The Debate Over the PCAOB's Proposal to Enhance the Auditor's Reporting Model Continues

Public Companies

By Ryan Deatrick

Last week, the Public Company Accounting Oversight Board (PCAOB) announced that it will host a public meeting in April 2014 in an effort to seek additional input regarding the August 2013 proposal, which would significantly enhance the auditor’s report.  According to the PCAOB, the meeting will be held in Washington, DC and will include panel discussions by investors and investor advocates, senior executives and audit committee chairs of major corporations, representatives from audit firms, academicians, and other interested parties.

The PCAOB first addressed this topic with a concept release during June of 2011.  The PCAOB believes that auditors acquire significant knowledge of a company’s financial statements during the course of the audit process and that the information could be valuable to the users of the financial statements.  However, the current format of the auditor’s report does not provide an opportunity for this information to be shared.  The current format of the auditor’s report was developed in the 1940s and is described as a “pass/fail” model because the auditor only opines on whether or not the financial statements are fairly presented.

On August 13, 2013, the PCAOB issued Proposed Rule 2013-005 which proposed two standards: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor's Report.

The most significant changes set forth in the first proposed standard are the requirement of the auditor to discuss “critical audit matters” in the audit report, enhance disclosures of the auditor’s independence, tenure, and responsibilities, and to enhance certain standardized language throughout the report.  The PCAOB defines critical audit matters as “those matters the auditor addressed during the audit of the financial statements that (1) involved the most difficult, subjective, or complex auditor judgments (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence or (3) posed the most difficulty to the auditor in forming an opinion on the financial statements.”

The second proposed standard describes the auditor’s responsibility in regards to “other information.”  Other information is described as “information, other than the audited financial statements and the related auditor’s report, included in a company’s annual report that is filed with the SEC under the Exchange Act and contains the company’s audited financial statements and the related auditor’s report.”  This proposed standard would require the auditor to evaluate the other information for material misstatements and inconsistencies, require the auditor to perform procedures with respect to evaluating the other information, and require the auditor’s report to address the auditor’s responsibilities to evaluate the other information and the results of that evaluation.

The PCAOB released a template for the proposed auditor’s report which can be found in the Proposal Rule on the PCAOB website.

To discuss Services that we Provide for Public Companies or the Proposed Rule 2013-005, contact either Steve Thompson (Pittsburgh) or Mike Renzelman (Columbus).

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