Yesterday was a very good day for investors!

The SEC finally approved PCAOB rules that will

make a lot more information public about what actually went down during the audit.

It is certainly fair to say that the new model for the audit report is of historic significance.
And of the new items, by far the most significant is the disclosures about “critical audit
matters.” These are defined as matters that: (1) were communicated to the audit committee
(as already required by other PCAOB AS 1301; (2) relate to material accounts or
disclosures; and most notably, (3) involved especially challenging, subjective, or complex auditor
judgment.
Even though I can’t recall a single instance where the SEC failed to approve a finalized PCAOB
rule, I was concerned about the prospects for this one. Normally, one would think that the
SEC would be closely monitoring the PCAOB’s rulemaking docket and providing feedback.
Nobody should want egg on their face, right? But a number of factors had me concerned that
this one would fail: strong resistance from the Accounting Establishment, including the former
white-shoe law firm of the new SEC chair Jay Clayton; a prolonged period for deliberations; a
depleted Commission with only three votes instead of the normal five, and two of which who
are ‘conservatives.’

But, thankfully, and to the credit of these three commissioners, the support by investor
interests ultimately held sway. Investors have long complained that, despite the large sums
paid to auditors out of shareholders’ pockets, the output of the standard auditor’s report is
opague and invariant. Moreover, the indications I am aware of from the UK’s experience with
similar rules have been largely positive.

The resistance to the PCAOB rule was spearheaded by the U.S. Chamber of Commerce. Their
arguments boiled down to these: CAM disclosures are not relevant information for investor
decision making; they would result in increased litigation costs to the detriment of investors;
they would quickly devolve into boilerplate; and they would chill communications between
the auditor and the issuer’s audit committee.