The Public Company Accounting Oversight Board has slated a meeting for June 1 to vote on issuing a final standard that would significantly change the auditor’s reporting model. Chief among the changes would be a new requirement that auditors include a narrative discussion of critical audit matters.

The PCAOB, created in the post-Enron era under the Sarbanes-Oxley Act to develop and enforce auditing standards and related quality control standards, has spent more than six years on this particular project, beginning with a concept release in 2011, a proposed rule in 2013, and a reproposal in 2016, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.”

Critical audit matters
The PCAOB’s proposed requirement for auditors to disclose and discuss critical auditing matters (CAMs) involving sensitivity and judgment is analogous to the SEC’s requirement that public companies disclose critical accounting policies (CAPs). CAMs are aimed at providing more useful information to investors about areas the auditor addresses which are highly subjective complex or subject to judgment.

Early in the development of the proposal, the PCAOB considered commentary of various stakeholders, including a recommendation of a Treasury Department Advisory Committee on the Audit Profession (ACAP), convened under then-Treasury Secretary Henry Paulson, that the PCAOB consider “enhancements to make the auditor’s standard reporting model more useful to investors by including more relevant information, such as key accounting estimates and judgments.” The ACAP and others had also suggested moving away from the historic “pass / fail” model of the auditor’s report (qualified or unqualified audit opinion) to something more nuanced, but that suggestion failed to gain traction among a majority of stakeholders. Concerns included the potential for misleading investors vs. providing useful information, and liability concerns.

Several elements of the original proposal on the auditor’s reporting model proved controversial, including not only CAMs, but an additional proposed requirement relating to the auditor’s responsibility for other information contained in a document that also contains the audited financial statements. After considering comment letters and other feedback on the initial proposal, the PCAOB narrowed the scope and decided not to address the requirements relating to “other information” in the proposal, but to focus more on other elements of the auditors report, including the new requirement for CAMs.

Additional information on the PCAOB’s proposed changes to the auditor’s reporting model can  be found in PCAOB rulemaking docket item No. 34.

Proposals on use of estimates, work of specialists
Also at the June 1 meeting, the PCAOB will take up whether to issue for public comment proposed rules in two areas:

  • auditing accounting estimates, including fair value; and
  • the auditor’s use of specialists.

The following is background on each of the above projects, excerpted from the PCAOB’s March 31, 2017 standards-setting update:

Auditing accounting estimates, including fair value

“(A)uditing accounting estimates and fair value measurements has proven challenging. … Additionally, there have been changes in the financial reporting frameworks relating to accounting estimates and an increasing use of fair value as a measurement attribute, together with new related disclosure requirements.” For further information, see Staff Consultation Paper: Auditing Accounting Estimates and Fair Value Measurements.

The auditor’s use of the work of specialists

“(T)he use and importance of specialists has increased in recent years, in part due to the increasing complexity of business transactions and the resulting complexity of information needed to account for those transactions. Specialists covered by the project include specialists employed or engaged by the auditor and specialists employed or retained by the company whose work is used by the auditor.” For further information, see Staff Consultation Paper No. 2015-01: The Auditor’s Use of the Work of Specialist.

SAG meets this week, will discuss implications of data, technology on audit
In other PCAOB news, a key advisory group to the auditing standard-setter, the Standing Advisory Group, meets this week.

Among the topics being discussed is a PCAOB staff briefing paper on the use of data and technology in audits  and potential implications for PCAOB auditing standards.

On the data technology front, the Maryland Association of CPAs and the Business Learning Institute recently announced a partnership with IBM to help educate accounting and finance professionals on artificial intelligence, big data and more. See the following for more information:

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