From the October 2011 issue of Treasury & Risk magazine

PCAOB Aims to Encourage More Analysis in Audit Letter

Auditors warn the changes could confuse investors, rather than help them.

The Public Company Accounting Oversight Board (PCAOB) has proposed revising the auditor’s report that appears at the end of public company financial statements in an effort to make it less of a pass-fail exercise.

A study by the American Accounting Association (AAA) suggests the current audit letter is basically a rubber stamp. In one survey, 53,834, or 62%, of the auditors’ reports examined were unqualified, 32,337, or 37%, were unqualified with emphasis on a matter, and only 32, or 0.04%, were either qualified, adverse or no opinion. The AAA’s comment letter on the proposed change described the reports as mostly “standard or ‘boilerplate’ wording.”

To address that shortcoming, the PCAOB is discussing several changes. It wants to encourage the auditor to include discussion and analysis, which could cover such topics as audit risk and audit procedures, and it is proposing required or expanded use of emphasis paragraphs, which highlight matters of importance in the company’s financial statements.

The PCAOB also proposes that auditors give assurance concerning information outside of the company’s financial statements, such as the management discussion and analysis. Finally, it suggests that auditors clarify the language they use.

By Sept. 22, the PCAOB had received 15 comment letters. The strongest endorsement for the proposed changes came from the AAA’s Audit Standing Committee.

Most of the letters from auditors opposed the changes, warning that they would be burdensome and could end up being more confusing than helpful for investors—particularly smaller investors. One CPA firm, New England-based BerryDunn, warned the changes “could be perceived” as a kind of “hedging” by auditors of an otherwise unqualified opinion.

There were also concerns cited about the impact on the audit committee. Dennis Beresford, former chairman of the Financial Accounting Standards Board, wrote that “many of the [PCAOB] suggestions could make the [audit] committee’s oversight of the audit and communications with external auditors more difficult without providing the promised benefits to ordinary investors.”

The U.S. Chamber opposed all the changes, arguing that they “will only exacerbate the disclosure overload problem.”

The PCAOB calendar calls for the board to issue a proposed standard for audit letters in the first quarter of next year. Any new rule would have to be approved by the Securities and Exchange Commission.

The PCAOB’s Website offers a briefing document on this proposal, as well as a transcript of the September roundtable.


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