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Society Cautions IAASB and PCAOB Against Expanding Auditor’s Role

Published Date:
Jan 6, 2014

In a pair of recently released comment letters, the NYSSCPA cautioned that efforts by regulators to expand the role of the auditor and provide more hand holding to investors as they navigate a company’s financial information would not only fail to improve users’ understanding of entities, but could create further confusion.

The comment letters, which were published on Nov. 19 and Dec. 10, were in response to proposals by the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB) that would require audit professionals to disclose more information in the audit report than they do now.

Under its proposal, PCAOB Release 2013-005, Docket Matter 034, which was published on Aug. 13, the PCAOB would require that the auditor communicate “critical audit matters” in the report to help illustrate for investors and other financial statement users the areas that he or she found challenging. This, the PCAOB said, would provide users with previously unknown information about the audit, enabling them to conduct a more thorough analysis of the financial statement, and bridge what the board said is an information asymmetry between investors and management.

The comment letter to the IAASB was written in response to its exposure draft “Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing,” which was released to the public on July 25. With respect to disclosures, the proposal is similar to the PCAOB’s: Auditors would be required to communicate “key audit matters” in the report, so as to provide a document that could be more informative, particularly to investors.

In both cases, the NYSSCPA came out strongly against the idea, arguing that, because auditing is a very complex, professional discipline that takes years of education, training and experience to perform well, financial statement users probably won’t get anything useful from reading critical details of audit engagements, and that it is unreasonable to expect the report to provide it.

“We believe that financial statement users could never reasonably and meaningfully assess the effectiveness of such professional judgments, in relation to possible alternatives, without all the factual and technical knowledge that is available to the auditor,” the Society wrote in both the IAASB and PCAOB comment letters.

What’s more, the Society said it believes there is “little persuasive evidence that securities analysts and investor groups will actually find such disclosures in audit reports useful or will rely on them for making or recommending investment decisions, or that such a section will result in more informed and better investment decisions.” 

Elliot L. Hendler, a member of the SEC Practice Committee and one of the drafters of the PCAOB comment letter, said the audit report, as it currently stands, is just fine. “We’ve tweaked it a little over the years, [but essentially it all comes down to] here’s what we audited… management is responsible for this and we’re responsible for that, and here’s our opinion,” he said. The boards, according to Hendler, are trying to expand the report in ways “that should be of no concern to the user, but to the audit committee and management.”

Julian E. Jacoby, the current chair of the Auditing Standards Committee who contributed to both comment letters, added that in most cases the financial report itself and the associated disclosures would be more useful for communicating relevant information than the audit report, as these documents tend to have much more information as it is.

The other major component of the PCAOB proposal that the Society commented on is a standard that would require the auditor to identify material inconsistencies between other information outside the financial statements and the financial statement data itself that could be difficult for investors and other users to identify on their own. While auditors are currently required to read and consider this other information, the proposal would specifically apply the auditor’s responsibility for other information to the audit report, and would require him or her to evaluate the other information for material misstatement and inconsistency or manner of presentation, and disclose his or her responsibility in this area.

On this point, the Society felt that the PCAOB went too far. It said that the auditor’s responsibility should be to read the other information in the context of understanding the entity, its environment, activities, and financial performance and condition, and to consider whether there may be a material inconsistency, misstatement of fact or both. This is in contrast to the language in the proposal, which says the auditor would “evaluate” this information—wording that the Society said implies a more in-depth level of analysis than should be required. However, the Society did say that more attention to the other information would likely help readers to be more informed.

“We believe it is likely that the overall quality of the information available to investors and other financial statement users might improve, including an understanding and appreciation for the limitations on the auditor’s procedures and responsibilities,” the Society said.

Addressing going concern

The IAASB proposal would require that the auditor evaluate the appropriateness of management’s use of the going concern, rather than liquidation, basis of accounting—essentially, agreeing or disagreeing with management’s assessment that its business is and will continue to be a going concern, which will be contained in its own separate section of the audit report.

The Society, however, disagreed, as it worried that such a change would elevate going concern from a normally expected condition of an entity—a sort of default value that is only discussed in audit reports in cases such as material uncertainty, or areas where alternative liquidation bases are appropriate—to “a level of importance that rises above all other usual accounting conventions.” The Society felt that the audit report is not the place to inform users of basic underlying accounting conventions, and that going concern is only one of many significant conventions that are normal and expected “and need not be singled out to the exclusion of all others.” Further, it said, such a statement “would be (and should be) of virtually no value to users when continuation of operations as a going concern is not viewed as materially uncertain.”

“We felt it was not helpful to an understanding of the issues,” Jacoby said. “Addressing going concern in every auditor’s report is not necessary.”

The IAASB proposal also included a requirement to include the engagement partner name on the report, much like a separate PCAOB proposal devoted specifically to this idea that recently came out (see “Society members skeptical of value in disclosing auditor name” on page 7 for more on the PCAOB effort). The Society came out against this measure as well, saying that it would not provide meaningful transparency or information to users of financial statements and that, in addition, an audit is a team effort, where all are accountable for the results.

Such a disclosure, the letter warned, “would likely be the creation of an unnecessarily exaggerated user impression of the extent of responsibility placed on the engagement partner in relation to other members of the audit team and, more significantly, the audit firm.” Moreover, the Society felt that such a measure would not increase any sense of responsibility for the audit quality, since there are already numerous professional and regulatory pressures.

“If a firm identifies weakness in the performance of an engagement partner, this doesn’t have to be in the public domain [under] any circumstance,” Jacoby said. “The firm will generally take appropriate measures to remediate that partner or suspend his privileges. It’s a very serious issue within firms.” 

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