The Public Company Accounting Oversight Board (PCAOB) released exposure draft PCAOB Release 2023-003, “Amendments to PCAOB Auditing Standards Related to a Company’s Noncompliance with Laws and Regulations (NOCLAR),” in June 2023 (https://tinyurl.com/bdck3kcj). The proposal raised significant controversy. As reported by Bloomberg Tax on November 15, 2024, investors were generally in favor of the proposal, but it faced sharp criticism from auditors and corporate leaders (A. Iacone, “US Audit Board Shelves Rule Rewrite on Flagging Illegal Acts,” Bloomberg Tax, Nov. 15, 2024, https://tinyurl.com/mryvb2cf). Despite this opposition, the PCAOB seemed determined to move the proposal forward. Fortunately—in the minds of many—the proposal was put on hold in the wake of last year’s federal election. But the accounting profession should not assume this proposal will not be brought forward again. Therefore, even though the PCAOB’s NOCLAR proposal has been put on hold due to the recent broad-based shift toward reduced regulation and oversight, the proposal could still resurface at some date in the future.
The NOCLAR proposal is currently listed as a “Short-Term Standard Setting Project” on the PCAOB’S website (PCAOB, n.d., “Standard-Setting, Research, and Rulemaking Projects,” Accessed Aug. 27, 2025, https://tinyurl.com/yc5pa2ad). It should be noted, however, that two of the PCAOB’s proposals aimed at increasing audit regulation, which had been submitted to the SEC for consideration in November 2024, “Firm Reporting” and “Firm and Engagement Metrics,” were formally withdrawn on February 11, 2025 (https://tinyurl.com/yc5pa2ad). The NOCLAR proposal was not withdrawn, however–it was only put on hold, where it remains at press time. This article will present a brief overview of the proposed NOCLAR standard and its potential impact on various aspects of the accounting profession—public and private practice, higher education, and the CPA Exam—should it be moved out of hibernation.
Overview of PCAOB Release 2023-003
The PCAOB’s mission is to protect the public. Under the PCAOB’s proposed NOCLAR standard, significant penalties and fines can result from the violation of various laws and regulations, such as environmental regulations and anti-money laundering regulations, that are against the public interest. In addition, the PCAOB proposal contends that investors become “confused” by the separation of direct from indirect financial statement effects and that such separation exists to benefit the auditor by establishing boundaries on the responsibilities of auditors, there-by limiting the audit procedures that must be performed. NOCLAR aims to address these concerns.
In place of “illegal acts,” PCAOB’s proposed NOCLAR standard defines “noncompliance with laws and regulations” very broadly:
An act or omission, intentional or unintentional, by the company whose financial statements are under audit, or by the company’s management, its employees, or others that act in a company capacity or on the company’s behalf, that violates any law, or any rule or regulation having the force of law. Noncompliance with laws and regulations includes fraud as described in paragraph .05 of AS 2401, Consideration of Fraud in a Financial Statement Audit (pp. 23 – 24).
Impact on the Accounting Profession
Under NOCLAR, an auditor’s responsibility would be significantly increased. Auditors would now become responsible for identifying all sorts of noncompliance with laws and regulations across a multitude of areas, such as:
- securities laws and regulations,
- environmental laws and regulations,
- bribery laws,
- privacy laws and regulations,
- occupational health and safety laws and regulations,
- anti-money laundering laws and regulations,
- antitrust laws and regulations,
- food drug and administration laws and regulations, and
- employment and consumer safety laws and regulations (PwC, “PCAOB Proposes Significant Expansion of Auditor Responsibilities,” June 28, 2023, https://tinyurl.com/yc3dnvp9).
