Standard-setters around the world are considering changes related to the auditor’s reporting model. In today’s increasingly interconnected global environment, the regulatory actions in one country can influence those in another.
In June, the Financial Reporting Council (FRC) in the United Kingdom finalized its auditor reporting standard. In July, the International Auditing and Assurance Standards Board’s (IAASB) released for comment its proposed standard on auditor reporting. The US Public Company Accounting Oversight Board’s (PCAOB) is expected to propose a standard by year-end. The IAASB and PCAOB previously issued an invitation to comment and concept release related to auditor reporting in June 2012 and June 2011, respectively.
The FRC standard requires the auditor’s report, among other matters, to describe the assessed risks of material misstatement that had the greatest effect on the overall audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team. The proposed IAASB standard includes certain elements consistent with the FRC standard ─ most notably required auditor disclosure for listed entities of “key audit matters,” which are matters that are most significant to the audit. Similarly, the PCAOB concept release included expanded use of emphasis paragraphs to highlight the most significant matters in a company's financial statements and key audit procedures related to those matters.
The proposed IAASB standard also includes a requirement that the auditor’s report for all entities contain conclusions related to the appropriateness of the going concern basis of accounting and whether a material uncertainty exists that may cast significant doubt on the entity's ability to continue as a going concern. The PCAOB is expected to release its proposed standard related to going concern by year-end, which comes on the heels of the FASB’s recent Exposure Draft, Disclosure of Uncertainties about an Entity’s Going Concern Presumption. More information on that draft can be found here.
While the FRC standard, which is effective for audits that began on or after October 1, 2012, applies only to entities that report on the application of the UK Corporate Governance Code, it will most likely influence the debate regarding the PCAOB and IAASB proposed standards. These changes coincide with new, expanded audit committee reporting requirements in the UK.
For 2013, there are no changes to the standards that govern auditor reporting in the United States.
On July 8, the US House of Representatives passed the Audit Integrity and Job Protection Act, which would prohibit the Public Company Accounting Oversight Board (PCAOB) from moving forward with mandatory audit firm rotation.
"The US House of Representatives voted overwhelmingly -- 321 to 62 -- to uphold a key responsibility of public company audit committees -- selection of the audit firm,” said Laura Cox Kaplan, leader of PwC’s Government, Regulatory Affairs & Public Policy practice. “The vote was significantly bipartisan and sends a clear signal to other regulators around the world."
Although a path forward in the Senate is still considered uphill, a bipartisan companion bill to the Audit Integrity and Job Protection Act is expected to be introduced in the coming weeks. It will likely be debated in the Senate Banking Committee.
In August 2011, the PCAOB issued a concept release to solicit public comment on ways that auditor independence, objectivity, and professional skepticism can be enhanced, including through mandatory rotation of audit firms. Mandatory audit firm rotation would limit the number of consecutive years for which a registered public accounting firm could serve as the auditor of a public company.
Proponents of audit firm rotation say it would provide an environment that promotes auditor independence, objectivity, and professional skepticism. Opponents argue the costs would outweigh the benefits and audit quality could suffer.
In its comment letter, PwC stated it is concerned with audit firm rotation because, among other things:
The PCAOB recently signaled which of its standard-setting projects are a priority for the remainder of 2013. On June 30 its Office of the Chief Auditor issued its standard-setting agenda. That agenda has been “significantly informed” by current economic conditions, according to a PCAOB statement. For example, the board has determined, based on its oversight activities, that there is a need to revisit such issues as the auditor’s reporting model, quality control standards, auditing accounting estimates (including fair value measurements), and auditors’ responsibilities with respect to other accounting firms, individual accountants, and specialists.
By the end of the year the PCAOB expects to issue proposals on the auditor’s reporting model, auditors’ responsibilities with respect to other accounting firms, individual accountants, and specialists, and on auditing accounting estimates. It is also working on a concept release for quality control standards.