The U.S. Chamber of Commerce and a group of 27 other major corporations and business trade associations have sent a letter to the Securities and Exchange Commission urging the SEC not to finalize the Public Company Accounting Oversight Board’s proposed changes to audit reports.
The Chamber of Commerce’s Center for Capital Competitiveness first submitted an earlier comment letter to the SEC ahead of a deadline last week for feedback on the PCAOB’s proposed standard (see Groups weigh in with SEC on PCAOB audit report standard). The Chamber of Commerce then organized a joint letter with other powerful corporations and businesses and submitted it on the deadline last Friday to persuade the SEC to reject the new standard.
In June, the PCAOB voted to approve a new standard that would significantly change the auditor’s reporting model, adding a section discussing “critical audit matters” (see PCAOB makes major changes to auditor’s report). The critical audit matters would include those issues that involve “especially challenging, subjective or complex auditor judgment.” Auditors would also need to disclose their tenure in terms of how many years they have consecutively audited a company.
However, the Chamber of Commerce and the other business groups argue that the standard, if approved, could hurt public companies. Among the signatories are major companies and organizations such as American Tower Corporation, Ameriprise Financial, Chevron, FedEx, Halliburton, Nasdaq, Nike, UnitedHealth and UPS, and business trade groups such as the American Insurance Association, the Equity Dealers of America, the Financial Services Roundtable, the Retail Industry Leaders Association, the Securities Industry and Financial Markets Association.
“We support efforts to provide useful information to the users of financial statements, as it enhances the trust and confidence in the financial markets that rely upon them,” they wrote. “However, we have serious concerns that the requirements for Critical Audit Matters (‘CAM’ or ‘CAMs’) will result in the disclosure of immaterial information, replace management as the source of original information, create a chilling effect on the audit committee—auditor relationship, create liability for businesses and auditors , and impose additional expenses on firms. In its current form, the Proposed Standard will make audited financial statements a less effective means of disclosure, making the investment decision making process less efficient and leading to significant negative consequences for public companies.”
The business groups contend the proposal also runs counter to efforts by the SEC to promote disclosure effectiveness. “Under the Proposed Standard, auditors may be required to disclose a broad range of immaterial information that public companies may not be required to disclose,” they argued. “Customarily, the duty for making public company disclosures is the responsibility of the company’s management. The auditor ensures that the disclosures by management comply with applicable reporting standards. The Proposed Standard would make auditors a source of original information. This shift is a fundamental re-ordering of financial reporting responsibilities. The broad definition of CAMs may stifle the current open dialogue between auditors and audit committees. Under the Proposed Standard, auditors may have to stop before every communication to consider the potential CAMs implications of such communication. Every potential communication will be evaluated for CAM obligations. This process could result in situations where less, rather than more, communication occurs between auditors and audit committees. This will significantly slow the audit process and drive up costs for public companies.”
The groups contend that in making a determination to approve the proposed standard, the SEC has to consider whether it will promote efficiency, competition and capital formation. They cited rulings by the D.C. Circuit Court of Appeals in other cases calling for the SEC to conduct a robust cost-benefit analysis subject to public commentary. “In light of the concerns identified above, we believe the costs of the rule likely outweigh the benefits,” they said.
The SEC usually approves PCAOB standards, and the proposed audit report standard already has gone through several rounds of deliberations since 2010. The PCAOB received input from stakeholders in roundtable discussions, comments and meetings over the years. It would be the “first significant change in the standard form auditor’s report in more than 70 years,” according to PCAOB chairman James Doty when discussing the standard in June. The PCAOB declined to comment on the Chamber of Commerce letter.
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