US Accounting Regulator Proposes Greater Audit Reporting Rules
Dealbook reports that the federal regulator who polices accounting firms is proposing a major overhaul of how company audits are reported to the public, a move that could provide investors with deeper insight into the health of corporations.
For more than 70 years, auditors have had to provide only relatively superficial opinions about what they see when delving into companies’ books. But that would change under new rules that the Public Company Accounting Oversight Board proposed this month.
The board wants accounting firms to include a potentially large amount of new information in the audit report that is attached to a company’s annual report.
For instance, an auditor would have to explain where it found it difficult to form judgments about a company’s books. That difficulty might stem from the complexity of the company’s financial statements, or from a lack of evidence to support management’s estimates of an accounting item.
The proposal is one of the most ambitious initiatives to come from the oversight board, which was set up 10 years ago after devastating accounting scandals at large companies revealed serious shortcomings at auditing firms.
“The proposed standards to enhance the auditor’s reporting model mark a watershed moment for auditing in the United States,” James R. Doty, the chairman of the oversight board, said in a statement. He added that the new rule “would make the audit report more relevant to investors.”
The overhaul would not do away with the current and longstanding practice of requiring the auditors to give a simple pass or fail opinion in the reports. It would add to it by requiring accounting firms to discuss what it calls “critical audit matters.”
Critics of the current approach say that accounting firms get to see a lot of important information when conducting audits, but do not necessarily have to share significant insights they may arrive at when looking at the numbers.
Under the proposal, the auditors would have to communicate details of the difficult parts of the audit. And at large corporations, there could be many situations where an auditor may find its task nettlesome.