Potent new SEC Rule makes public companies disclose remarks and inquiries by independent auditors starting 2018

audit-errors-300x200

 

The Securities and Exchange Commission has passed a new rule requiring all public companies to disclose remarkds and inquiries by independent auditors starting in January 2018. The Wall Street Journal reports that the SEC’s new rule has been in motion for a few years now, the real surprise is how quickly it will impact companies across the United States. The publication says, this move will take effect immediately and will allow auditors to say more about their reviews of a company’s finances.  This new information will be included as an expanded audit report and will include a letter on whether or not the auditor agrees that the company has accurately presented its financial statements.  Auditors and companies alike will have to get up to speed fairly quickly, here’s a look at a timeline:

  • 2018: Full disclosure of about the auditor’s association with a company required early next year.
  • 2019: Starting in mid-2019 the “critical audit matters” must be included for large companies.
  • 2021: Other companies will have follow suit within just 4 years.

 Right now, independent auditors are allowed to give a “pass” or “fail” grade to a company’s books.  The SEC’s new rule was created by The Public Company Accounting Oversight Board at the urging of transparency advocates.  They said that a more transparent approach would help investors understand risks before engaging with a company.  Public Company Accounting Oversight Board chairman, James Doty, is in complete support of the new regulation. The SEC’s new rule now requires auditors provide commentary about “critical audit matters” that may come up during an audit. Jay Clayton, the SEC Chairman came out in strong support of the rule even though it was opposed by some critics.  They claimed that this new rule will just create more risk of litigation for companies in the future, and is cumbersome and will lead to extra costs. The Center for Audit Quality also came out in support of the SEC’s new rule.  The center represents public-company auditors.  The WSJ says the center “welcomes the enhanced auditor’s reporting model to provide additional information to investors and other stakeholders in an increasingly complex and global business environment.”

Years in the Making

 According to the WSJ, similar rules are already in effect across the pond.  Companies in the U.K. and Europe must allow audit comments.  The Public Company Accounting Oversight Board, or PCAOB, has been advocating for the change for years and made a formal proposal back in 2013.  Now that it has been approved, the wheels are turning more quickly. Analysis is expected to engage on how this rule will affect the power and influence of the independent auditors. Some believe it will require additional oversight because the comments and inquiries must have factual basis and the way in which the reports are drafted will require additional care in wording and breadth. In addition, the timing of the release of the information may be scrutinized and as such the audit companies will have to take care not to fall to influence as to completion and release of the comments, inquiries and full reports. The other issue, closely watched is whether the new rule will aid investors, financial advisors and hedge funds in making better decisions on their investments and whether this kind of information favors particular kinds of financial analysis and projections over other kinds. Stay tuned.

 

Jeffrey A. Newman represents whistleblowers: 1-800-682-7157