Last month, the Public Company Accounting Oversight Board
("PCAOB") proposed new standards for auditor reports
that, if adopted, would dramatically change the role and the
responsibility of audit firms in the financial reporting
process—and not for the better. The proposed standards would
require auditors to discuss "critical audit matters"
relating to the audit, which are those matters the auditor
addressed that involved the most difficult, subjective, or complex
auditor judgments, or that posed the most difficulty to the auditor
in obtaining sufficient evidence or in forming an opinion on the
financial statements. Even more troublesome, the proposed standards
would also require the auditor to evaluate "other
information" that is included in a company's annual report
filed with the SEC in order to identify material inconsistencies
between the information and the company's audited financial
statements and material misstatements of fact contained in the
annual report—in essence, an overall review of the entire
disclosure document, including subject matters as to which the
audit firm is, in our view, unexposed and unexpert. The deadline
for comments to the proposed standards is December 11, 2013, and
the PCAOB may hold a public roundtable in 2014 to discuss the
proposed standards and the comments it receives. We intend to
comment and would welcome participation by our clients.
The stated purpose for expanded reporting requirements is to make
audit reports more informative and useful for investors. If
adopted, however, the proposed standards would make the financial
reporting process even more complex and cumbersome, without
producing any information that is of real value to investors for
the vast majority of publicly traded companies. Under the proposed
standards, auditors would be required to disclose audit matters and
information that otherwise would not have required disclosure under
existing auditor and financial reporting standards, which is at
best distracting, and at worst could raise significant liability
issues for both the auditor and for the company. It would be
difficult if not impossible for an auditor that has conducted a
complex and lengthy audit to disclose each and every audit matter
that required a sophisticated auditor judgment or otherwise
involved a high level of difficulty, but each matter that is not
disclosed presents an opportunity for investors or others to
second-guess the auditor's decisions with the benefit of
20–20 hindsight. Further, the auditor's report is not
intended to be a due diligence report on the company or the audit
process.
Moreover, the audit process does not lend itself to this sort of
one-size-fits-all disclosure; the audit process is by its nature
complex and subjective, and each audit has its own difficulties and
challenges based on the company, its industry, its personnel, the
audit team, and myriad other factors. Disclosures focused on the
process of the audit rather than the results will not be comparable
among companies and, in our view, will be largely meaningless to
investors. In fact, the prospect of public disclosure of sensitive
details of the audit process may have a chilling effect on the
disclosures a company includes in its annual report.
On a more fundamental level, the proposed standards misconstrue
the role of the auditor in the financial reporting process and
grossly underweight the degree of care by which most publicly
traded companies already approach the SEC reporting process. The
auditor's role is to attest as to financial information
prepared by management; the responsibility for accurate and
transparent financial reporting lies squarely with the company.
Burdening audit firms with significant additional disclosure
responsibilities—and potential liability—will not
improve the financial statements and disclosures on which
stakeholders make investment decisions, but it will most certainly
impose substantial and unnecessary additional costs on public
companies.
A more detailed analysis of the proposed auditor report standards
is included in a Jones Day Alert titled "
PCAOB Proposes Important Changes to Audit Reports," which
was published on September 5.
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