PCAOB Proposals Would Significantly Impact Public Company Audits

Today the public comment period ended for two proposals by the Public Company Accounting Oversight Board that we believe could dramatically increase the scope, length, cost and complexity of the public company audit. As we described in our September 10 client newsflash, the proposals would:

• require the auditor to make an express statement within the audit report as to the absence of material misstatements in the company’s annual report – including all non-financial statement information, and
• require the auditor to communicate in the audit report “critical audit matters,” defined as “those matters addressed during the audit that (1) involved the most difficult, subjective, or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming the opinion on the financial statements.”

The PCAOB expects the proposals “to increase the informational value of the auditor’s report.” Davis Polk filed a comment letter with the PCAOB today expressing our concerns with the proposals, explaining that the costs – including increased pressure on management, audit committees and auditors during already-hectic annual reporting periods – are difficult to justify compared to the anticipated benefits. More fundamentally, we believe that if additional information for investors is the goal, the public company itself should be the source of that information – not a third party who lacks any particular expertise in communicating with investors and the marketplace. Our comment letter is available here.

We hope that as more companies become aware of the potential negative consequences of the proposals and make their views known to the PCAOB and the SEC, the regulators will reconsider the need for action.