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PCAOB Proposes Changes in Auditor’s Reporting Model

WASHINGTON, D.C. (JUNE 21, 2011)

Among the alternatives are the inclusion of an auditor’s discussion and analysis with an audit report, and audit assurance on information outside the financial statements, such as non-GAAP information on earnings releases. The changes would go well beyond the traditional pass/fail model.

The board plans to convene a public roundtable to discuss the concept release in the third quarter of 2011.

“The concept release we issue today represents a significant step for investor protection in response to the financial crisis, and a first step toward a holistic consideration of reforms designed to foster the relevance, transparency and reliability of the audit process,” said PCAOB chairman James R. Doty in a statement.

The PCAOB is seeking comment on alternatives and other matters presented in the concept release regarding possible enhancements in the auditor’s reporting model. The auditor’s report is the primary means by which the auditor communicates to investors and other financial statement users about information regarding the audit of the financial statements.

“The auditor is in a unique position to provide relevant and useful information, because of the auditor’s extensive knowledge of the company and as an independent third-party,” said PCAOB Chief Auditor and Director of Professional Standards Martin F. Baumann. “The concept release explores ways to expand the auditor’s communication in the auditor’s report about the audit and the company’s financial statements.”

The concept release presents several alternatives for changing the auditor’s reporting model and is seeking specific comment on these or other alternatives that could provide investors with more transparency in the audit process and more insight into the company’s financial statements or other information outside the financial statements. These alternatives include:

•    An auditor’s discussion and analysis;
•    Required and expanded use of emphasis paragraphs;
•    Auditor assurance on other information outside the financial statements; and,
•    Clarification of language in the standard auditor’s report.

The current release seeks public comment on alternatives for amendments to, or the development of new, auditing standards that would supersede the board’s current standards on the auditors’ report.  The PCAOB also released a fact sheet that provides a summary of the matters included in the concept release.

Several board members that a number of issues remain unresolved.

“One threshold question is whether auditors should move beyond their traditional role of attesting to information that management prepares,” said PCAOB member Daniel Goelzer. “Under some of the ideas floated in the concept release, auditors would be required to provide commentary on such matters as management’s judgments and estimates and its selection of accounting policies and practices. The auditor might also be asked to characterize particular auditing judgments on which the decision to issue a clean opinion is based as ‘close calls.’”

“As someone who performed audits for over thirty years, I would like to sound one note of caution,” said PCAOB member Jay Hanson. “Auditors do a great deal of work and obtain important insights about the information that goes into their client’s financial statements. They may be able to provide additional information about the audit work they performed and what it means, or about the risks of a material misstatement of the company’s financial statements, or about the company’s accounting policies and significant judgments and estimates. However, auditors are not analysts or investment advisers. They are not trained to evaluate and communicate the overall business and strategic risks of the companies they audit.” He said he looked forward to hearing the input the board would receive.

Earlier this year, PCAOB staff reached out to investors, auditors, preparers of financial statements, audit committee members, and other interested parties to seek their views on potential changes to the auditor’s report.  The staff reported its findings to the board on March 22.
Comments on the concept release are due Sept. 30, 2011.

Additional details about the roundtable discussion on the auditor’s reporting model concept release will be announced at a later date.


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