Aug 13th 2013
By Jason Bramwell
A new auditing standard and related amendments to enhance the auditor's reporting model were proposed for public comment by the Public Company Accounting Oversight Board (PCAOB) on August 13. An open meeting was held by the PCAOB to consider the proposed changes to the auditor's report.
The auditor's report, which has changed very little since the 1940s, is the primary means by which the auditor communicates to investors and other users of financial statements about the audit of financial statements. According to the PCAOB, the size and complexity of US capital markets have greatly increased in the past seventy years, and a greater percentage of American households invest their savings in the stock market than ever before.
The proposed auditing standard – The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion – would retain the pass/fail model in the existing auditor's report, but would provide additional information to investors and other users of financial statements about the audit and the auditor.
The proposed standard would supersede portions of AU Section 508, Reports on Audited Financial Statements, according to the PCAOB.
"These proposed changes will make the auditor's report more relevant to investors," PCAOB Chairman James Doty said in a written statement. "More robust audit reports that demonstrate the strength and value of the audit also should lead to better public awareness of – and application for – auditors' skill and insight."
According to the PCAOB, the proposed auditor reporting standard would require the following:
- The communication of critical audit matters as determined by the auditor.
- The addition of new elements to the auditor's report related to auditor independence, auditor tenure, and the auditor's responsibilities for – and the results of – the auditor's evaluation of other information outside the financial statements.
- Enhancements to existing language in the auditor's report related to the auditor's responsibilities for fraud and notes to the financial statements.
Another related proposed auditing standard – The Auditor's Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor's Report – describes the scope of "other information" and procedures the auditor is required to perform, including procedures when the auditor identifies a material inconsistency between the other information and the audited financial statements, a material misstatement of fact, or both.
The scope of "other information" in an annual report filed on Form 10-K would include, among other items, selected financial data and management's discussion and analysis.
The new standard would supersede AU Section 550, Other Information in Documents Containing Audited Financial Statements.
"The goal of these proposed standards and amendments is to significantly improve the current auditor reporting model by requiring the auditor to communicate specific information about each audit based on audit procedures performed," said Martin Baumann, PCAOB chief auditor and director of professional standards. "Communicating critical audit matters in the auditor's report will make the report more informative, thereby increasing its relevance and usefulness to investors and other financial statement users."
The Center for Audit Quality (CAQ) applauded the PCAOB's new standards proposals, and said it is committed to embracing calls for responsible change to the auditor's report.
"We support a holistic approach that examines opportunities for improvement in the roles and responsibilities of all members of the financial reporting supply chain, including those charged with governance, as this will best serve the interests of financial statement users," CAQ Executive Director Cindy Fornelli said in an August 13 written statement.
Fornelli added that she was encouraged that the PCAOB acknowledged concerns with an auditor's "discussion and analysis" approach.
"The CAQ believes that auditors should not be the original source of information about an entity; management's responsibility should be preserved in this regard," she said. "The PCAOB has proposed disclosure regarding auditor tenure. As noted by several board members at today's open meeting, there is no demonstrated correlation between auditor tenure and audit quality. After a thorough review of the standards, the CAQ will provide detailed comments to the PCAOB."
Comments on the proposed PCAOB standards and related amendments are due by December 11, 2013. Additionally, the board is considering holding a public roundtable in 2014 to discuss the proposed standards and comments received.
"We are only at the proposal stage, and I see today's action as a starting point for more discussion," PCAOB Board Member Jay Hanson said during the open meeting on August 13. "In many respects, these proposals have attributes of a second concept release. We will carefully review written comments. We plan to hold a roundtable to seek additional feedback. It is possible, if not likely, that we will have a reproposal before we adopt any final standards in these areas. Thus, while I support the need for the proposals to start the discussion, I do have questions about certain aspects of the proposals."
In 2010 and 2011, PCAOB staff conducted outreach to investors, auditors, preparers of financial statements, audit committee members, and other interested parties to see their views on potential changes to the auditor's report. The staff presented its findings to the board at an open meeting in March 2011.
In June 2011, the PCAOB issued a concept release to seek public comment on potential changes to the auditor's reporting model.
Additionally, in September 2011, the PCAOB held a public roundtable to obtain insight from a diverse group of investors and other financial statement users, preparers of financial statements, audit committee members, and auditors on the alternatives presented in the concept release.
Tammy Straus, a CPA with accounting and consulting services firm Grassi & Co. who serves on the Securities and Exchange Commission Committee for the New York State Society of CPAs (NYSSCPA), told AccountingWEB one of the main considerations the NYSSCPA will look at is if the proposals push the burden of transparent reporting onto the auditor rather than management.
"We need to look at how to make the auditor's report more useful to investors without taking the burden of financial reporting away from management and putting it on auditors," she said. "In theory, it sounds like a great idea for investors, but in practicality, we have to make sure the process is managed so that companies retain responsibility for communication about their financial results and that auditors remain objective about that information."