IAASB/PCAOB: Standard setters propose bold new models for auditor’s reports

01 Sep 2013

The US audit watchdog has proposed wider disclosure in the auditor’s report, hot on the heels of a proposed international standard suggesting the same. The Public Company Accounting Oversight Board (PCAOB) and the International Auditing and Assurance Standards Board (IAASB) have followed earlier consultations with exposure drafts that accept that the current pass/fail model of auditor reporting is no longer sufficiently informative.

PCAOB member Lewis Ferguson said: “The current form of the report was developed to increase uniformity and, consequently, comparability of audit reports, a goal that the current form of the auditor’s report achieved admirably but at the cost of communicating little useful information about what the auditor actually does or learns in the course of an audit.” That is the opportunity that both the IAASB’s and PCAOB’s proposals address.

"A watershed moment for auditing"
- James Doty, PCAOB member

“Communicating critical audit matters…will make the report more informative, thereby increasing its relevance and usefulness to investors and other financial statement users,” said Martin Baumann, chief PCAOB auditor, on the release of the PCAOB’s proposed new auditor reporting standard. The IAASB chairman Arnold Schilder said that he viewed the changes the IAASB is proposing as “critical to the perceived value of the financial statement audit”, a comment echoed by the PCAOB, who also described a more “robust” report as part of rebuilding trust between auditors, companies and the public. James Doty, PCAOB chairman referred to the proposed new standards as marking a “watershed moment for auditing in the United States”.

Key proposals in the IAASB and US PCAOB consultations include:

  • Increased transparency into those matters that were considered of most significance in the audit or involved the most difficulty (IAASB’s Key audit matters and the US PCAOB’s Critical audit matters).
  • A new section on going concern that makes explicit the auditor’s conclusions on the use of the going concern basis and material uncertainties (IAASB only).
  • A conclusion from the auditor about the outcome of the auditor’s responsibilities for “other information” (e.g., the front part of the annual report). Both the IAASB and US PCAOB are proposing revisions to their respective standards setting out those responsibilities.
  • A statement about independence.
  • Disclosure of the year the auditor began serving consecutively as the company’s auditor (US PCAOB only).
  • Enhancements to the existing standard language describing the audit and the auditor’s responsibilities.

“We are beyond a debate about the merits of change to the shape of the auditor’s report,” said Richard Sexton, PwC Global Assurance leader, responding to the release of the exposure drafts. “Energies need to shift to begin working on what will be needed to deliver the new style reports.”

The new reports are not without challenge –both sets of proposals set out a structure, but leave a lot of judgment to auditors to select the ‘key’ or ‘critical’ audit issues they will discuss in their reports. Vin Colman, PwC’s US Assurance leader, echoed the global view that research has shown considerable appetite among investors for more information from the auditor, adding that PwC US “strongly supports any enhancements to the auditor’s report that will address the needs of today’s users”.

Diana Hiller, Assurance partner at PwC, said: “the proposals by the various standard setters (including the recent new UK auditor’s report) are remarkably similar. Each standard setter has, however, defined the ‘filter’ to select the key audit matters differently – either through a planning and scoping lens (as in the new UK standard) or influenced more by outcome.- Despite different words being used, it’s hard to see that substantially different judgments will, or at least should, be made.”

Overall, it is hoped that the new model of disclosure will not adversely affect management’s responsibility to disclose relevant company information, or blur the lines between auditors, financial analysts and investment advisers. As PCAOB board member Jay Harrison explained to the Financial Times, he sees the wider window on the audit “as telling investors what kept the auditor up at night”.

The comment period for the IAASB’s exposure draft closes on 22 November 2013. The comment period for the PCAOB draft ends on 11 December 2013.