What Do Investors Want from the Standard Audit Report?

Results of a Survey of Investors Conducted by the PCAOB's Investor Advisory Group

Joseph V. Carcello, PhD, CPA, CMA, CIA

Audit engagements performed by registered public accounting firms can cost tens of millions of dollars, and in some cases, the audit fee can approach $100 million. For example, Bank of America's 2010 audit fee was $96 million (according to Bank of America's 2011 proxy statement). The only outcome of the audit process that is observable to investors is the auditor's report—and in most cases an unmodified, or clean, report is issued (hereafter referred to as the standard audit report [SAR]). The SAR contains an introductory paragraph (which identifies the company audited, the years and financial statements audited, and the responsibilities of management and the auditors); a scope paragraph (which confirms that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board [PCAOB], and which briefly explains the nature and limitations of an audit and states that the auditor believes that he has a sufficient basis for expressing an opinion); and an opinion paragraph (which states that the auditor believes that the financial statements are “fairly presented” in accordance with U.S. GAAP). Other than the opinion paragraph, the SAR is essentially devoid of informational content. The SEC does not permit issuers to file qualified audit opinions, and consequently the overwhelming majority of audit reports issued are clean. This serves to further limit the informational content of the audit report.