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Auditors will have to disclose—to investors and others—what raised the most concerns while reviewing companies’ financial statements, under new auditing reporting rules approved Oct. 23 by the SEC.
The move marks the first update of the auditor’s reporting model in over 70 years.
Under the new Public Company Accounting Oversight Board rules, auditors won’t be able just to give a company’s financial statements a pass or a fail. Auditors will now have to disclose “critical audit matters"—CAMS—matters that were communicated to the audit committee, are related to accounts or disclosures material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment.The new rules, adopted earlier this year by the PCAOB, “breathe life into the audit report and give investors the information they’ve been asking for from auditors,” PCAOB chief James Doty said at the time.
In a statement, Securities and Exchange Commission Chairman Jay Clayton said he strongly supports the objective of the rule to give investors meaningful insights into the audit. However, he said he also is “sensitive” to commenters’ concerns that disclosure of CAMs will result in more litigation that doesn’t benefit investors, provide boilerplate rather than meaningful information, or chill the dialogue between the auditor and the audit committee.
Clayton said he is “pleased the PCAOB intends to monitor the results of implementation, including consideration of any unintended consequences.”
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