Wall Street regulator approves tougher rules for accounting ‘negligence’

Wall Street’s top regulator voted 3-2 on Tuesday to bless the new rules, which make it easier for an audit watchdog to prosecute people responsible for audit firms’ wrongdoing.

Divided along party lines, the five-member US Securities and Exchange Commission approved a rule change adopted in June by the US Public Company Accounting Oversight Board.

Under the rule, audit firm employees, partners, independent contractors and others who substantially contribute to a firm’s violations can be held liable for negligence rather than the higher recklessness standard.

SEC Chairman Gary Gensler said the change would harmonize the auditor accountability standards used by the PCAOB with those used by the SEC and would mean that auditors and the firms they work for are now held to the same standard.

Republican commissioners disputed the need for the rule and criticized the process used to bring it to a vote.

“The PCAOB can and already does pursue individual misconduct under existing rules,” said Republican Commissioner Hester Peirce. “The SEC, state boards of accounting and auditing firms can already respond to individuals’ negligent contributory behavior.”

Peirce added that the tougher rule could discourage people from working in an industry that already needs employees.

In the wake of the Enron-era accounting scandals, Congress created the PCAOB in 2002 to oversee the work of auditing firms, but its rules and standards are subject to SEC approval.

The SEC also unanimously approved two sets of new PCAOB accounting standards on auditor general responsibilities and technology-assisted audits on Tuesday.

The general principles reinforce standards adopted 21 years ago and state auditor responsibilities such as the need to exercise due professional care and skepticism.

The second set of standards aims to modernize technology-assisted audit procedures by requiring auditors to ensure the use of reliable information. Among other changes, according to the PCAOB, this may include ensuring that auditors test a company’s overall IT controls and automated applications.

(Reporting by Douglas Gillison; Editing by David Gregorio)