Wall Street regulator approves tougher rules for accounting 'negligence'

By Douglas Gillison

(Reuters) -Wall Street's top regulator on Tuesday voted 3-2 to bless new rules making it easier for an audit watchdog to hold people responsible for audit firms' violations.

Divided along party lines, the five-member U.S. Securities and Exchange Commission approved a rule change adopted in June by the U.S. 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 standard of recklessness.

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

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

"The PCAOB already can and does pursue individual misconduct under existing rules," said Republican Commissioner Hester Peirce. "The SEC, state accountancy boards and audit firms already can respond to individuals' negligent contributory conduct."

Peirce added that the tougher rule could discourage people from working in an industry already in need of recruits.

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

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

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

The second set of standards are intended to modernize technology-assisted audit procedures, calling on auditors to ensure the use of reliable information. Among other changes, according to the PCAOB, this can include ensuring that auditors test a company's general IT and automated app controls.

(Reporting by Douglas Gillison; Editing by David Gregorio)