG can become part of the other work that management accountants are already involved in performing for their organizations.

“Ultimately there are a lot of competencies that management accountants were already doing in their organization, and ESG might sometimes seem unrelated, but it basically ties in into the competencies that we already know,” said de Graaff. “I hope that with this report, we can also show that the competencies that we are so familiar with, that we’ve been dealing with other strands of financial information, that you can basically also use these competencies in the ESG arena. Even though there’s a lot that seems very new, if you are aware of how you can tie that in, you can use the skills that you already have, the skill set that you have as a management accountant, to really improve your risk management processes, your business acumen, your operational decision making, etc. I hope that with this publication, we can also take away a little bit of the big fear that might be around a huge topic, as ESG is now. This is actually just a very interesting and exciting way to look at this kind of information, and we are very well equipped to help organizations navigating through this changing ESG regulation world.”