PCAOB trying to help auditors find their voice

BY KEN TYSIAC

Auditing standard setters are trying to find a way for auditors to communicate with investors but are struggling to find the proper mechanism.

During the first of two days of public hearings on the PCAOB’s proposal for changing the auditor’s reporting model, a handful of panelists said Wednesday that the concept of “critical audit matters” described in the proposal represented an infringement by auditors on a duty that should be reserved for management.

The proposal says auditor’s reports should include disclosures of “critical audit matters” that posed the most difficulty for the auditor during the audit or involved subjective or complex judgments. Some panelists invited by the PCAOB expressed concern that this proposed requirement would result in auditors usurping management’s responsibilities.

“The proposed requirement for auditors to report critical audit matters could expand the set of information disclosed about firms beyond what is currently required under the securities laws. This seems like a very significant change in the whole financial reporting model,” said Douglas Skinner, a professor at the University of Chicago’s Booth School of Business.

Alan Beller, a partner at the law firm Cleary Gottlieb Steen & Hamilton LLP, cited one of the PCAOB’s own examples, which he said showed an auditor reporting on a hypothetical critical audit matter, discussing a company’s significant deficiency in internal control over financial reporting that did not rise to the level of a material weakness.

“Why is this helpful, rather than potentially confusing to investors, where by definition it is … remote that the significant deficiency will result in a material error in the financial statements?” Beller said.

But Joseph Ucuzoglu, who serves as national managing partner, regulatory and professional matters, for Deloitte LLP, said a tailored communication to investors would enhance the connection of the auditor to the user of the audit report.

He cited research that said 91% of financial statement users don’t read the auditor’s report as evidence that a mechanism must be created to give auditors a more meaningful voice.

“Management is and should remain the primary voice of a corporation’s financial performance,” Ucuzoglu said. “But the auditor must be the voice of the audit that was performed, and there is much that can and should be shared with investors about the performance of the audit without infringing on the role of management and the audit committee in the financial reporting process.”

And Sir David Tweedie, the former International Accounting Standards Board chairman who now chairs the International Valuation Standards Council’s board of trustees, said the PCAOB should give auditors even more latitude to communicate directly with investors than the proposal indicated.

“I would like to see the auditor moving away from the company,” Tweedie said. “He’s representing the investor. He’s going into the company, he’s reporting to the investor, in my book. And that’s where he should be.”

Other suggestions for the basis of auditor reporting included:

  • Former SEC Commissioner Aulana Peters’ suggestion that auditors’ comments should focus on matters with the highest risk of material misstatement brought agreement from Ann Cavanaugh, CPA, managing director, global head of accounting policy for investment giant BlackRock. “I think financial risk is what [investors] are most interested in,” Cavanaugh said.
  • Beller recommended that the board require auditors to include a statement in the audit report reflecting that the correct accounting policies and estimates are disclosed and that the description of critical accounting policies and estimates is accurate and complete in all material respects. “This approach directly addresses the core material elements of financial reporting, rather than proceeding indirectly,” Beller said.
  • Wallace Cooney, vice president for finance for Graham Holdings Co., said a framework focusing on matters of emphasis would be an improvement over a critical audit matters approach.


“All of these options should be looked at carefully,” Cooney said. “I don’t have strong opposition to critical audit matters in general. I just have concern about the way it would be applied. And it wouldn’t be my first choice. But I believe that based on all the work that you’ve done, that this is an important project and you should go forward with some type of change.”

Additional panel sessions are scheduled for Thursday from 9 a.m. to 3:30 p.m. ET and can be viewed via webcast at the PCAOB’s website.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

SPONSORED REPORT

Time to prepare for overtime changes

As an employer, trusted business adviser, or HR professional, you will need to be aware of exemption guidance, record requirements, advice for clients, and typical problems in applying overtime pay.

QUIZ

News quiz: Good news on pay and benefits for accountants

CPAs can find much to like in recent reports, including news that their expertise and skills are in such demand that pay is expected to rise and that their employers value professional certifications.

CHECKLIST

Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.