Congress enacted the Act against the backdrop of a series of major accounting scandals and accounting frauds that rocked our markets and shattered public confidence in the integrity of financial reporting.
The Act established the Board, which was given the independent responsibility of overseeing public accounting firms and setting auditing standards. It strengthened auditor independence and corporate accountability, enhanced financial disclosures, and made it possible for investors to recoup any losses from securities law violations. The law has played a vital role in ensuring that investors have access to quality financial reporting based on audit opinions that fully comply with applicable audit standards.
Market confidence is tied to the basic presumption that audits of public companies are the product of a process that meets the high standards required by law.
A public accounting company registered with the Board that audits the books of a public company is perceived as credible and reliable. Because it is subject to rigorous oversight.
In making investment decisions, investors rely on the audited financial statements of public companies, disclosed to the public and filed with the Commission. A clean audit opinion carries weight because it is the product of a rigorous process that is designed to protect investors.
These foundational standards, some of them initially issued by the AICPA over five decades ago, address the general principles and responsibilities of the auditor in conducting an audit. These include those relating to due professional care, professional skepticism, competence, and professional judgment.
The new standard does not create new obligations for auditors. However, the auditing environment has evolved significantly since the Board first adopted interim standards in 2003.
In the face of rapid change, investors are better protected with updated and modernized standards that can yield more informative, accurate, and independent financial reporting.
The Board’s new standard clarifies the auditor’s responsibility to evaluate whether the financial statements are “presented fairly” in the context of the applicable financial reporting framework, in a manner that is not misleading to investors.
It will also require auditors to assemble a complete and final set of audit documentation in 14 days, instead of the current 45, to reflect the electronic-based environment auditors now operate in.
The new standard clarifies that auditors must exercise professional skepticism and judgment throughout the audit process – consistent with longstanding investor expectations about the fundamental responsibilities of auditors.
The amendments should benefit investors by making auditors’ foundational obligations clearer and more user-friendly. Firms will be in a better position to train new auditors. Investors and audit committees can better understand what auditor responsibilities are, ultimately improving the quality of financial reporting.
The Commission’s staff has determined that the Board’s amendments are consistent with Title I of the Sarbanes-Oxley Act and associated rules and regulations. Following its own thorough review of the Board’s efforts, and extensive engagement with the Board throughout the process, Commission staff has also determined that the amendment is necessary or appropriate in the public interest or for the protection of investors. The staff is therefore recommending Commission approval and I am pleased to support.