The major difference between current requirements and NOCLAR is with the scope of legal compliance (M. Friedlich, “Concerns Abound Over NOCLAR Proposal to Widen Auditor’s Duties,” Wolters Kluwer, May 23, 2024, https://tinyurl.com/ujbh3ef4). Existing standards, such as AS 2405, “Illegal Acts by Clients,” already mandate that auditors carry out procedures to identify illegal acts that have a direct and material financial statement impact. Existing standards mandate significantly less inquiry into illegal acts involving violations of law or regulations that may only have an indirect financial statement impact (T. W. White, “PCAOB Proposes New Auditing Standard for Noncompliance with Laws and Regulations,” Business Law Today, pp. 81–84, June 2023). Additionally, a significant increase in audit procedures would be required (Y. M. Rechtman, and S. O’Callaghan, “The ‘Controversial’ NOCLAR Proposal,” The CPA Journal, March/April 2024, https://tinyurl.com/4ahbssj3). Also, NOCLAR specifically includes the detection of fraud as the auditor’s responsibility.
Many critics of NOCLAR believe that the proposed standard places an unreasonable expectation on auditors, who are trained in accounting, not law. The proposed standard would require an auditor to determine whether non-compliance has or may have transpired. If an auditor determines that other knowledge or skills are needed, the auditor would be required to refer to other PCAOB standards regarding the use of specialists for an audit. According to an initial comment letter submitted to the PCAOB by Deloitte, NOCLAR “requires auditors to have legal acumen and expertise beyond their core competencies, and may create conflicts with the legal profession including introducing risks that auditors may engage in the unauthorized practice of law” (Deloitte, “Comment Letter to PCAOB Regarding PCAOB Rulemaking Docket Matter No. 051, Letter #56,” Aug. 7, 2023, https://tinyurl.com/bdesxv25).
There is also legitimate concern that this would result in very costly audits, morphing them into expensive, large-scale pursuits and distracting attention from the auditor’s crucial role of certifying the accuracy of financial statements (Friedlich 2024). According to Allison Henry, the vice president of professional and technical standards at the Pennsylvania Institute of Certified Public Accountants, the possible impact of this proposal would involve all publicly traded companies and the accounting firms they hire (“Why the Profession Needs to Say No to NOCLAR,” Accounting Today, Mar. 18, 2024, https://tinyurl.com/3898sstp). For example, if a publicly traded company sells products to customers, the audit team would need to consider laws and regulations established by the United States Food & Drug Administration, National Labor Relations Board, Consumer Product Safety Commission, Environmental Protection Agency, Federal Trade Commission, and the Occupational Safety and Health Administration.
The audit team would also need to evaluate the applicable state, local, and foreign laws and regulations of the location where the company’s goods are manufactured and sold. After considering these numerous laws and regulations, the audit team would then need to determine if a non-compliance act occurred and assess the potential impact of the non-compliance (Henry 2024). Duane M. DesParte, one of the two board members who oppose the proposed standard, faulted the proposal in part because laws are complex, constantly change, and encompass a multitude of areas such as foreign corrupt practices, consumers, employment, health, safety, corporate governance, securities, trade, markets, contracts, taxes, environmental, privacy, mergers and acquisitions, intellectual property, and others. Auditors do not have the legal expertise to analyze such laws (Board Member Duane M. DesParte, “Remarks Made at PCAOB Open Board Meeting, Statement on Proposal to Amend PCAOB Auditing Standards Related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments,” June 6, 2023, https://tinyurl.com/44j5vt5n).
Furthermore, Mintzer (2024) discusses how NOCLAR would impact CPAs in both public practice and business, and he provides the following as just some examples of potential scenarios that could arise, necessitating further action under NOCLAR (A. Mintzer, “Navigating the CPA Ethical Landscape: Understanding the New NOCLAR Interpretation,” California CPA, vol. 92, no. 10, pp. 16–17, 2024):
- You are walking through your employer’s or client’s plant and notice that harmful waste material may have been inappropriately disposed of.
- While at the entity’s workplace, you become aware of possible labor law violations, such as discrimination that may be taking place.
- While working at your employer’s or client’s facilities, you come across information suggesting a data breach, and you believe that your employer or client has not followed the law by appropriately contacting those individuals who the security breach has impacted.
