By Allison M. Henry, CPA, CGMA, vice president – professional and technical standards
In my June 12, 2017, blog post, “PCAOB Approves Most Significant Changes to Auditor’s Report in 70 Years,” I discussed the key provisions of the overhauled auditor’s report that was issued June 1, 2017, by the Public Company Accounting Oversight Board (PCAOB).
The PCAOB standards are required to be approved by the Securities and Exchange Commission (SEC). Approval is typically granted with little controversy, however, as reported by Michael Cohn on AccountingToday.com (Aug. 23, 2017), in this case many large companies and associations representing millions of workers appealed to the SEC to reject the new standard in its current form. They asserted in their correspondence that the proposed reporting by the auditor of critical audit matters represents a “fundamental reordering of financial reporting responsibilities,” making the auditor a source of original information. They argue that the required reporting of critical audit matters would stifle communications with the audit committee and conclude that the costs outweigh the benefits.
On Oct. 23, 2017, the SEC approved the PCAOB’s report, with Chairman Jay Clayton stating, “I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with main street investors ending up in a worse position than they were before.” This is a tenuous basis upon which to finalize an audit standard that presents significant ethical challenges and could result in additional practitioner liability. Unfortunately, his potential disappointment may not shame trial lawyers into not taking legal action.
In the meantime, PICPA’s Accounting and Auditing Procedures Committee has been following the AICPA Auditing Standards Board’s (ASB) project on auditor’s reports to evaluate its impact on privately held companies. On Nov. 28, 2017, the ASB issued an exposure document, Proposed Statements on Auditing Standards – Auditor Reporting, that would require significant changes to audit reports issued in accordance with generally accepted auditing standards. In short, the ASB proposed the following significant changes: moving the opinion to the first paragraph; adding an auditor statement of compliance with ethical responsibilities and independence; expanding the discussion of the auditor’s responsibilities and the key features of an audit; expanding the description of management’s responsibilities for preparing and fairly presenting the financial statements, and requiring the identification of those responsible for the oversight of the financial reporting process if they differ from those responsible for financial statement preparation; adding new reporting for other information included in an annual report; revising the reporting on the entities ability to continue as a going concern; and providing guidance when the communication of key audit matters is contractually required.
Many will be relieved that the AICPA’s proposed requirement to disclose key audit matters was not expanded to privately held companies. How long these entities will be able to have separate reporting requirements remains to be seen. Comments on the AICPA’s proposed changes are due by May 15, 2018. It is important that your voice be heard.
If you would like to share your perspective on this project with PICPA’s A&A committee, please forward your comments to me at firstname.lastname@example.org.