This post is Part II in a series summarizing highlights of comment letters filed on the PCAOB’s proposal (May, 2016 reproposal) to amend the auditor’s report. The comment deadline on the proposal closed yesterday (August 15). See Part I.
Auditors’ Generally Support Proposal
The Center for Audit Quality, a public policy organization whose board consists of the CEOs of the eight largest accounting firms, the CEO of the AICPA, and investor and academic organizations, notes its support of the proposal, applauding changes made to the definition of CAMS.
Citing its earlier field study, the CAQ notes that the revised approach to CAMs in the latest proposal should reduce the large number of CAMs, and should reduce differences between the PCAOB and IAASB’s approach, adds the CAQ, whose letter includes recommendations for further improvements to the proposal.
Cost/benefit questioned by IMA
The Institute of Management Accountants, in a letter signed by Nancy Schroeder, Chair of IMA’s Financial Reporting Committee, praised the PCAOB’s efforts to improve the auditors’ report and certain changes made in the most recent proposal – including removing a proposed requirement that was viewed as expanding auditor’s responsibility for ‘other information’ contained in the financial statements.
However, IMA’s Schroeder states, “We remain unconvinced that inclusion of CAMs in auditor’s reports will add value relevant information for readers of those reports while such inclusion will almost certainly add cost to the audit, create operational issues, and cause problems in the management/auditor relationship.”
Although recognizing the value contributed by field testing conducted by the CAQ, the IMA questions why the PCAOB did not directly conduct field testing, and notes that investor participation was not part of the CAQs field tests.
Remove materiality thresholds from CAMS: Investors
Capital Group’s Mooney and Mott recommend removing limitations on CAMs in the current proposal, asking the PCAOB to ‘eliminate materiality requirement for CAMs,” and to ‘require disclosure by auditors and management of materiality measures.”
Similarly, the AFL-CIO, in its letter signed by Deputy Director Brandon Rees, stated, “We are concerned that including a materiality threshold for the identification of CAMs may unduly limit the flow of useful information to investors.”
Also agreeing was Jeff Mahoney, General Counsel of the Council of Institutional Investors, who said, “We would not limit CAMs to any matter that “relates to accounts or disclosures that are material to the financial statements,” adding, “We would revise the reproposal’s provisions on the determination of CAMs to clarify that in most audits, the auditor would determine that CAMs include those matters that involved significant accounting judgment or estimation by management.”
Auditor independence; tenure
Investor groups generally support the PCAOB’s proposed inclusion of auditor tenure and an additional statement regarding auditor independence in the auditor’s report.
AFL-CIO’s Rees said they not only support a requirement for auditors to state that they are required to be independent, but “further believe that audit firms should be required to state if they are in fact independent and in compliance with the applicable independence rules. We also favor requiring that auditor’s reports be addressed to investors in addition to company boards of directors. Investors are the intended third party beneficiaries of the audit, and therefore it makes sense that the auditor’s report be addressed to them.”
Regarding auditor tenure, the AFL-CIO letter adds, “We strongly favor requiring disclosure of auditor tenure in auditor’s reports. “While long tenure is just one factor that can compromise objectivity, investors should be provided with this data point.”
In contrast, IMA’s Schroeder points out that the PCAOB’s proposal notes that any value from disclosure of auditor tenure has not been clearly demonstrated, and there can be more risk of audit failure in the earliest states of an auditor-client relationship. Therefore, the IMA asks that the PCAOB remove that requirement from the proposal, or at least shift the requirement to appear in the Form AP filed by the auditor with the PCAOB – which is searchable by investors – rather than in the auditor’s report itself.
A number of commenters suggested the PCAOB extend the effective date of the proposal. “We believe that the implementation of the reproposal, particularly the effort to develop and deliver training and implement effective quality control processes, could place a significant and possibly disproportionate burden on smaller audit firms,” says the CAQs, which recommends that large accelerated filers be given two years from the date the SEC approves the standard (under Sarbanes-Oxley, the SEC decides whether or not to approve PCAOB standards, once standards are approved by the PCAOB board). All other accelerated filers and non-accelerated filers would be given an additional year after the largest companies implement the standard, suggests the CAQ.
The IMA cautions the PCAOB to carefully consider the proposal before finalizing it, and asks the PCAOB to hold a public roundtable to facilitate interaction among investors and others on the current version of the proposal.
Former FASB Chairman Dennis Beresford, a member of numerous FASB and SEC advisory committees, chair of numerous audit committees, and Executive in Residence at the University of Georgia, praised the PCAOB’s continuing quest to improve the auditor’s report, but reiterated concerns with CAMs and certain other aspects of the proposal. He also believes auditor tenure disclosure, if required, would be more suited for PCAOB Form AP or as a matter of SEC consideration for proxy disclosure.
He also cautions the PCAOB against any self-imposed pressure to finalize the proposal before appropriate consideration has been given to comments received and related redeliberations. “Board member Harris hopes for a vote by year-end 2016,” observes Beresford. “That might be possible if there are relatively few comment letters or most don’t have significant concerns about the [proposal].”
“This is one of the Board’s most important projects,” says Beresford, “and it should make every effort to get it right.”