The PCAOB says auditor reports should distinguish between restatements caused by errors and those made simply because a company adopted a new accounting principle.
A proposed auditing standard could help companies more clearly show that a restatement occurred because they implemented a new accounting rule or changed their accounting methods — and not because they had made an accounting error.
Since the Financial Accounting Standards Board adopted FAS 154, Accounting Changes and Error Corrections, companies have been required to restate their current and previous financial reports when they decide to use a different accounting method or comply with a rule change. In mid-2005, FASB decided that applying changes retrospectively made sense and the board wanted to match up this rule with a similar International Accounting Standards Board standard. It eliminated the practice of recording a one-time cumulative effect in the income statement in the year the new accounting principle is adopted.
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As a result, however, auditors' reports highlighted that a company had restated its financial reports — which left uninformed investors, unclear why the adjustment had been made, with a negative taste in their mouths.
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