New Auditors’ Reporting Model Proposal Set for Release in Q2

December 5, 2011

The PCAOB’s proposal for a new auditors’ reporting model should be completed by the second quarter of 2012, PCAOB Chairman James Doty said Monday.

Speaking at the AICPA’s National Conference on Current SEC and PCAOB Developments in Washington, Doty gave an update on the PCAOB’s initiative on the form and content of the standard auditors’ report.

The initiative is a response to investor calls for more insight based on auditors’ work, Doty said. He said the alternatives described in the concept release issued by the board in June are focused on enhancing relevance.

Potential changes outlined in the concept release included the addition of an auditor’s discussion and analysis (AD&A), mandatory emphasis paragraphs, auditor assurance on other information outside the financial statements and clarification of language in the standard auditor’s report.

“They would not change the fundamental role of the auditor to perform an audit, attest to management’s assertions as embodied in management’s financial statements—they’re not intended to put the auditor in position of reporting financial information for management,” Doty said. “But they are intended to explore how the auditor’s report can be more useful to the investor.”

Doty said firms provide venture capital and other private equity clients with detailed analyses of management’s stewardship of investments. He said such reports may not be suitable for public companies if they can’t be produced consistently to give investors a basis of comparison.

“But they show that when one thinks of the investor as a client, providing additional insight is possible,” he said.

Enhancing the auditor’s reporting model is one of the PCAOB’s main initiatives. Improving auditor independence and increasing transparency are others.

With regard to audit independence, the PCAOB is considering the idea of mandatory audit firm rotation for public companies. The PCAOB in August issued a concept release examining potential limits on audit firm tenure with public companies. Comments on the release are due Dec. 14, and the PCAOB will hold a public meeting in March on the issue.

Doty mentioned that the European Commission included mandatory audit firm rotation in its proposals released Nov. 30 for changing the role of auditors in Europe. He said auditors are generally opposed to mandatory audit firm rotation and acknowledged that it’s a difficult subject, but asked whether there’s another solution.

“I want you to think about it,” he said.

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