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Expanded Auditor Report Remains a Regulatory Priority

PCAOB Chairman James Doty told a group of institutional investors that he wants to make the auditor’s report more useful for them. The board has been working on a project to require auditors to go beyond the current pass-fail model to provide more details about problems in clients’ financial statements.

The PCAOB plans to issue a revised proposal to expand the auditor’s report in the coming months.

Chairman James Doty recently told a group of institutional investors that he hoped they will find the new format useful once the project is completed.

The current pass-fail report has not substantially changed for 75 years, and some investors want more insight into how auditors felt when they examined a company’s financial statements.

“We want to put in the audit report… what were the significant, challenging, difficult issues that auditors faced,” Doty said at a conference hosted by the Council of Institutional Investors (CII) in Washington on March 21, 2016. “It should give investors a better understanding of how these matters relate to financial reporting generally.”

The PCAOB has been working on the project for several years, and the plan to issue a revised proposal is the audit regulator’s response to concerns raised by auditors and financial executives who commented on the August 2013 proposal in Release No. 2013-005, Proposed Auditing Standards on the Auditor’s Report and The Auditor’s Responsibilities Regarding Other Information and Related Amendments.

The release proposed that auditors disclose critical audit matters (CAMs), or issues they found difficult and complex during an audit. Auditors and companies said the proposed matters were too broad, and they were concerned that the critical matters may sometimes reveal company information that management has not disclosed, which is not the job of the auditor.

In response to their concerns, the revised proposal is likely to define a critical matter as an issue arising from the audit of the financial statements that was communicated or required to be communicated to a client’s audit committee. The information would have to be considered material.

Doty called the proposal a means for sparking discussions between auditors and their clients about problems in a client’s accounting.

“Our role as a board is to create that firm rock on which the auditor can say to management, ‘this is something we need to talk about,'” he said.

The CII’s representatives have said investors are auditors’ true clients, and Doty echoed their views at the conference.

In the meantime, auditors, investors, and companies responded positively to the UK’s decision to expand auditors’ reports in 2013.

In Doty’s view, the British experience indicates that CAM reporting may be good for the profession and its ability to attract and retain young talent.

“People are looking for ways of finding a productive career,” Doty said. “The UK indication is that young auditors who have been writing these expanded reports, these long form reports, find that it invigorated… them.”

He added that he would be worried if the project did not lead to useful changes for U.S. investors.

“It’s a plea for comments,” Doty told conference attendees. “It would be very helpful to know what you think.”

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