- A client’s employee received a federal grant, and based upon your understanding of the law, you believe the employee inappropriately spent the money.
Impact on Higher Education
While numerous issues need to be addressed regarding the unrealistic expectations that the NOCLAR proposal would impose upon the accounting profession—in particular, auditors—and the technical problems that would result if it were to become effective, the profession must also consider the educational impact of this proposal. As stated by KPMG in its comment letter to the PCAOB, NOCLAR would necessitate auditors to “identify complete populations of all laws and regulations applicable to the Company” and that “auditors may never be able to meet those requirements given the sheer number and variety of laws and regulations that impact companies” and lack of sufficient resources, such as specialists, to comply with the proposed standard (KPMG, “Comment Letter to PCAOB Regarding PCAOB Rulemaking Docket Matter No. 051, Letter #92,”Aug. 7, 2023, https://tinyurl.com/bdesxv25).
If auditors are expected to be aware of noncompliance with any law or regulation, accounting majors will need to be educated on numerous laws within various jurisdictions. Examples of areas of law that accounting majors would need to study include:
- Commercial laws
- Environmental and energy laws
- Food & Drug Administration laws
- Occupational Safety & Health Administration (OSHA) laws
- Securities laws
- Labor laws
- Intellectual property laws
- International laws
- Education laws
- Tax laws
- Antitrust laws
- Sports and entertainment laws
- Trust and estate laws.
According to a recent survey of the top 50 accounting programs in the United States (as identified by the Big Four), these programs typically only require three semester hours of business law (R. B. Griffin, P.H. Moore, and B. J. Elam, “Analysis of the Best Forty-Eight Undergraduate Accounting Programs of 2023-2024 in the United States,” International Journal of Accounting, Economics, and Finance Perspectives, vol. 3, no. 1, Winter 2023). The most common course is a survey course of the legal environment of business that surveys many areas of law, such as intentional torts, property, employment law, and negligence. Some schools offer a legal studies course on the Uniform Commercial Code, emphasizing property leases and contracts involving merchandise sales. This minimal exposure to law would not be sufficient to provide entry-level accountants with the legal background necessary to comply with NOCLAR. Consequently, if this proposal passes, accounting programs would need to significantly enhance the breadth and depth of legal studies coverage in accounting curriculums. Other topics that may be covered include labor and employment issues, antitrust, regulatory agencies, and environmental law. But three or even six semester hours do not provide faculty with the time to cover what would be required to give an entry-level accountant the knowledge and skills necessary under the NOCLAR proposal.
To provide CPA candidates with a sufficient background to identify noncompliance with various laws, accounting programs would have to require more legal studies courses and significantly enhance existing courses. Unfortunately, the NOCLAR proposal requires more than simple awareness of the existing laws. A simple awareness may work at the Big Four, where an auditor can consult with the firm’s attorneys when there appears to be noncompliance with a law or regulation. Firms that do not have staffed attorneys, however, will either need to be familiar with the details of various laws and regulations or hire an outside legal consultant. Small firms typically do not have such resources. As stated by Bobrow, Spencer, and Silverberg:
If the auditor determines that specialized skill or knowledge outside of accounting and auditing is needed to assist the auditor in evaluating noncompliance with laws and regulations, the proposed standard will require the auditor to appoint and properly supervise legal counsel (“The PCAOB Adopts New Standards: How Accounting Firms Can Comply,” Nixon Peabody, Oct. 16, 2023, https://tinyurl.com/p9fxk6an).
NOCLAR would also significantly raise the risk of legal liability for accountants. At a time when the accounting profession is facing a dire shortage of accountants, due to the significant decline in accounting majors (J. A. Burke, and R. S. Polimeni, “The Accounting Profession is in Crisis,” The CPA Journal, September/October 2023, pp. 6–8) and a large number of CPAs are at or near retirement age, the authors believe NOCLAR would have the potential of discouraging students from selecting accounting as a major if additional legal courses are added to the curriculum with the potential of increasing the number of credits required for graduation (B. Oliver and C. Vanover, “Opinion: Our Obsession with Hours is Destroying the Accounting Profession,” CPA Practice Advisor, April 12, 2023).
