The message from financial statement preparers to the PCAOB about the content of audit reports is clear.
Preparers don’t want their responsibilities usurped by auditors.
“While some investors may desire improvements in disclosures, the proper source of this information is management and not the auditor,” Fedex Corp. told the PCAOB in a comment letter on the board’s proposal to expand disclosures in auditors’ reports.
The key element of the PCAOB’s proposal to require new information in auditors’ reports faces significant opposition from financial statement preparers, audit committees, and industry organizations, comment letters show.
Letters posted on the PCAOB’s website from more than 60 companies that prepare financial statements overwhelmingly express opposition to the board’s proposed requirement for auditors to include descriptions of “critical audit matters” in their reports.
Companies such as Apple, Chevron, ExxonMobil, and Wells Fargo are among the dissenters on critical audit matters as described in the proposal, which would require auditors’ reports to include information about the most difficult matters auditors encountered during the audit.
Trade group representatives such as the Committee on Corporate Reporting of Financial Executives International and the U.S. Chamber of Commerce Center for Capital Markets Competitiveness also wrote letters opposing the inclusion of critical audit matters in the proposal, as did some audit committee leaders and organizations.
Letters to the PCAOB from many investor advocates, however, supported more disclosure by auditors.
More than 230 letters on the topic—from writers that also included public accounting firms, state CPA associations, academics, and individual CPAs—were posted on the PCAOB’s website.
The proposal would represent the first substantial change in the auditor’s report since the 1940s, according to PCAOB Chief Auditor Martin Baumann. The board proposed the changes to accommodate investors’ desire for information beyond the pass/fail opinion auditors provide on financial statements.
Objections to the inclusion of critical audit matters, as expressed in comment letters, include concerns that:
- Auditors would become the original source of some information about the company. This is a role that has been management’s domain. “The communication [of critical audit matters] in the auditor’s report may blur the roles of management and the auditor with respect to communication of information about the company,” The Walt Disney Co. said.
- Information would overlap and possibly conflict. Some preparers said information that would be included in critical audit matters already is expressed by management in the financial statement as risk factors or as accounting policies in management discussion and analysis (MD&A). “We do not believe an auditor’s discussion of critical audit matters would add value to the discussion provided by management regarding critical accounting estimates and accounting policies,” ConocoPhillips said.
- Inconsistency would occur across companies. Some preparers said the subjective nature of the proposed critical audit matter requirements could lead to different conclusions from auditors in similar circumstances on whether to disclose. “Variability in the quantity and extent of [critical audit matters] in a registrant’s audit opinion relative to other similar filers may cause investors to draw inappropriate conclusions,” Costco said.
Audit committee members echoed these concerns in their comment letters. And the National Association of Corporate Directors (NACD) said it would be more appropriate for the SEC or FASB to consider whether such reporting is useful.
“It [the proposal] is not in the PCAOB’s proper domain,” the NACD said.
But many of the investor groups and advocates who sent comment letters supported the PCAOB’s proposed expansion of auditor reporting. In some cases, they called for disclosure by auditors of more information than the PCAOB proposed:
- Barbara Roper, director of investor protection for the Consumer Federation of America, said the proposal focuses only on information about the audit and avoids any discussion of the auditor’s assessment of the financial statements. “There is no statutory reason we are aware of why auditors should be precluded from discussing with investors their chief impressions of the quality of a company’s financial reporting,” Roper said.
- The Council of Institutional Investors advised revising the proposal to require the auditor to at least communicate an assessment of management’s critical accounting judgments and estimates based on the audit procedures performed. “This modest revision to the proposed model would result in an auditor’s report that provides the kind of insights that are more responsive to [an] investor’s information needs,” the council said.
The Center for Audit Quality (CAQ), which is affiliated with the AICPA, wrote a letter saying critical audit matters could be useful to investors, but suggested streamlining the auditor’s process for determining critical audit matters. The CAQ said the critical audit matters should be focused on the most important matters in the auditor’s communications with the audit committee.
Many audit firms that wrote the PCAOB were aligned with the CAQ’s suggestion that critical audit matters disclosed should be a subset of items the auditor discusses with the audit committee. The Big Four firms—Deloitte, EY, KPMG, and PwC—communicated similar sentiments, as did BDO, Grant Thornton, and McGladrey.
The CAQ is collaborating with members of the auditing profession to field-test the proposal. It will take several months to conclude the field-test and analyze the results, but the CAQ hopes to share insights in advance of a round-table meeting the PCAOB is expected to hold related to the auditor’s reporting model in the spring.
— Ken Tysiac ( firstname.lastname@example.org ) is a JofA senior editor.