Audit Board to Target “Clearcut” Violations of New Auditor Rules

The Financial Accounting Resource Center™ is a comprehensive research service that provides the full text of standards, the latest news from the Accounting Policy & Practice Report ®,...

By Steve Burkholder

U.S. auditing regulators plan to take an enforcement tack that targets more serious violations of new auditor requirements, rather than mere negligence.

The new requirements go beyond the traditional pass/fail audit opinion to highlight difficult issues that arise in an audit.

Claudius Modesti, enforcement chief at the Public Company Accounting Oversight Board, said Nov. 28 that the board will initially focus on the “more clearcut” and “more egregious violations” of new PCAOB rules that mandate auditors to lay out ”critical audit matters.”

The requirements for public company auditors to detail critical audit matters become effective for financial statements covering fiscal years ending on or after June 30, 2019.

The new PCAOB standard, ratified by the Securities and Exchange Commission Oct. 23, will offer more information about a company’s financial reporting—viewed through the auditor’s eyes—thought to be useful to investors.

The new rules for public company auditors define a critical audit matter, or CAM, as “any matter arising from the audit of financial statements that was communicated or required to be communicated to the audit committee and that":

  •   relates to accounts or disclosures that are material to the statements; and
  •   “involved especially challenging, subjective or complex auditor judgment.”

Mere Negligence Isn’t Focus

The PCAOB’s enforcement approach won’t focus on merely negligent application of the new rules, Modesti indicated at an auditing conference at Baruch College.

That approach hews to PCAOB’s general thrust of “focusing on serious departures” from rules, and what regulators see as “reckless cases,” said Modesti, director of PCAOB’s Division of Enforcement and Investigations.

Such clear-cut violations are more serious and need to be deterred, he said. They will probably trigger higher sanctions and therefore lead to greater public benefit in terms of greater protections from bad audits, he said.

Modesti, who spoke for himself and not the PCAOB, commented on the long lead time that he was providing his audience of accountants on the board’s enforcement philosophy.

“This is an important standard,” Modesti said. If it’s “very evident that someone trips over that line, we’re going to focus on it the way we think is appropriate.”

Ensure Auditor Perspective

“Our job here is to vindicate the interest that the standard laid out, which is to provide useful, relevant information from the unique perspective of the auditor” to investors. Modesti said.

“I don’t know many people get an 18-month ramp in terms of what enforcement is thinking about on a standard that’s only going into force in June 2019,” Modesti said. “But there’s a lot of time to think about this, everybody.”

The auditor reporting rules are to be phased in starting in year-end 2017 reporting, which would focus in part on providing information on auditor tenure.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at sburkholder@bloombergtax.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bloombergtax.com

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Financial Accounting