PCAOB refines auditor’s reporting model proposal

The PCAOB voted Wednesday to propose revised changes to a standard designed to modify an auditor’s report to provide more information to investors.

Information provided in audit reports has been largely unchanged since the 1940s, and the PCAOB has sought for years to find a way to communicate more information from the audit to the public. The proposal Wednesday took into account comments from the public on the original PCAOB proposal from August 2013.

Under the new proposal, auditor’s reports would retain the current pass/fail model but would provide additional information. This would include the communication of critical audit matters arising from the audit and new elements related to auditor independence and auditor tenure.

The new proposal seeks to:

• Limit the source of potential critical audit matters to matters communicated or required to be communicated to the audit committee.
• Add a materiality component to the definition of a critical audit matter.
• Narrow the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment.
• Revise the related documentation requirement.
• Require the auditor to describe how the critical audit matter was addressed during the audit.
• Change the format of the auditor’s report, moving the opinion on the financial statements to the front and requiring section titles in an effort to make it easier for readers to follow.

“The refinements to the 2013 proposal presented today address feedback we received, including many of the concerns we heard, while still providing important additional information to investors,” PCAOB Chief Auditor and Director of Professional Standards Martin Baumann said in a news release.

The revised proposal would generally apply to audits conducted under PCAOB standards. But unlike the 2013 proposal, the new proposal would not apply to audits of:

• Brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a-5.
• Investment companies other than business development companies.
• Employee stock purchase, savings, and similar plans.

Comments on the new proposal will be accepted through Aug. 15 and can be made at the board’s website.

The Center for Audit Quality (CAQ), which is affiliated with the AICPA, supports the PCAOB’s efforts to update the auditor’s reporting model, CAQ Executive Director Cindy Fornelli said in a statement released Wednesday. She called adopting expanded auditor reporting “a move in the right direction.”

Fornelli said a key recommendation from the CAQ’s efforts to field-test the auditor’s reporting model was to focus the source of critical audit matters on matters communicated to the audit committee—which is a key component of the PCAOB’s new proposal.

“We are encouraged by what we heard about narrowing the scope of the definition of critical audit matters to those matters communicated, or required to be communicated, to the audit committee, and matters that are material to the financial statements,” she said.

The new proposal was designed to preserve management’s role as the primary source of original information about a company, board member Lewis Ferguson said.

“Company information, both financial and otherwise, and its disclosure is the responsibility of management, not the auditor,” Ferguson said in his prepared remarks. “To blur that responsibility by putting part of it on the auditor could only lead to confusion and mischief.”

Board members Jeanette Franzel and Jay Hanson said they continue to be troubled by the inclusion of a requirement to include auditor tenure in the audit report, which remains in the proposal.

“The evidence about the impact of tenure on audit quality continues to be mixed, at best, and I share commenters’ concern that disclosing tenure could lend credence to the theory that long auditor tenure necessarily results in poor audit quality,” Hanson said in his prepared remarks.

Other regulators also have been working on this issue. The International Auditing and Assurance Standards Board issued new standards in 2015 that change how auditors communicate in their reports.

The U.K. Financial Reporting Council issued new rules in 2013 that require an auditor’s report to provide more information on the scope of the audit and materiality and risk considerations from the audit.

“While there has been promising experimentation abroad, describing those judgments in a way that is appropriate and most useful for dispersed share owners is new to the United States,” PCAOB Chairman James Doty said in his prepared remarks. “Many auditors supported the goal to provide more informative reports, but in their comments they asked for more clarity on the framework for determining and discussing such judgments in the report. I believe today’s proposal benefits from experience and appropriately addresses comments received.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.