Business Law on the CPA Exam
Passing the CPA Exam has traditionally been viewed as one of the primary ways of assuring that entry level accountants possess the necessary skills and competencies needed to practice in public accounting. Business law has been a part of the CPA Exam since its inception, but the coverage has been diminishing over time (M. C. Kocakülâh, A. D. Austill, and B. J. Long, “The Business Law Education of Accounting Students in the USA: The Accounting Chairperson’s Perspective,” Accounting Education, March 2008). The most recent exam blueprints show that business law is only a small component of the exam (“Uniform CPA Examination Blueprints,” AICPA, 2024). There was a time when entry-level CPA candidates were expected to have a more detailed knowledge of business law, as indicated by a separate business law section that used to exist on the CPA Exam. Over the past several decades, however, the coverage of business law has been significantly reduced on the exam.
In 2004, the Uniform CPA Examination was substantially reorganized, with the business law section being eliminated as a separate section; coverage of the topic was significantly reduced as well as moved into the new Regulation Section. For example, the Exhibit compares the content and allocation of the Business Law & Professional Responsibilities covered in CPA review courses when business law was tested in a dedicated section, prior to the 2004 exam changes, as compared to the new topics on the 2024 Regulation (REG) exam.
EXHIBIT
Business Law Topics Covered in CPA Review Materials
Few experienced and entry-level accountants have an adequate legal background to evaluate noncompliance with the laws and regulations that the standard would require.
The Uniform CPA Examination has four distinct parts that must be passed. As noted in the table, the new 2024 CPA Exam covers business law as 15–25% of the Regulation part, which amounts to a maximum of approximately 6% (25% × 25%) of the total CPA Exam. Prior to 2004, Business Law made up 25% of the total CPA Exam. Thus, if NOCLAR goes into effect, it would raise issues and concerns about the adequacy of the current exam content to assess the necessary knowledge and skillsets of CPA candidates. Tysiac explains that the CPA Exam must change as laws and regulations affecting accountants change (K.Tysiac, “Getting it Right: Crafting the CPA Exam,” Journal of Accountancy, vol. 226, no. 6, pp. 1–5, 2018, https://tinyurl.com/2cs2kdb7).
The Uniform CPA Examination aims to protect the public by ensuring that entry-level candidates possess the knowledge and skills necessary for a career in public accounting (NASBA, “CPA Exam,” https://nasba.org/exams/cpaexam). NOCLAR would require auditors to possess expertise significantly beyond what is currently tested in the CPA Exam due to the additional complex legalities imposed by the proposed standard. As a result, to appropriately assess the knowledge and skills of CPA candidates, additional legal topics would need to be tested on the CPA Exam if NOCLAR were to go into effect. The legal part of the CPA Exam would need to be expanded, requiring more testing time, or some other topics would need to be eliminated to make room for additional legal coverage. In fact, a separate required core section of law, as it was before 2004, would possibly need to be added to the CPA Exam, or many additional law topics would need to be added to the REG or auditing section.
Unrealistic Expectations
Increasing legal complexity, globalization, technological advancements, and an unpredictable regulatory environment are all challenges in today’s business environment. It is understandable to expect auditors to have a basic understanding of business law. But one problem with the PCAOB’s NOCLAR proposal is that few experienced and entry-level accountants have an adequate legal background to evaluate noncompliance with the laws and regulations that the standard would require. Requiring auditors to detect noncompliance “that violates any law or any rule or regulation having the force of law,” as proposed by NOCLAR, sets unrealistic expectations of auditors. While many auditors may be relieved that NOCLAR has been shelved at present, the profession should be prepared for the possibility that this proposed standard may resurface.
