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May 11 — The Public Company Oversight Board unanimously approved a reproposal of the auditor's reporting model standard.
“In today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors want a better understanding of the judgments that go into an audit opinion,” PCAOB Chairman James R. Doty said May 11.
“This proposal delivers on the intention of Congress to further the public interest in the preparation of more informative audit reports for public investors,” he said.
The standard—Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion—refined the concept of “critical audit matters” and added other auditor assurances. The standard also retained the existing “pass-fail standard,” which hasn't been changed in over 70 years.
According to the PCAOB, “The standard auditor's report is commonly described as a pass-fail model because the auditor opines on whether the financial statements are fairly presented (pass) or not (fail).”
Martin Baumann, PCAOB chief auditor and director of professional standards, said the refinements to the 2013 standard aim to “address feedback we received, including many of the concerns we heard, while still providing important additional information to investors.”
The reproposal differs from the original 2013 proposal in its attempts to address complaints from auditors, who argued they would be exposed to liability by being required to provide “original source” material.
Doty said that the critical audit matters (CAMs) were refined so that auditors aren't put “in the position of speaking for management.”
Among other things, the reproposal would:
Jennifer Rand, deputy chief auditor, said this reproposal gives the auditor discretion to describe the CAMs rather than be limited to a particular list of factors. Whether a CAM is a CAM is to be determined in the “context of the particular audit,” not some boilerplate list of factors, she said.
The auditor would be required to state that he or she exercised independent judgment. The auditor would also have to add the statement “whether due to error or fraud” when describing whether the financial statements are free of material misstatement, Rand said.
Board member Jay Hanson told Bloomberg BNA that “ultimately when we are faced with the final vote,” the length of auditor tenure issue will be in dispute.
Hanson, in his statement at the meeting and afterwards to Bloomberg BNA, said he had reservations about whether it was necessary for tenure to be disclosed in the audit report when it is “relatively easy for most companies to find” that information elsewhere if they want it.
Hanson said that he was troubled by the “de facto suggestion” that long auditor tenure was “bad” when the “evidence does not support it.”
Hanson also told Bloomberg BNA that a key question to be resolved with the input of investors was whether the disclosure of CAMs would provide the investor with “useful information” in terms of making an investment decision. He gave the example that the investor may be more interested in looking at an objective measure such as revenue—found in the financial statements—rather than an auditor's description of CAMs.
PCAOB member Steven Harris had a different concern about CAMs. He said they were still too subjective and suggested the PCAOB should follow the European Union regulation, which has a list of items for auditors to comment on.
An objective standard is better for two reasons, Harris said. It would help ensure auditors don't pursue “artful means to avoid providing information to investors,” he said, and avoid the difficulty of applying the inspection process to the new CAM rules.
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A fact sheet on the auditor's reporting model reproposal is available at http://src.bna.com/eUM.
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