PCAOB’s New Audit Report Proposal

In case you missed it: in May, the Public Company Accounting Oversight Board issued a new proposal for modifying the auditor’s standard report. It’s the latest iteration in a long-running project to make the auditor’s report a little more than an expensive rubber stamp on the financial statements.

(If you don’t agree the audit report is a mere rubber stamp on the financial statements, ask yourself this question as an investor: when was the last time you read one? If you can answer that, a follow-up question: what did it say? Chances are that you haven’t read one in years, if ever.)

The proposal has one really big feature to it: the inclusion in the audit report of “critical audit matters,” or CAMs, which the auditor has communicated (or was required to communicate) to the audit committee of the board of directors, concerning audit-specific issues involving the exercise of significant auditor judgment. Obviously, this is not going to be welcomed by issuers or auditors.

Done properly, it could make investors a lot more knowledgeable about the company’s accounting policies and principles employed. While companies are required to describe their accounting policies in the footnotes, and their most critical accounting policies and estimates in the Management’s Discussion & Analysis, this is different in several ways. Those two current disclosures can sometimes be a litany of boilerplate language, and sometimes they’re even a very close copy of each other. Both are really statements of management to shareholders.

CAMs, on the other hand, are the result of an expert’s assessment of those accounting principles, in application. They’re communicated directly to the shareholders by the agent who is working for them – the auditor. It should be a heads-up to investors that if they don’t have a good technical understanding of the accounting matters addressed in CAMs, they should take it upon themselves to get that understanding. It’s not something an investor is going to drop into an earnings estimate, but it does give them information to test their own knowledge. For someone who’s trying to do their job right, that can be important.

I’ve written a comment letter in support of the proposal, and you can obtain it here. The comment deadline is August 15, and I’d encourage you to respond whether you agree with the PCAOB’s idea or not. They certainly make it easy for you: you can simply dash off a quick email, if you like. Here are the links to the email submission page and other ways to submit a comment.

 

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