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From Securities Regulation Daily, August 13, 2013

PCAOB proposes revisions to the auditor's report

By Jacquelyn Lumb

The PCAOB members have unanimously approved for comment a proposed standard that would revise the contents of the auditor’s report. The proposal would require auditors to include a discussion of critical audit matters related to the audit and to provide an evaluation of other information that is disclosed in the issuer’s annual report on Form 10-K filed with the SEC. PCAOB Chair James Doty characterized the proposal as a watershed moment for auditing in the U.S., but later added that the water may shed in the wrong direction if the auditing profession fails to seize this opportunity to provide meaningful information to investors.

Critical audit matters. The critical audit matters that would be discussed in the auditor’s report would include the most difficult, subjective, or complex auditor judgments or those that proved the most difficult in obtaining sufficient appropriate evidence. The proposal would add new disclosure elements to the audit report, including a statement about the auditor’s independence and its tenure with the issuer.

The proposal includes a list of factors that auditors should consider when determining the critical audit matters that merit a discussion in the audit report. If there are no critical audit matters, the auditor would disclose that fact. The proposal includes three illustrative examples of critical audit matters and the relevant disclosure.

Doty sees the proposal as a first step and believes that it will not take another 70 years before additional, but perhaps incremental, changes are made. He noted that the report will retain its long-standing pass/fail opinion and the standard retains management’s responsibility for the information in the issuer’s financial statements.

Board member Lewis Ferguson said the proposal should satisfy users’ legitimate request for more information while preserving the well-established allocation of reporting responsibilities between management and auditors. He raised concerns about whether the communication about critical audit matters would become boilerplate. Chief Auditor Martin Baumann assured him that the proposal will require that auditors address specific considerations in identifying particular critical audit matters.

Auditor tenure. With respect to the disclosure about the auditor’s tenure, the release notes that the Board has not drawn any conclusions about how it may or may not correlate with audit quality. Ferguson believes that investors will be well-served by receiving this information and said they can make their own decisions about whether it is useful.

Board member Steven Harris was concerned that the proposal is not strong enough to meet the needs of investors. He said his view was based, in part, on meetings with the Board’s Investor Advisory Group. He also expressed concern about the ability to inspect and enforce compliance with the critical audit matters standard.

Board member Jay Hanson also questioned certain aspects of the proposal, including the appropriateness of requiring the disclosure of an auditor’s tenure with a particular client since the Board has not reached a conclusion about the relationship between audit quality and auditor tenure. Board member Jeanette Franzel also questioned whether the disclosure of auditor tenure belongs in the auditor’s report.

Hanson said the proposals represent a dramatic shift for the auditing profession and he urged commenters to provide information about issues that may constitute critical accounting matters and how they would be addressed under the standard.

Timetable. The staff is not encouraging early adoption of the standard and believes it would be premature for the market given the differing views about the relevance of the proposed disclosure. The comment period is open through December 11, 2013. The Board expects to hold a roundtable in 2014 and suggested it is likely that a reproposal will follow. During a subsequent media briefing, Baumann said a final standard could be in place for audits beginning after December 15, 2015. When you are changing the audit report for the first time in 40 years, Baumann said, it is important to be thoughtful and careful.

MainStory: TopStory PCAOBNews AccountingAuditing

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