PCAOB Proposes new Standard to Enhance Audit Report

By Cydney Posner

This morning, the PCAOB proposed a new auditing standard designed to enhance the content of the auditor's report. The objective of the proposed standard is to make audit reports more useful to investors by providing more insight into the underlying auditor judgments without eliminating the binary "pass/fail" model and without inappropriately stepping into the roles of management or the audit committee. As Chair Jim Doty commented, investors depend on the opinion and the judgments underlying the opinion, but the judgments themselves are merely implied or assumed and out of reach to the typical investor.

The proposed new standard would require the auditor to report on "critical audit matters," generally defined as matters the auditor addressed during the audit that

• involved the most difficult, subjective or complex auditor judgments;
• posed the most difficulty in obtaining sufficient appropriate evidence; or 
• posed the most difficulty with respect to forming an opinion on the financial statements.

Essentially, the concept is intended to capture the matters that "kept the auditor up at night." Some of the factors to be considered might be, for example, the difficulty of obtaining adequate audit evidence or matters that required outside consultation. The expectation is that, typically, the auditor would disclose at least some CAMs; only audits for companies without any complex operations would not lead to any CAM disclosure. One PCAOB member commended the proposed standard because it gave the auditor great discretion while at the same time constraining that discretion through the imposition of a more objective standard of whether a reasonable and experienced auditor looking at the same evidence would find a CAM. However, another PCAOB member was critical of the proposal as too subjective and allowing the auditor too much discretion.

In addition, the PCAOB proposed to enhance the auditor's responsibilities (including reporting responsibilities) for other information in an annual report that contains audited financial statements and the auditor's report (but not in registration statements). The auditor would be required to evaluate the other information in the annual report and to state whether the auditor identified a material inconsistency or material misstatement based on the auditor's procedures. This statement is not intended to be an audit opinion, and the procedures are not designed to provide any technical "assurance" about the other information. Participants in the meeting indicated that, many auditors perform this task anyway, and the standard proposes to regularize this practice.

The proposal also would require additional information regarding auditor independence and auditor tenure. Interestingly, some of the meeting participants indicated that the learning is mixed on the benefits and risks associated with long tenure.

For further information on the PCAOB proposal, here is a link to the "fact sheet," and the actual proposal.

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