Volume 20, No. 9

 

A PCAOB Proposal: Not Your Father's Audit Opinion:  The auditor’s opinion on the financial statements have only slightly more information content than the nutrition label on a bag of potato chips. The typical “clean” opinion identifies the financial statements examined by the auditor, the auditing standards followed, and states whether or not the financials are presented fairly in conformity with accounting standards. It’s often called a “pass/fail” model: the auditor’s opinion states the financials are fairly presented (pass) or not (fail).

For the thousands of man-hours and millions of dollars invested in the typical annual audit, that’s a pretty unsatisfying snack for investors to digest. After all, the auditing firm is inside the firm owned by the shareholders - and is privy to more facts than expressed by the standard audit opinion. The auditor is working for the shareholders - and the audit report should reflect more of the intelligence gleaned from the audit than the simple pass/fail opinion suggests has been learned.

Think of it this way: when was the last time you actually read an audit opinion? Perhaps never, because you didn’t expect it to contain any information. The PCAOB wants to change that: after gathering opinions from its own advisory boards and conducting broad-ranging interviews, the Board has put together a proposal that could radically increase the information built into the auditor’s report. Expect resistance from both auditors and companies - and if it becomes a reality, expect higher audit fees, too.

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