Volume 27, No. 4

The investment world has endured, even thrived, on a rapid pace of evolution, in just about every regard. The speed with which information is transmitted by companies to markets has been whittled down to nanoseconds; investor attention spans and holding periods have compressed by nearly as much. Derivatives have made hedging possible of practically any kind of risk, and in so doing, perhaps raised risks that aren’t even understood yet. Financial models have multiplied exponentially, and cheap or free software puts many of those models into the hands of more users who never understood the models in their theoretical realm. The financial world continues turning, and faster with each spin.

One thing hasn’t changed much in the financial world: the auditor’s report, which hasn’t evolved much since the 1940’s. That’s changing: evolution has come to the audit opinion. The length of an auditor’s tenure is now displayed right after the auditor opinion. In the “Basis for Opinions” section, the audit report now carries a clearer definition of both auditor and management responsibilities, while providing a high-level overview of what an audit entails. Beginning next year, investors will be treated to the information the auditors bring to the audit committee: audit reports will contain discussions of “critical audit matters,” or CAMs.

The “Basis for Opinions” won’t generate much excitement, and the CAMs won’t show until the June 30, 2019 year end firms report. Don’t despair: there’s very good, fresh information about current audits, found in the little-known AuditorSearch database provided by the Public Company Accounting Oversight Board on their website. Who was the engagement partner on the audit of a company? It’s in the database. How much of the audit work was performed by an audit firm other than the one signing the opinion? That’s in the database, too. From there, investors can start connecting the dots in assessing the quality of an audit.

 Investors are going to finally have some meaty information that will allow them to make judgments about the quality of an audit - if the quality of the audit concerns them. It should, because the auditor is supposed to be acting in the interests of investors - and the only time investors usually care about the auditor is when they ask the too-late question, “Where were the auditors?” The auditor should be the investor’s ally, not adversary, and the new information will put pressure on auditors to amplify the quality of their audits. Evolution may now be catching up to the audit world - if politics don’t put a halt to it.

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