With the closing of the comment period yesterday on a PCAOB proposal that would significantly change the auditor’s report, comments from investors, auditors, preparers and others ranged from extreme criticism to extreme praise.
Although most commenters concurred the current model of the auditor’s report could be improved, and many supported the PCAOB’s continued efforts -through an initial Concept Release and proposed standard, to the May, 2016 reproposal – to evolve the concept of Critical Audit Matters (CAMs) forming the centerpiece of the proposal, the harshest criticism from some commenters was reserved for CAMs.
The proposed CAMs are designed to address concerns voiced over the years, including in a 2008 report of the U.S. Treasury Advisory Committee on the Audit Profession (ACAP), that the ‘unqualified’ auditor’s report is viewed by many as a boilerplate, pass/fail document, and could include more information of value to investors and others. Efforts to change the basic pass/fail model were criticized in earlier iterations as costly, confusing and potentially misleading; thus the effort has focused on adding more narrative information about CAMs. Additionally, the proposal tracks certain developments on the international front, including the International Audit and Assurance Standards Board’s (IAASB’s) guidelines for disclosure of ‘Key audit matters’ or KAMs. Others say requiring auditors to disclose CAMs is analogous to the existing SEC requirement that management disclosure ‘critical accounting policies.’
Biggest Change Ever to Auditor’s Report
“If the Proposal is approved, the new auditing standard could be the biggest change ever to the auditor’s report,” said the American Banker’s Association in its comment letter filed on Friday, and, as to the proposed CAMs, “the ABA sees little, if any, ongoing value provided to investors and analysts, while burdening both registrants and auditing firms with costly processes…” Furthermore, the ABA asserts this will result in “tak[ing] the focus away from the registrant and onto the auditing firm – from the results of operations to the results of auditing procedures.”
“Final Blow to Commonsense Auditing”: ABA
Citing the likelihood of CAMs driving increased audit documentation requirements, the ABA continues, “In light of the continually increasing emphasis on auditing procedures over internal controls over financial reporting during the past several years, the Proposal could become the final blow to the PCAOB’s common sense Auditing Standard No. 5 An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (AS 5).”
“As a result,” concludes ABA’s Gullette, “ABA recommends that the PCAOB suspend this project,” and recommends certain actions taken by the PCAOB instead, including if other types of disclosures could address the issues the PCAOB was aiming to get at with CAMs.
Investors Favor Proposal: Ciesielski on how info may be useful
Jack Ciesielski, CPA, CFA, President of R.G. Associates, publisher of The Analyst’s Accounting Observer and a frequent member of FASB and other advisory committees, favors the proposal, and responds to perhaps the greatest argument against the proposal: whether, and how, investors will use information supplied by CAMs.
“Before answering the question “how will investors use CAM information,” says Ciesielski, “I have a question of my own: how do investors use the audit report now? In thirty-plus years of working in the investment research world, I’ve rarely encountered anyone who reads them – and when they do read them, it’s not for the purpose of incorporating nuggets of information from them into an earnings model.”
Ciesielski explains, “Not every disclosure or number in the financial statement package is “used” by investors in, say, building earnings estimates,” he adds. “They don’t “do” something with every figure in the package. That doesn’t mean information of a qualitative nature, such as the CAMs, is without its uses. If investors get into the habit of understanding them, they may find that there are other parts of the financial statement package they’ve been neglecting.”
Proposal ‘long overdue’: Capital Group
Global investment management firm Capital Group, in their letter signed by accounting analysts Dane Mott and Elizabeth Mooney (a current member of the PCAOB’s Standards Advisory Group), strongly supports the PCAOB’s proposal, arguing for its expansion.
“It is long overdue for auditors of U.S. issuers to provide meaningful information about audits to investors, the customers of independent audits,” say Mooney and Mott of Capital Group. “Audit committees and investors should know about critical audit matters (CAMs) from the perspective of the independent auditor. It’s important for investors to have an understanding of the auditor’s perspective on the financial statements including their risk assessment and what they ultimately found.”
Auditors, preparers and other comments
Read more about auditors, preparers and others comments on the proposal in Part II in this series, including investor comments calling for removing materiality thresholds from determining CAMs, and proposed disclosures regarding auditor independence and audit firm tenure.
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