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

Speaking at the AICPA 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. The concept release is available at Potential changes outlined in the concept release include the addition of an auditor’s discussion and analysis, mandatory emphasis paragraphs, auditor assurance on other information outside the financial statements and clarification of language in the standard auditor’s report.

  FASB will not require management to assess whether there is substantial doubt about an entity’s ability to continue as a going concern.

A majority of board members determined that such a requirement would be difficult to apply, FASB announced. Board members decided that users of financial statements would benefit more from ongoing disclosures about risks and uncertainties.

Disclosures made only after management concludes there is substantial doubt about an entity’s ability to continue as a going concern would be less beneficial to users of financial statements, according to the board.

The next step in the project is developing a principle for an entity to determine the adequacy of its disclosures about risks and uncertainties, and to evaluate how the content of those disclosures could be improved. The board directed the FASB staff to develop such a principle.

More information on FASB’s decision is available at

Currently, AICPA Statement on Auditing Standards (SAS) no. 59, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern (AICPA, Professional Standards, vol. 1, AU sec. 341), provides the U.S. guidance on this topic. It states that the auditor is responsible for evaluating whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period not more than one year beyond the date of the financial statements’ being audited. Information obtained during a financial statement audit is the basis for this evaluation.

  The AICPA’s Auditing Standards Board issued Statement on Auditing Standards no. 125, Alert That Restricts the Use of the Auditor’s Written Communication. The SAS, which is part of its Clarity Project, supersedes SAS no. 87, Restricting the Use of an Auditor’s Report (AICPA, Professional Standards, AU sec. 532 and AU-C sec. 905). It also amends other SASs and addresses the auditor’s responsibility, when required or the auditor decides, to include in the auditor’s report or other written communication issued by the auditor in connection with an engagement conducted in accordance with GAAS (referred to in this SAS as the auditor’s written communication) language that restricts the use of the auditor’s written communication. SAS no. 125 is effective for the auditor’s written communications related to audits of financial statements for periods ending on or after Dec. 15, 2012. For all other engagements conducted in accordance with GAAS, this SAS is effective for the auditor’s written communications issued on or after Dec. 15, 2012.

  The European Commission proposed sweeping regulations that would, if approved, trigger major changes in the relationships between European public companies and their auditors.

The changes include:

  • Limiting to six years the period that an outside auditing firm can perform audits for a public-interest entity. A cooling-off period of four years would be imposed before a firm could audit again for the same client. Companies that opt for a voluntary joint audit would be allowed a nine-year window.
  • Prohibiting audit firms from providing nonaudit consultancy services to their audit clients, and requiring large audit firms to separate audit activities from nonaudit activities.
  • Public-interest entities would be required to have an “open and transparent tender procedure” when picking a new auditor.
  • Creating a single market for statutory audits by introducing a European passport for the audit profession, allowing firms to provide services across the European Union.

The proposed changes have to be approved by European Union states and the European Parliament. If approved, the changes could alter the European market share of the Big Four audit firms of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, which would be required to separate their audit and nonaudit services in Europe.

The entire proposal can be found at

Restricting nonaudit services would mark a significant shift in many parts of Europe, where audit firms are allowed to provide other consulting services to their public company audit clients. In the United States, the Sarbanes-Oxley Act of 2002 forbids auditors from providing many nonaudit services for their public company clients.

In the United States, the PCAOB also is examining potential limits on audit firms’ tenure with public companies. The PCAOB is particularly focused on weighing the advantages and disadvantages of audit terms of 10 years or greater.

The AICPA has recommended that the PCAOB refrain from imposing mandatory audit firm rotation. AICPA Chairman Greg Anton and President and CEO Barry Melancon signed a comment letter Dec. 14 to the PCAOB, stating that mandatory audit firm rotation is costly and has the potential to hinder audit quality rather than enhance it.

The PCAOB’s August concept release noted that proponents of rotation contend term limits could decrease client pressure on auditors and create opportunity for a fresh look at a company’s financial reporting.

The AICPA letter supported the PCAOB’s goals for enhancing auditor independence and objectivity, and professional skepticism. But the Institute said the PCAOB should not impose mandatory audit firm rotation without evidence linking audit firm tenure to audit failures detailed in PCAOB inspection findings.

Even if such a link is indicated through further study, the AICPA would like the PCAOB to carefully weigh the costs associated with mandatory firm rotation and consider other potential enhancements that would be less costly and disruptive.

The AICPA cited research indicating that audit quality increases with audit firm tenure.

The entire letter is available at

  The PCAOB has increased its budget for fiscal year 2012 by 11.4%, or $23.3 million, over the 2011 budget, according to a news release.

The 2012 budget is approximately $227.7 million, compared with $204.4 million for fiscal year 2011, and is designed to accommodate increased inspections. Additional funds are needed to accommodate increased non-U.S. inspections.

The PCAOB must also maintain the current scope and pace of inspections of domestic firms, and oversee the audits of broker-dealers as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The budget is subject to SEC approval.

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