The business of accounting is hardly a routine one, and the profession’s future depends on meeting society’s changing needs, said James Doty (pictured center), chairman of the Public Company Accounting Oversight Board (PCAOB), during a Dec. 5 keynote speech at the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments.
“Since the dark days of Enron and the many other accounting scandals that followed it, both the profession and the PCAOB have worked hard to re-establish the profession’s footing solidly in the public interest,” Doty said.
And establishing the PCAOB was one way to “shore up the critical role of audit in our markets,” he added.
As an example, new disclosures in 2017 will inform investors and the markets of the names of the engagement partner and other firms involved in audits.
The auditor’s report will likely change, too, as the PCAOB nears completion of a project to make the reports more meaningful to investors and financial statement users. A revised proposal, issued last May, would retain the pass/fail model in the existing auditor’s report, but would provide additional information in the report, such as the communication of critical audit matters arising from the audit and new elements related to auditor independence and auditor tenure.
While investors like the pass/fail opinions, “in today’s complex economy, and particularly in light of lessons learned after the financial crisis, users of the audit report also want a better understanding of the judgments that go into an opinion,” Doty said.
“There has been positive reaction to these changes from a broad range of market participants, including securities issuers themselves, who have seen expanded audit reports as a tool to signal commitment to high quality and reliable financial reporting,” he added.
During his speech, Doty also covered four elements of the role the PCAOB plays to maintain and grow public trust.
1. Auditor oversight enhances investor protection. When “uninformed and dispersed” investors have information that they trust, they are more confident in participating in the market, Doty said. In turn, confidence in the markets bolsters the ability of private businesses to gain access to capital.
Without validation of the financial information brought to the market, businesses pay more than they need to for funding, he added.
“The long-term stability of our capital markets, and the audit profession’s important role in those markets, depends on uncompromising trust. That trust, once lost, cannot be easily regained,” Doty said. “If long-term investors don’t have a basis for trust in a company’s statements about its position and plans, short-termism may become the dominant market mentality, stifling innovation and job creation, and, ultimately, hindering economic growth. The PCAOB protects against such erosion.”
2. The PCAOB is “making a real difference.” PCAOB inspections have improved audits, Doty said.
“When we find deficient audits, the engagement teams raise their game,” he added. And that produces a “statistically significant reduction in restatements.”
What’s more, regular inspection reports provide information that previously didn’t exist. That helps everyone involved make better decisions.
“Enforcement has helped root out bad apples and fosters trust in the system,” Doty said. “Boards can use our published cases to gravitate to better auditors and better audit practices.”
3. The PCAOB’s intent is to forge a constructive relationship with the profession that benefits the economic system, protects investors, clarifies standards, and helps companies stay on track. Inspectors find many examples of auditors who are “unsung heroes” in averting scandals by requiring companies to adjust their accounting or improve their internal controls over financial reporting, Doty said. But they also find numerous instances when audit reports shouldn’t have been released.
“The more audits we can review, the more likely the prospect of scrutiny will deter the kind of audit failures that led to the Sarbanes-Oxley Act,” he said. “This was the organizing principle underlying the creation of the PCAOB, but now we’ve put it to the test and demonstrated that it’s true.”
4. A rapidly changing landscape requires the PCAOB to sustain innovation, which determines the work ahead. The PCAOB is researching four areas for new standards:
- Improved quality control.
- Better use of technology to determine risks.
- Monitoring of auditors’ association with non-GAAP data and especially data from audited financial statements.
- Auditors’ responsibilities under the Private Securities Litigation Reform Act of 1995 and how they relate to possible illegal acts.