Investors to receive more under enhanced auditors' reform rule

In a change intended to provide investors with a more informative auditor’s report, the Securities and Exchange Commission gave final approval on Monday of a new regulation that requires significant enhancements to certain public company audit reports.

The new auditors’ reporting standards includes requirements by auditors not only to include information on what is called critical audit matters (CAMs), but also to say how long an auditor has been working for a company.

The Public Company Accounting Oversight Board (PCAOB) mooted this proposal back in 2010 after investors commented that they wanted to learn more about how auditors reached their opinions.

Bringing insight to investors

The oversight body engaged in a number of public solicitations of comment and held discussions with various stakeholder groups before reaching the ruling the SEC approved.

SEC chairman, Jay Clayton, in a statement supporting the final ruling 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.”

Benefits to investors outweigh chances of increased litigation

The rule has its dissenters, audit companies worried that it would be onerous and time consuming given the breadth of CAMs and could led to increased litigation as well as how meaningful the information will become or whether it may become boilerplate. 

Other pushback from public companies like metal manufacturer, Ball, hinges on what its vice president and controller, Shawn Barker and its chief financial officer, Scott Morrison, wrote in a joint comment to the SEC on the "negative impact on the open dialogue that exists between auditors and audit committees." 

Nasdaq in a comment letter in August this year also added its voice along with others focusing on how the proposal "required disclosure of CAMs extends beyond materiality, including matters the auditor communicated to the audit committee even if not required to do so."

Key to enhanced reporting quality

The SEC remains hopeful that this rule could help investors and emphasises the importance of independent audit committees to help to provide value to investors. The key is not to have main street investors ending up in a worse position than they were before. 

SEC chairman Jay Clayton

Clayton says he's sensitive to the concerns raised that CAMs will "chill auditor-audit committee dialogue."  

He added that he would be "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". 

However, he encourages a watchful implementation of the revised auditing standards with monitoring of the results of implementation including consideration for any unintended consequences.