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Will the PCAOB Tighten Auditing Standards?

o Karen M. Kroll
30.03.2011 kl 13:56 | CFOworld (US)

Just how much value do the statements provided by auditors offer investors and other consumers of financial statements? Some recent actions by the Public Company Accounting Oversight Board show that the Board believes they could do much more.


Just how much value do the statements provided by auditors offer investors and other consumers of financial statements? Some recent actions by the Public Company Accounting Oversight Board show that the Board believes they could do much more.

At the March 22 PCAOB meeting, board member Lewis Ferguson issued a statement on the auditor's reporting model. In it he says that "the time has come to evaluate holistically both the investors' needs and what auditors reasonably can be expected to provide in an audit report..."

The PCAOB, the nonprofit corporation that Congress established to oversee public company audits, followed up several days later with a discussion paper titled "Auditing Financial Statement Disclosures." The paper says that the board is "evaluating whether, in light of recent events and changes to accounting standards, the auditor's responsibilities for auditing financial statement disclosures should be updated or enhanced."

The authors points out, too, that the increasing complexity of many business transactions, and the greater use of accounting estimates such as fair value, have resulted in disclosures that are more extensive, and contain more qualitative information. That can boost the risk of material misstatements. "To effectively evaluate those disclosures, auditors need to exercise professional skepticism and be alert for events or conditions that may contradict management's assertions in the disclosures," the paper states.

A Question of Investor Frustration

"There's a real contention about what's being provided to users," says Mike Shaub, a CPA and clinical professor of accounting at Texas A&M University. In particular, the increasingly "boilerplate nature" of the audit report has led some investors to view it as a commodity.

"The motivation behind changing the audit report reflects a broader frustration among investors that they're not getting the information they need from the financial statements, and not from the auditors," says Barbara Roper, a member of the PCAOB's Investor Advisory Group and director of investor protection with the Consumer Federation of America. Rather than working for investors -- the ones, after all, who use financial statements most -- auditors continue to view themselves as working for management, Roper adds.

On the other hand, at least some of the changes under discussion are "trying to push on auditors what users should be doing," to educate themselves about a company," says Robert Kollar, also a CPA, and director of the master of accountancy program at Duquesne University.

Just what, if any, changes to audit standards are merited will be sorted out over the next few months. In a release also dated March 22, PCAOB Chair James Doty indicated that the Board would work to develop a "meaningful proposal for change in a concept release," possibly as early as this summer.

What Do the Tea Leaves Say?

As the PCAOB does its work, those likely to be affected by the outcome are trying to read the tea leaves to get a handle on the potential changes. Auditors worry that they'll be asked to provide information that may be sensitive, unavailable, or that could leave them vulnerable to lawsuits.

For instance, one suggestion would have auditors relay to investors any discussions they had with the company's audit committee, says Leland Graul, national director of accounting with BDO. The idea "would have a chilling impact on the openness of discussions between auditors and audit committees," which can encompass such issues as the auditors' impression of the management team, he says.

Given the litigious nature of modern society, auditors worry that the more they're forced to say, the more liability they might be assuming, Texas A&M's Shaub says. They're also concerned that the client is the only source of information. Some of the proposed changes could lead to a point/counterpoint exchange between the company and its auditors that would offer little value.

At the same time, the current pass/fail nature of the audit report means that investors can't discern whether a company squeaked or sailed through the audit, Shaub notes. The result? "Knowledgeable users just skim the audit info, looking for anything out of the ordinary."

Auditors could provide more information in several areas without usurping the role of management or the board or increasing their liability, Shaub adds. A case in point: "We should be able to identify those things that we know are risks." For instance, companies operating in parts of the world in which corruption is rampant are at risk of getting caught up in it. The audit report could note this.

Highlighting the risk actually could rein in the auditor's liability, Shaub says. If corruption later becomes an issue, the auditor could point to the disclosures it had been making.

Moving Ahead

Another area that Shaub sees for auditors to take a more forthcoming stand relates to statements of how aggressive companies are in their reporting, compared to others in their industry. "That's not difficult," he says. The auditors also could discuss the steps they've taken to ensure their independence from the company they're auditing.

The PCAOB appears to be forging ahead at a relatively rapid pace. The fact that it issued a discussion paper before announcing an exposure draft is one sign of its determination to make changes, Shaub says. "There's momentum at the Board for change."

At the same time, it's become clear that auditors and the companies that issue financial statements view the role of the audit very differently from investors, the PCAOB's Roper observes. That means any proposed changes are likely to engender strong opposition.

Some auditors recognize the need for change, even if they question some of the proposals. "It's good for us as a profession to go back in," and periodically review how we operate, says Barry Smith, a CPA and member of RW Group LLC in Landenberg, Pa. At the same time, Smith notes that audits need to focus on the accuracy of the financial statements and their compliance with accounting principles; they're not "an insurance policy" against poor investment choices.

Over the long term, the changes could enhance the auditing profession, Shaub says. Auditors who take a minimalist approach to their work lose sight of what it means to be a profession: to take responsibility for their work to the public. "We should want to be valuable," he points out, "and we're valuable if we provide information people use."

Keywords: Business Management  
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