Investors will soon get a new window into companies, courtesy of auditors. Audit regulators from the Public Company Accounting Oversight Board voted Thursday to approve a long-planned overhaul and expansion of the auditor's report--the letter included in a company's annual report in which the auditor blesses the financial statements. That statement, which hasn't changed much in more than 70 years, has largely become legal boilerplate and doesn't give investors much information about what an auditor actually thinks of a company. The new report will retain the current report's up-or-down decision on whether an auditor thinks a company's numbers are "fairly presented." But it will also require auditors to tell investors about any "critical audit matters"--areas of their audit that were especially challenging or complex or forced them to make tough decisions in evaluating a company's books. For instance, the auditor's assessment of how a company sets aside loan-loss reserves when it introduces a new loan product could be a critical audit matter. So could the evaluation of a company's estimates and the valuations of the assets it acquires. The new rule will make the auditor's report "more complete and relevant" for investors, the board's Chairman James Doty said in an interview with The Wall Street Journal. "Investors want it." The new requirement will bring the U.S. closer to the U.K. and other European countries where such disclosures in the auditor's report are already required. Some other new disclosures will also be required, including the length of the auditor's tenure working for the company. Some investor advocates think an audit firm that has been working with a company for decades might get too cozy with management, jeopardizing its ability to perform a tough, impartial audit. In addition, new language will be added to the report to clarify the auditor's responsibilities, notably a proviso that auditors are required to design the audit to detect any material misstatements, "whether due to error or fraud." The new rule will take effect in stages. Disclosure of auditor tenure and all other changes except the critical audit matters will begin with reports filed in early 2018. Large companies must begin detailing critical audit matters with reports in mid-2019; all other companies will begin doing so in early 2021. Newer, smaller companies classified as "emerging growth companies" will be exempt from the critical audit matters requirement. The efforts to revamp the auditor's report date back nearly a decade, and the PCAOB made its first formal proposal in 2013. Audit firms balked at first, complaining the requirement to disclose critical audit matters was too broad and could force them to disclose dozens or hundreds of such issues. The oversight board subsequently narrowed the requirement's scope: To be disclosed, critical audit matters must be material and significant enough to be reported to the company's audit committee. Cindy Fornelli of the Center for Audit Quality, which represents public-company auditors, said in a statement that the board's move was "a positive step toward continuous improvement of the audit to better serve investors and our capital markets." The board's action comes amid a push by the Trump administration against new regulations, and the new rule is still subject to ratification by the Securities and Exchange Commission, which oversees the PCAOB. Mr. Doty said the board always consults with the SEC on such matters, and he was optimistic there won't be any problems. "This is not a partisan issue," he said. "We think we have done a good job of making this practical and rigorous."

The June 1, 2017, issue of theWall Street Journalincludes an article by Michael Rapoport entitled "Coming Soon: What Auditors Really Think About Company Numbers." It provides a discussion about changes to be made to the auditor's report.

Instructions

Read the article and answer the following questions.

1. What does the current auditor's report primarily focus on?
2. What will the new report provide beyond the current report? What are some examples of items that might be discussed?
3. How would the requirements of the new report compare to the requirements of auditor reports in other countries?
4. What criteria must be met in order for an item to be disclosed in the new report?