New Auditor Reporting Requirements Take Effect in December 2009

August 16th, 2009

Investors will soon have more information about the accounting firms that audit public companies, thanks to an order signed by the US Securities and Exchange Commission on August 13, 2009. The SEC’s order officially approves a new set of reporting requirements for all firms registered with the Public Company Accounting Oversight Board (PCAOB).

More Information for Investors

The new auditor reporting requirements include timely disclosures about certain current events, as well as detailed annual reports. These added disclosures are designed to help investors and regulators better assess the risks associated with audit firms and their audit opinions. For example, the list of reportable current events includes the following:

  • An accounting firm withdraws an audit report, and the related issuer has not complied with its requirement to report that event on a Form 8-K.
  • A firm becomes aware than an issuer has made use of the firm’s name in an unauthorized manner without the required consent of the firm.
  • A firm (or any of its partners, managers, or members) becomes a defendant in certain criminal, governmental, administrative or disciplinary proceedings.
  • A firm hires an employee, admits a partner, or contracts to work with a person or entity who is the subject of certain disciplinary sanctions.
  • Any of certain professional licenses or certifications is revoked, suspended or made subject to conditions or contingencies.

These requirements take effect for events occurring on or after October 12, 2009 (60 days after the SEC’s approval). Starting then, the firms will make their reports to the PCAOB, and the PCAOB in turn will make the information available on its website to investors and the general public. Based on this timetable, the first reports on current events could be due to the PCAOB as soon as November 11, 2009 and available to the public shortly thereafter. The first annual reports are due to the PCAOB on June 30, 2010 and will likewise be made available to the public soon thereafter.

More Work for Accounting Firms

Some of the current events reporting requirements were controversial because of the added work they will make for the accounting firms.

One area of added work relates to the communications and controls needed to ensure that current events reports are timely filed. The general rule is that a report for a certain type of event must be filed 30 days from the date the firm becomes aware of certain facts. The firm is considered aware of the facts at the same time that any partner, shareholder, principal, owner of member of the firm becomes aware of the facts. So firms will need to establish procedures to make sure the person responsible for filing the reports is timely notified.

Another area of added work involves the level of documentation needed for those firms that may be able to shield themselves to some extent from the public spotlight in the new regulatory environment. The PCAOB is signaling that it intends to be reasonable, but it doesn’t intend to accept too many excuses or make too many exceptions for firms that fail to provide the appropriate documentation. Examples:

  • Claims of proprietary information. A firm can request that certain categories of information be held confidential. But it will need to support that request with solid documentation, including a representation that the information has not otherwise been publicly disclosed and a detailed explanation of the basis for asserting the information is proprietary or protected by law.
  • Claims of extraterritorial reach. A non-US audit firm may withhold information that it feels cannot be disclosed without violating a non-US law. But the firm will need to provide adequate support for any omissions, including a copy of the local law, a legal opinion, and an explanation of its efforts to obtain the necessary consents or waivers. If the PCAOB feels the support is not adequate, it can use its authority to compel the firm to disclose the information.

The PCAOB has the power to enforce the new requirements under the Sarbanes-Oxley Act of 2002. Under this Act, the Board is, in effect, the auditor of the auditors. It is responsible for registering and inspecting accounting firms that audit public companies whose stock is traded on any US exchange. It also sets applicable auditing standards, and it can conduct investigations of and initiate disciplinary proceedings against registered firms.

The full text of the SEC’s release is available at

Note: The special reporting requirements were originally scheduled to take effect for events occurring on or after October 12, 2009 (60 days after the SEC’s approval) but were subsequently postponed to events occurring on or after December 31, 2009. 

Entry Filed under: Governance

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