US regulators are being asked to consider mandatory requirements for public companies to disclose whether they have obtained an auditor attestation of their internal controls, as a means of improving transparency and investor confidence in financial reporting.
The proposal, SEC Should Consider Requiring Companies to Disclose Whether They Obtained an Auditor Attestation by the Government Accountability Office (GAO) to the US Securities and Exchange Commission (SEC) calls for the requirement for an explicit disclosure.
The report is based on a GAO study following the introduction of the Dodd-Frank Act which exempts smaller companies with less than $75m (£50m) in public float from the auditor attestation requirement under the Sarbanes-Oxley Act, which concerns strict adherence to internal controls, legislated after the collapse of Enron.
It found that these companies have had more financial restatements than non-exempt companies, and the percentage of restatements by exempt companies has exceeded those of non-exempt companies.
Exempt and non-exempt companies restated their financial statements for similar reasons, such as revenue recognition and expenses, and the majority of these restatements produced a negative effect on the companies' financial statements, the GAO noted.
The GAO study concluded that compliance with the requirement for auditor attestation has a positive impact on investor confidence in the quality of financial reports. However, the SEC does not usually require companies to disclose voluntary compliance with requirements from which they are exempt, and has also stated that it believes investors can easily determine the attestation status of a particular company from available information in the annual report, so there is no need for an additional statement.
The GAO contests this view, saying that without clear disclosure, investors may misinterpret a company's status, and wants the SEC to give further consideration to such a requirement. It also points out in its report that the Public Company Accounting Oversight Board (PCAOB) is likely to look at this issue as part of a project examining changes to the auditor's reporting model, due to conclude later this year.
