Major Overhaul of Company Audits Is Proposed

The federal regulator that 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 insights into the health of corporations.

For more than 70 years, auditors have had to provide only relatively undetailed opinions about what they see in companies’ financial statements. But that would change under new rules that the Public Company Accounting Oversight Board proposed on Tuesday.

The board is proposing that accounting firms include details of “critical audit matters” in the audit report that is attached to a company’s annual report. The overhaul does not do away with the current practice of requiring the auditors to give a simple pass or fail opinion in the reports.

In practice, under the new rules, an auditor would have to explain where it found it particularly difficult to form judgments about a company’s books. Reasons for that might include the complexity of the financial statements or a lack of evidence needed to reach an opinion. For instance, if a company recognized its revenue in way that was complicated, hard to track or insufficiently supported with reliable data, the auditor would be required to discuss that.

“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 the new rule “would make the audit report more relevant to investors.”
In another significant shift, the board is proposing that auditors broaden their oversight. While an auditor’s main focus would stay on financial statements, it would also have to cover other information in the annual report. Specifically, the proposal would require the auditor to evaluate the other information for material misstatements or inconsistencies.

The board is also proposing that accounting firms make public statements about their independence from the companies they audit and give details of how long they’ve been auditing the companies.

The proposals could be diluted in response to pressure from some accountants and their supporters, who may think the measures will be expensive and burdensome to implement. Other accounting specialists, however, don’t think they go far enough.

Steven B. Harris, a member of the oversight board, said the proposals may “improve communication of areas of high audit risk.” But he added, “The language in today’s proposals, however, does not appear to me to create a rule that will be sure to do that.”