Audit Overseer Updates Agenda Amid Reporting-Model Controversy

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By Laura Tieger Salisbury

July 1 — The U.S. auditor oversight agency updated its agenda June 30 with a reminder of deadlines for upcoming comment dates on the auditor supervision standard and auditor's reporting model (ARM), and pushed-back to the first quarter of 2017 the probable release of fair value and specialist standards.

The PCAOB has received three comment letters on ARM reproposal due by Aug. 15, but none yet on the Supervision of Audits Involving Other Auditors proposal, which has a comment period closing July 29. The letters so far revealed a wide difference of opinion on what the ARM should be.

PCAOB Chairman James Doty had said in March that he expected the fair value measurement estimates proposal to be released later in the year so the “comment period will overlap” with the International Auditing and Assurance Standards revamping of ISA 540 (12 APPR 06, 3/25/16).

Auditor's Reporting Model

The reproposal was issued May 11, 2016 (12 APPR 10, 5/20/16).

Critical audit matters (CAM) were refined, along with other parts of initial proposal, with the aim of reassuring auditors that they would not be put “in the position of speaking for management,” Chairman Doty said.

The reproposal defined the scope of potential CAMs to matters that auditors considered:

  •  material to the financial statements—matters communicated or required to be communicated to the audit committee; and
  •  issues that required extremely complex, challenging audit judgments by auditors—such as the auditor's assessment of risks of material misstatement, including significant risks

Auditors also have to explain how they addressed the critical audit matter when it arose in the audit, according to the reproposal.

CAMs, Materiality

A four page comment letter from accounting analysts Elizabeth Mooney and Dane Mott of the Capital Group Companies June 24 said PCAOB's concept of CAM didn't go far enough.

Capital Group wrote that “many cases of material accounting problems or fraud started as ‘immaterial' to the financial statement and built over time.”

Materiality: Financial Statements or Scope

Capital Group's Mooney, a member of the PCAOB's Standing Advisory Group , was part of the meeting in May debating materiality and CAM (12 APPR 11, 6/3/16).

Martin Baumann, PCAOB'S chief auditor, had said that what the PCAOB meant by materiality pertained only to matters in the financial statements. Baumann distinguished this from what he believed SAG members were saying they wanted to know more about—what he referred to as the scope of the audit. He said the PCAOB's meaning was different from the U.K. requirement for the auditor to disclose “what is the materiality threshold for trying to set tolerable misstatements and determining the scope of work.” (12 APPR 11, 6/3/16).

Capital Group's comment letter reiiterated Mooney's argument that “regardless how subjective an auditor's judgment was—if it is only communicated to the audit committee—it leaves investors out of the information loop, and at a distinct disadvantage.”

“Auditors should also be required to disclose what adjustment they make to reported figures in determining materiality thresholds for the audit,” as is “currently provided in the U.K and other European countries, to the investor's benefit, ” Capital Group wrote in its comment letter on the investor's need for disclosure.

Dennis Beresford, a former chairman of the Financial Accounting Standards Board, wrote in his 10 page letter that auditors would over report CAMs to “avoid later criticism from PCAOB inspectors or others” and would make the reports too long.

Instead of lengthy CAMs, Beresford has a “modest proposal” that would add a sentence to the Basis for Opinion section, which currently reads: “Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.”

Beresford suggested that sentence should direct the readers of the audit report to the “most important of these principles and estimates” and the page numbers where the reader can find them under “Critical Accounting Policies and Estimates.”

At an earlier agenda update from Doty March 21, he let investors know their feedback was crucial to determining whether or not auditor tenure will be included in the auditor's reporting model (12 APPR 06, 3/25/16).

Leave it to the SEC

Beresford wrote that he did “not support two key features of the ED: required presentation of CAMs (or a statement that there were none) and required disclosure of auditor tenure.”

Beresford further wrote that the issue of auditor tenure was one that should be “left to the SEC to consider in the context of proxy statement disclosure rules.”

Auditor Tenure

On issue of tenure, Capital Group wrote the auditor should have to “disclose reasons for any change of audit partner prior to mandatory rotation.” That is “material information” investors need, the letter stated.

Joe Dugger, VP & CFO, RSR Corporation, in Texas, told the PCAOB in a two paragraph letter that the reproposal was another example of adding layers of processes, procedures and reporting that lack substance and that the PCAOB should “rein in the proliferation of new requirements that are driving the cost an complexity of audits with minimal or NO positive impacts to the benefits derived from the audit process and reporting.”

To contact the reporter on this story: Laura Tieger Salisbury in Washington at

To contact the editor responsible for this story: Steven Marcy at

For More Information

Comment letters are available on the PCAOB's website at

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