The Securities and Exchange Commission gave its approval Monday to the Public Company Accounting Oversight Board’s new standard for an enhanced audit report.
The PCAOB voted to approve the new standard in June, expanding the scope of the audit report to include a discussion of “critical audit matters” that have been communicated to the audit committee, particularly those that involve “especially challenging, subjective or complex auditor judgment” (see PCAOB makes major changes to auditor’s report). It also requires disclosure of auditor tenure, or which year a firm began auditing a company.
The SEC typically rubberstamps any new standards approved by the PCAOB, but in the case of the new audit reporting model, a set of powerful industry trade groups, including the U.S. Chamber of Commerce, and major corporations banded together and asked the SEC to reject the new standard (see Business groups object to new standard). They claimed that the requirements for disclosure of critical audit matters, or CAMs, would result in the disclosure of immaterial information, replace management as the source of original information, and create a chilling effect on the audit committee—auditor relationship, creating liability for businesses and auditors, and imposing additional expenses on firms.
The SEC also received an unprecedented number of comment letters on the proposed rule, PCAOB board member Jeanette Franzel said at a recent panel discussion hosted by the New York State Society of CPAs (see Auditors prepare for PCAOB audit reporting changes).
SEC chairman Jay Clayton issued a statement Monday, however, supporting the commission’s decision to approve the new standard.
“I strongly support the objective of the rule to provide investors with meaningful insights into the audit from the auditor,” he said. “CAMs are designed to provide investors and other financial statement users with the auditor’s perspective on matters discussed with the audit committee that relate to material accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment. Investors will benefit from understanding more about how auditors view these matters.”
The new standard has been in the works since 2010, Clayton noted, in response to investor comments that the independent auditor’s report should provide more specific information about how the auditor reached his or her opinion. The PCAOB held three rounds of public solicitation of comment along with substantial outreach to various stakeholder groups, he pointed out.
The deadline for making a decision was slated to be this Thursday, and Clayton is scheduled to attend a meeting of the PCAOB’s Investor Advisory Group on Tuesday with SEC chief accountant Wes Bricker.
The Center for Audit Quality praised the approval of the new standard. "The CAQ welcomes the enhanced auditor's reporting model to provide additional information to investors and other stakeholders in an increasingly complex and global business environment,” said CAQ executive director Cindy Fornelli in a statement. “We appreciate the PCAOB’s responsiveness to the auditing profession’s concerns and recommendations throughout the proposal process, including observations from the CAQ's field testing. This is a positive step toward continuous improvement of the audit to better serve investors and our capital markets. We look forward to working with the SEC and PCAOB during implementation of the new model to encourage a seamless transition for preparers, auditors, audit committees, and investors.”
The new standard would be the biggest change to the format of the audit report in more than 70 years, going beyond the traditional pass/fail model. The Treasury Department's Advisory Committee on the Auditing Profession had recommended in a 2008 report that the PCAOB work on expanding the auditor's report, in response to requests from investors for more information. The PCAOB plans to do a post-implementation review of the new standard once it's in place to make sure it is working as intended and not leading to the unintended consequences critics have feared. Clayton said that would be necessary, and the PCAOB might need to revise the new standard if there are problems. The PCAOB will phase in the implementation of the CAMs requirements, starting with the biggest publicly traded companies known as large accelerated filers.
"I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships—with Main Street investors ending up in a worse position than they were before," said Clayton. "I therefore urge all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release. In this vein, I am also pleased the PCAOB intends to monitor the results of implementation, including consideration of any unintended consequences. Post-implementation review of new standards, including the use of economic analysis tools, is an important component of high-quality regulatory decision-making. The phased effective dates for CAMs should facilitate some early-stage analysis through the PCAOB’s Post-Implementation Review (PIR) process, based on the experiences of large accelerated filers. Depending on the findings of this analysis, including an evaluation of unintended consequences, the board should be open to making changes, if necessary, to the revised auditing standards, including to the effective date for companies other than large accelerated filers. Ultimately, I support a timely and effective PIR for these revised auditing standards, and it will be critical that this PIR is completed as soon as practicable. To this end, I have directed the SEC staff to assist as needed in that process."
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