PCAOB meeting to focus on changing the auditor reports
Are we on the verge of historic change in the standard auditor's report, which has employed the same basic model since the 1940s?
I wouldn't say change is imminent, but the PCAOB is taking action on possible alternatives, and it's likely that change will be instituted at some point. The PCAOB has called a meeting for September 15 to get more feedback on some big ideas it floated back in June. The board obviously wants auditors to provide more information than they currently do, but how to require any change is quite tricky and the audit industry is already pushing back.
The strength of the current model of auditor's report has bubbled to the top of the agenda in the wake of the financial crisis, when many audit firms fell short of reasonable expectations. Lehman Brothers and Bear Stearns, for example, were given clean bills of health before they failed.
The alternatives up for discussion include the following:
- Auditor's Discussion and Analysis. This looms as among the most contentious ideas. The idea is to ask the auditor to provide a narrative that would add color and nuance to their reports, getting away from the strict pass/fail model that has endured for decades. The AD&A could discuss grey areas---the areas where the audit firm felt challenged in addition to other material issues. While investors would welcome this added layer of insight, the audit industry has already made clear that it will not support such a proposal. In its view, that sort of information about the company should come from the issue and no one else.
- Required and expanded use of emphasis paragraphs. The PCAOB also has floated the idea of expanded emphasis paragraphs, which are not currently required under existing PCAOB standards, though they may be added at the auditor's discretion. The idea here is to provide more information on a spot basis. This alternative would mandate the use of emphasis paragraphs in all audit reports to highlight the most significant matters in the financial statements. Areas in which emphasis paragraphs could be required: Significant management judgments and estimates, areas with major measurement uncertainty and areas where the auditor thinks more information would be useful to explain the presentation.
- Auditor assurance on other information outside the financial statements. The idea here is to require auditors to provide assurance on information outside the financial statements, such as MD&A, non-GAAP information, and the like. The hope is that an auditor providing assurance on information outside of the financial statements could improve the "quality, completeness, and reliability of such information, providing investors and other users of financial statements with a higher level of confidence in information about the company that is provided by management."
- Clarification of language in the standard auditor's report. In the least onerous of the proposals, the PCAOB has suggested clarifying the language of current reports. This would not expand the content per se, but it might make it all more readily understandable. It might seem like an expansion of content in many ways. This might be used to spell out auditor findings in the area of "reasonable assurance" and fraud, for example. -Jim