Public Company Boards Skeptical of PCAOB Auditor's Report Proposal

By Jason Bramwell
 
Almost half (45 percent) of public company board members do not think the Public Company Accounting Oversight Board's (PCAOB) proposed changes to enhance the auditor's reporting model will improve its usefulness, according to a new survey from Chicago-based accounting and consulting firm BDO USA, LLP.
 
Only 27 percent of board directors surveyed believe the changes will improve the auditor's report, while 28 percent are not sure.
 
Conducted by the Corporate Governance practice of BDO USA, the 2013 BDO Board Survey examined the opinions of seventy-four corporate directors of public company boards about financial reporting and corporate governance issues, including the PCAOB's proposed new auditing standard and related amendments to enhance the annual auditor's report.
 
The proposed auditing standard  The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion – which the PCAOB issued on August 13, 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.
 
According to the PCAOB, the proposed auditing 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.
When asked about specific components of the PCAOB's proposal, 78 percent of board members are in favor of the report disclosing the length of the external auditor's tenure. However, 67 percent are opposed to the auditor's report evaluating information beyond the financial statements for potential errors or misstatements that conflict with information obtained during the audit. A smaller majority, 52 percent, is opposed to the report containing a discussion of critical audit matters that gave the auditor the most difficulty in forming its audit opinion.
 

Additional Key Survey Results

  • Sixty-four percent of corporate directors are aware of the new US Securities and Exchange Commission (SEC) rule that allows companies to disclose material information through postings on social media, but none indicated their companies have utilized this new channel to do so. Eleven percent anticipated utilizing social media for material disclosures in the future.
  • Close to half of the board members cited succession planning (47 percent) and studying industry competitors (45 percent) as areas they would like to spend more time on, followed by risk management (38 percent) and evaluating management performance (32 percent).
  • Just 11 percent of board members said their company has experienced a cyber breach during the past two years. Forty-seven percent of directors reported documenting all of the critical cyber assets of their company, and 45 percent said they are currently in the process of identifying their critical cyber assets.
  • The vast majority (82 percent) of board members thought proxy advisory firms should be subject to SEC oversight due to the potential for a conflict of interest in providing services to both corporations and institutional shareholders.
 
"Clearly, corporate board members aren't sold on the usefulness of the PCAOB's proposal to require external auditors to include much more detailed information in the annual auditor's report that accompanies a business' financial statements," Lee Graul, a partner in the Corporate Governance practice of BDO USA, said in a written statement. "However, when you make changes to something that has been done the same way for more than seventy years, there is bound to be some push back."
 
The PCAOB did not respond to a request for comment about the survey results.
 
Assessing Risks
More than two-thirds (69 percent) of public company board members cited regulatory/compliance overload as the greatest risk facing their businesses, followed by cyber breaches (13 percent), fraud/corruption (9 percent), privacy violations (6 percent), and intellectual property misappropriation (3 percent).
 
When asked to identify the greatest risk for fraud at their companies, a large proportion of the directors reported embezzlement or similar crimes against the company (42 percent), followed by corruption/bribery (20 percent), earnings management (18 percent), insider trading (12 percent), and revenue recognition (8 percent).
 
A majority of board members (55 percent) said they have increased their company's antifraud and anticorruption resources in the past year. When asked where they have devoted the greatest percentage of those increased resources, almost half (46 percent) cited training, and more than a third (35 percent) said personnel. Smaller proportions cited technology (14 percent) and the use of external consultants (5 percent).
 
"It is not surprising to see that companies are dealing with regulatory overload. The financial services sector, in particular, has been dealing with new regulations in both the United States and the European Union," Glenn Pomerantz, partner in charge of global forensics at BDO Consulting, said in a written statement. "The directors' focus on training and education to improve compliance and reduce fraud is certainly positive news. Many of the companies we work with perform a comprehensive risk assessment addressing fraud and corruption. The risk assessment results often guide the company toward additional and more strategic training and education. By proactively conducting independent risk assessments, businesses can greatly enhance their risk mitigation efforts."
 
About the survey:
The 2013 BDO Board Survey, conducted by the Corporate Governance practice of BDO USA, examined the opinions of seventy-four corporate directors of public company boards, with revenues ranging from $250 million to $750 million, about financial reporting and corporate governance issues. The survey was conducted in September by Market Measurement, an independent market research firm, on behalf of BDO USA.
 
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