New Audit Rule Forces Companies to Evaluate Internal Controls and Procedures

A new rule adopted by the Public Company Accounting Oversight Board (“PCAOB”) became effective for certain public filers, which requires an independent auditor to disclose in its audit report, certain challenges it faced, referred to as “critical audit matters”, while reviewing and auditing the financial statements of public companies.  

Despite the rule’s short lifespan, having only become effective earlier this year, recent filings and news reports have highlighted the importance of the rule as well as managements’ response to critical audit matters identified by the company’s auditors.  For example, a recent Wall Street Journal article reported that in addition to providing investors with more robust disclosures about a company’s financial reporting, the new rule is causing companies to re-evaluate their internal controls and procedures over financial reporting in order to remedy any weaknesses uncovered during the audit.  

While there is no doubt that a “critical audit matter” is material to an investor’s evaluation of a company’s performance, how a company’s management reacts to that potential weakness is of equal, if not greater, importance.