Standard on Auditing Revenue May Be in PCAOB's Future

By Jason Bramwell
 
A member of the Public Company Accounting Oversight Board (PCAOB) said during a conference October 25 that setting a standard for auditing revenue will likely be on the PCAOB's radar in the months ahead.
 
"Another audit area that we will need to turn to in the near future, although it is not yet on our standard-setting agenda, is auditing revenue," Jay Hanson said in a speech on October 25 during the Brigham Young University Accountancy Alumni Conference in Provo, Utah. "Revenue is probably the most important number on the financial statements for most investors, and it is one in which our inspectors frequently find problems. Revenue recognition also is a complex accounting area."
 
Hanson stated the joint revenue recognition project between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will "fundamentally change the basis for revenue recognition."
 
The two standards-setting groups are collaborating on developing a final converged standard for revenue recognition. FASB Chairman Russell Golden said earlier this month that he hopes the standard will be released in early 2014. 
 
"We are monitoring the development of these new accounting standards," Hanson said. "It is my hope that the PCAOB will soon devote substantial resources to an audit standard project in this area and that we will be able to issue a proposal on auditing revenue with sufficient lead time to allow new accounting and auditing standards to become effective at or around the same time."
 
Hanson also discussed a recent proposal by the PCAOB for a new auditing standard that would enhance the auditor's reporting model.
 
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.
 
"This proposal, if adopted, would require auditors to go beyond the current model of providing only a pass/fail opinion on whether the company's financial statements are fairly stated (or whether internal controls are effective) and would require auditors also to discuss in their reports so-called 'critical audit matters' in order to provide investors and others with more insight into the audit," Hanson said.
 
He defined critical audit matters as those matters addressed during the audit that:
  • Involved the most difficult, subjective, or complex auditor judgments.
  • Posed the most difficulty to the auditor in obtaining sufficient appropriate evidence.
  • Posed the most difficulty to the auditor in forming the opinion on the financial statements.
"We issued this proposal after a long period of public outreach, during which investors clearly voiced their interest in learning more from auditors about what they do and what they are learning about the company in the process," Hanson said. "Our approach was tailored to achieve a careful balance  between satisfying the investor need for more information about the audit while not undermining management's role in providing financial information about the company.
 
"I see the proposed 'critical audit matters' as a window into the audit, intended to provide more information about the audit process and the difficulty faced by auditors in connection with providing assurance on certain important and complex aspects of the company's financial statements or internal controls," he continued. "Perhaps you can think of it as auditors telling investors what kept the auditor up at night."
 
Hanson concluded his speech by discussing the many challenges facing the auditing profession today, including keeping investor interests first, attracting and retaining talent, performing high-quality audits, and providing appropriate work-life balance.
 
"I am directly asking firm leaders what they are doing to ensure their audit teams have the resources to perform a quality audit," Hanson told the audience. "An overworked and exhausted audit staff, manager, or partner cannot perform the job investors and audit committees expect. As we approach the end of the year and face the most intensive audit period in the early months of the new year, I encourage everyone in this room, as well as firm leaders and audit committees, to carefully monitor auditors' workloads, to keep in mind that audit quality will decrease if staff is forced to work excessive hours, and to adopt an attitude of 'not on my watch' with regard to that possibility."
 
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