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Volume 22, No. 12: Rewriting The Audit Report: The PCAOB Moves Closer

$1,000.00

In the summer of 2011, the Public Company Accounting Oversight Board issued a concept release intended to improve the way auditors communicate with investors. It wouldn’t take much to improve it: the current audit report is the text equivalent of a light switch, which is either on or off. The current audit report is either a pass or fail grade: the financial statements conform to generally accepted accounting principles, or they don’t conform. Investors, who foot the bill for the auditor’s fees, have long wanted more benefits from the auditor’s inside view of a firm’s inside workings.

The 2011 concept release was ambitious enough. It proposed the inclusion of an Auditor’s Discussion and Analysis; would have required and expanded the use of “emphasis paragraphs” in the report; proposed auditor assurance on other information outside the financial statements; and would have clarified language in the standard auditor’s report, particularly with regard to auditor responsibilities.

Two years later, the PCAOB has issued a pair of proposed auditing standards – one on the auditor’s report, the other on the auditor’s responsibilities for other information in documents containing the auditor’s report. Neither one completely embodies the concept release’s proposed changes, but some of the 2011 proposal’s DNA shows through in the proposed standards.

The PCAOB doesn’t intend to change the actions of the auditor, only the way they tell investors how they did their work – and in theory, should not cause further cost increases to companies and their shareholders. In practice, auditors are likely to be very cautious about any “new and improved” information they provide to shareholders and will take care to insulate themselves from any additional liability; you can reasonably expect costs to increase. In this report, we take an educated guess at how much costs can increase before investors will notice.

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