WASHINGTON, Oct 23 (Reuters) - The Securities and Exchange Commission will now require companies participating in audits to disclose remarks and inquiries made by independent auditors, the main U.S. financial regulator said on Monday.
The move was urged by transparency advocates who argued that disclosure would help investors better understand potential risks and determine how auditors are interacting with the companies they review.
The new rule, which takes effect immediately and which was created by the Public Company Accounting Oversight Board and approved by the SEC, will require auditors to disclose discussions held with companies and information about how the auditor reached conclusions about individual companies.
The rule would allow auditors to say more about their reviews of a company’s finances, beyond just giving the books a “pass” or “fail” grade.
It requires auditors provide more colorful commentary about “critical audit matters” detected in vetting a company’s books.
“I strongly support the objective of the rule to provide investors with meaningful insights into the audit from the auditor,” SEC Chairman Jay Clayton said in a statement.
The new rules had been opposed by some critics as creating a new layer of reporting that could increase the risk of litigation and potentially chill the relationship between auditors and board audit committees.
“I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships,” Clayton said in a statement. (Reporting by Ginger Gibson; Editing by James Dalgleish)