Rule to expand auditor’s report on course for completion by year-end

A week after Donald Trump was elected, the leadership of the House of Representatives sent a letter to federal executive and independent agencies, asking them not to finalize pending rules during the Obama administration’s final days.

Despite the congressional letter, the PCAOB, which has been very close to completing a long-running project to expand the auditor’s report and make it more useful for investors, is likely to wrap it up before Christmas.

“No one — I think — would think that this was hasty rulemaking,” said PCAOB Chairman James Doty during a brief interview at the board’s Nov. 30, 2016, Standing Advisory Group (SAG) meeting in Washington. “This is a project that goes back years.”

It is unclear whether the Nov. 15 letter by House Majority Leader Kevin McCarthy would apply to all pending rules. The chairs of House committees, including Rep. Jeb Hensarling, the Texas Republican who heads up the House Financial Services panel, also signed the letter.

In Doty’s view, the intent of the letter may be more about “midnight rulemaking” and adopting hastily devised, last-minute rules that would become effective immediately.

“This is very different,” he said.

“Improving the auditor's report to investors was first recommended in the 1970s,” said Lynn Turner, a former SEC chief accountant. “A U.S. Treasury report done during the previous Republican administration also recommended it again in 2008. The PCAOB has been at work on this for years, and in no way can anyone accuse the PCAOB of rushing through a last minute rule.”

If the audit regulatory board votes to finalize the rule, it would then have to be approved by the SEC before it goes into effect. The commission first would need to put the rule out for comment before voting on it. Some critics believe that it may be best for the incoming SEC chair and commissioners to weigh in on the rule before the PCAOB agrees to finalize it.

The pending vote also comes at a sensitive time for Doty, whose first term ended in October 2015 and is eligible for reappointment to a second five-year term. But SEC Chair Mary Jo White has avoided making a decision and left it to her successor, who will be a Trump appointee.

The audit regulator has already gone through three draft rulemaking releases over a span of several years for a rule that is expected to represent a major change in the content of the auditor’s report and require auditors to provide more information about their examination of a public company’s financial statements. The most recent one was issued in May as Release No. 2016-003, Proposed Auditing Standard—the Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards.

The current auditor’s report is a simple pass-fail model, and many investors said adding more information may be one of the most important things the board could do for them. Auditors know many details about a client's financial condition, but the reporting model that has been in place since the 1940s provides no opportunity for the auditors to offer insight about a company’s financial status. In the aftermath of the 2008 financial crisis, some regulators and investors observed that external auditors said nothing in their reports about companies that soon failed.

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