Will auditors of public companies be required to report "difficult" or "contentious" issues, and "close calls," including material matters that were corrected or resolved to the auditor's satisfaction before the end of the reporting period? The auditor could be required to do just that, and more, if ideas put forth in the
PCAOB's Concept Release on the Auditor's Reporting Model, published earlier this year, were to advance to proposed and final rulemaking.
Earlier today, the
PCAOB announced it will hold a public roundtable on September 15 to gather additional feedback on the Concept Release on the Auditor's Reporting Model, in addition to the feedback it receives through comment letters (comment deadline: September 30). See the
PCAOB's Briefing Paper for the Roundtable.
Close Calls, Difficult & Contenious Issues, Would Be Reported By Auditor in Proposed New "AD&A"As we previously reported, the PCAOB's Concept Release on the Auditor's reporting model includes a proposed new section in the auditor's report called the Auditor's Discussion & Analysis or AD&A, modelled after the SEC requirement for management to provide an MD&A section, or Management's Discussion & Analysis.
Pros and cons associated the above potential new reporting requirement is discussed in Appendix C of the Concept Release under 'staff outreach'. Here is an excerpt, illustrating the varying views of investors and others (preparers, auditors) [
style, but not content,
reformatted for emphasis]:
3. Difficult or Contentious Issues, Including "Close Calls"
Some outreach participants recommended that the auditor identify in the auditor's report the most difficult or contentious issues discussed with management.
Difficult or contentious issues might arise in various stages of the audit, including in the auditor's evaluation of management's judgments, estimates, and accounting policies. Many outreach participants described difficult or contentious issues as those critical matters that concerned the auditor when making the auditor's final assessment of whether the financial statements are presented fairly.
A difficult issue might not always be synonymous with a contentious issue.
Rather, a difficult issue might be a matter that requires significant consideration or consultation; however, the auditor might agree with management's conclusions regarding the issue.
A contentious issue might be a matter that not only requires significant consideration or consultation but also leads to significant points of disagreement, debate or deliberation between the auditor and management.
Regardless of whether the issue is difficult or contentious, some outreach participants indicated that they would like information concerning how management and the auditor ultimately resolved the issue in order for the auditor to issue an unqualified opinion.
In addition, some outreach participants suggested the auditor should discuss the "close calls" encountered by the auditor in performing the audit.
Some investors described close calls to include matters such as –
• Those accounting decisions that required significant deliberation by the auditor and management before being deemed to be acceptable within the applicable financial accounting framework,
• Those matters related to internal control over financial reporting that required significant deliberation by the auditor and management, and
• A financial statement issue that had a potential material impact to the financial statements and was corrected prior to the end of the period.
Some outreach participants indicated that knowing the difficult or contentious issues or the close calls would provide insight into the auditor's significant judgments.
Others suggested that the auditor provide a listing of the issues in the auditor's report (e.g., difficult, contentious, or close calls) without the auditor's views. Based on this information, financial statement users could determine if further investigation is warranted as part of their investment analysis.
However, other outreach participants believe that if the difficult or contentious issues, or "close calls" are resolved to the auditor's satisfaction then description of them in the auditor's report would not provide relevant and useful information and could be misleading regarding the meaning of the auditor's opinion (i.e., the issuance of an unqualified opinion demonstrates that the auditor has satisfactorily resolved all material matters).
Some outreach participants indicated that due to the financial complexity of most public companies and their many accounting policies and estimates, there are typically a significant number of difficult or contentious issues or close calls in the normal course of the audit. Therefore, it may be hard for the auditor to determine which particular issues are most important to be discussed in the auditor's report.
Next StepsThe potential requirements listed above, and other ideas floated in the PCAOB's June 2011 Concept Release on the Auditor's Reporting Model - not to be confused with
PCAOB's August, 2011 Concept Release on Auditor Independence (see Jim Petersen's latest post on the auditor independence concept release in his blog, Re:Balance; and Broc Romanek's post today in
TheCorporateCounsel.net blog) are just what the title of the document says - "Concepts," they are not "standards" or "rules" - yet.
That is, some of the concepts in the Concept Release ultimately may not become standards or rules, or could be further fine-tuned, based on the PCAOB board's deliberations upon reviewing public comments received on the Concept Release, as well as comments received if the board advances the ball to the next step of issuing proposed rulemaking (i.e., a proposed auditing standard(s) on the auditor's reporting model). Then, the PCAOB board would deliberate developing a final standard after reviewing comments received on the proposed standard(s).
My Two Cents: This is a "Big Deal"
Before proceeding, I remind you of the
disclaimer posted on the right side of this blog. I believe the significant potential changes to the auditors' report bear careful attention by preparers, auditors, investors and others, particularly issues such as the reporting of 'close calls' that were caught by the auditor or raised by the auditor in the review of financial statements prior to the information in question being publicly reported, and after any corrections or modifications were made to the auditor's satisfaction. In some ways, that would be like putting the teacher's or professor's grade of your 'rough draft' on your final report card, vs. your final grade after making changes based on the teacher/professor's suggestions. Or, like having doctor's report out to you a mistake they 'almost' made, but caught in time. As much as that might sound like information you'd 'like to know,' is there a 'need to know,' and could not only the cost of such reporting (including hours of time in the general counsel's office and outside counsel of the reporting entity and potentially the audit firm) worth it on such highly judgemental instances, particularly if modifications and corrections were made pre-publication to the auditor's satisfaction? Is such reporting best suited for public reporting, or internal reporting to the board of directors, particularly the audit committee?
The items discussed in this post are only a few of the concepts floated in the PCAOB's Concept Release. I would suggest interested parties (preparers, auditors, investors and others) review the Concept Release, tune into the Sept. 15 PCAOB public roundtable, and consider submitting a comment letter by the September 30 deadline. Thoughtful commentary, particularly when it includes data that substantiates practical considerations, and includes suggestions for alternatives that may better assist in reaching the goal of a particular proposal, can assist standard-setting and regulatory bodies in producing thoughtful rules and standards. Reference can be made to
comment letters filed so far on this Concept Release.
