Loyal readers of this blog won’t be surprised that we’re disappointed that the SEC has again perfunctorily approved another proposal of the Public Company Accounting Oversight Board, or PCAOB.  (If you haven’t been following our blog, you can find our prior screeds here and here, among other places.)

The victim this time is the auditor report.  The new PCAOB standard requires an expansion of the auditor report to include the auditor’s tenure; a statement that the auditor is required to be independent; and some other language changes.  It also requires the report to be addressed to the company’s shareholders and directors.  But the plotz (no typo) de resistance is a requirement to disclose so-called “critical audit matters”.

My colleagues and I have already commented on the silliness of these changes.  If shareholder votes on auditor selection are any indication (and it seems to me that they are at least some indication), nobody cares about auditor tenure. If you are the kind of person who reads auditor reports in the first place, it’s a safe bet that you already know that auditors are required to be independent.  And addressing the report to shareholders and the board is another cure for insomnia.

But it’s the “CAMs” requirement that frosts our cake.  When the dust settles, that requirement will at best result in boilerplate that will add length but no substance to already largely unreadable auditor reports.  At worst, the requirement could have several adverse results, not the least of which could be the end of the long-standing “pass/fail” nature of the audit.

It’s worth remembering that when this silly standard was first proposed, the PCAOB justified it in part on the basis that the common folk don’t understand auditor reports and are confused as to the nature of the auditor’s responsibility.  So far, so good.  Common sense would dictate that this problem be remedied by simplifying and clarifying the report; for example, the report could include “this is what we do” and “this is what we don’t do”, etc.  Instead, the PCAOB has chosen to further clutter the report, add untold paragraphs, and insist on “standard” language that will serve only to turn off readers.

But what disappoints me even more is that the SEC’s consideration of the PCAOB’s proposal could have been used to demonstrate that the new Chair and his team really care about making disclosures more effective.  They could have told the PCAOB to go back to the drawing board and come up with something that would really help investors.  Instead, the SEC has indicated that it’s business as usual and will continue to rubber-stamp whatever the PCAOB cooks up.  Oh, I know that in its order approving the standard, the SEC refers to some potential problems, but it says these shouldn’t be big deals, and that the PCAOB is cognizant of these problems and has addressed some of them.  In at least one case, the SEC says that the PCAOB will monitor practice and, presumably, take remedial actions if necessary.  My legal advice on that one is “don’t hold your breath”.

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Photo of Robert B. Lamm Robert B. Lamm

Bob Lamm co-chairs Gunster’s Securities and Corporate Governance Practice Group.  He has held senior legal positions at several major companies – most recently Pfizer, where he was assistant general counsel and assistant secretary; has served as Chair of the Securities Law Committee and in other leadership positions with the Society for Corporate Governance; and is a Senior Fellow of The Conference Board Center for Corporate Governance.  Bob writes and speaks extensively on securities law and governance matters and has received several honors, including a Lifetime Achievement Award in Corporate Governance from Corporate Secretary magazine.