Is the Auditors’ Report Telling Enough?

8/18/2011

By David J. Bayens, CPA

The Public Company Accounting Oversight Board (the Board) has issued a document for comment that would expand the auditors’ report on the financial statements of public companies. The Board solicited input from interested parties. Responses indicated a consensus that auditors’ have significant insight into the operations of companies. From that vantage point, they should be in a position to provide more relevant and useful information than they presently do.

The standard auditors’ report is filled with “boilerplate” language which varies very little from one report to another. In their comments regarding the format for the present report, many respondents indicated that the standardized language provides consistency, comparability and clarity. The standard auditors’ report either indicates, without qualification, that the company’s financial statements are fairly presented, or else, if it doesn’t, it indicates the reason why. This “pass/fail” language is relatively easy to understand.

In its “Concept Release” the Board had proposals for expanded disclosures by auditors’ in the following areas:

• Adding an “Auditors’ Discussion and Analysis”- a supplemental narrative in which auditors could disclose their views regarding significant matters. Included in this would be standard topics such as audit procedures and results, risk assessments and independence but also difficult and contentious issues and “close call” judgments.
• Expanded use of “emphasis of matter” language. Presently, these types of disclosures are optional. This proposal would make them mandatory. The new language would identify and discuss the most significant matters in the financial statements.
• Assurance language on other information outside the financial statements- including MD&A.
• More explanation of certain terms used in the auditors’ report such as reasonable assurance, responsibility for detecting fraud, and auditor independence.

Several interested parties have responded to these proposals. Respondents agreed that additional disclosures such as these would be very useful. Several concerns were expressed, such as:

• Whether the requirement to disclose potentially sensitive information would negatively impact the channels of communication between auditors and representatives of the company,
• Whether certain disclosures would be more appropriately made by the audit committee, and
• Whether the expansion in areas covered by auditors’ reports would increase their risk of litigation.

Following the September 30th deadline for comments, the Board plans to hold public meetings to discuss these issues. Presently there is nothing formally contemplated regarding adapting similar requirements for auditors’ reports on private companies.