Accounting and financial firms and business groups are sending comment letters to the Securities and Exchange Commission ahead of a deadline Friday for approving a new standard from the Public Company Accounting Oversight Board on expanding the scope of audit reports.
In June, the PCAOB voted to approve a new standard that would significantly change the auditor’s reporting model, adding a section discussing “critical audit matters” (see PCAOB makes major changes to auditor’s report). The critical audit matters would include those issues that involve “especially challenging, subjective or complex auditor judgment.” Auditors would also need to disclose their tenure in terms of how many years they have consecutively audited a company.
The SEC typically approves standards approved by the PCAOB, but several firms and trade groups have been weighing in for and against the new standard.
On Tuesday, BDO USA submitted its comment letter, which was generally supportive of the new standard, but asked for more time to implement changes such as the critical audit matters, or CAMs, section. “We believe the improvements to the auditor’s report to clarify the auditor’s role and responsibilities related to the audit of the financial statements and to make the auditor’s report easier to read will benefit investors and other users of the financial statements, and that implementation of such changes should be relatively straightforward,” said a letter signed by the firm. “However, other changes, such as the communication of critical audit matters, will require more time and resources to implement and, as such, we support the phased in effective dates for the communication of critical audit matters. Furthermore, we support the Board’s intention to monitor the implementation of critical audit matters, as we believe such monitoring will be critical to successful implementation. In this regard, we encourage the PCAOB to work with the SEC to establish a plan to actively monitor implementation that includes obtaining periodic feedback throughout the implementation period from auditors, users, and academic researchers to assess whether the communication of critical audit matters is accomplishing its intended purpose and whether the expanded auditor reporting is resulting in any unintended consequences. The phased in effective dates for critical audit matters will provide the PCAOB and SEC with the opportunity to evaluate the experience of large accelerated filers and their auditors in implementing the standard and to make revisions as necessary prior to the effective date for all other companies.”
David T. Hirschmann, president and CEO of the U.S. Chamber of Commerce’s Center for Capital Competitiveness, however, urged the SEC not to approve the provisions regarding critical audit matters and audit tenure. The Chamber has also urged other groups to oppose the changes, according to The Wall Street Journal.
“As currently designed, this standard will lead to the disclosure of immaterial information, increase liability costs for businesses and audit firms, and create a chilling effect on audit committee-auditor communications,” Hirschmann wrote in his comment letter. “If approved, the Proposed Standard will contribute to disclosure ineffectiveness and overload, degrading the ability of the SEC to promote efficiency, competition and capital formation without a demonstration of the benefits of the proposal. Perhaps most troubling, the Proposed Standard fails to demonstrate the benefits that would accrue to public companies, investors, and the capital markets if the proposal were adopted.”
In contrast, a prominent group representing investors, the Council of Institutional Investors, said it supported the disclosure of critical audit matters. “We support the Proposed Rules’ auditor reporting model that requires the independent auditor to communicate CAMs in the auditor’s report,” said the comment letter from CII general counsel Jeffrey P. Mahoney. “We believe that the required communication of CAMs will make the auditor’s report more relevant and useful to investors and other readers by providing tailored, audit-specific information directly from the auditor’s point of view.”
The CII also said it supported the disclosure of auditor tenure in the audit report. “We believe the required information regarding auditor tenure will be useful to investors in deciding whether to vote to ratify appointment of the auditor and on the election or reelection of the audit committee chair and members,” wrote the CII. “As support for our view, we note the existence of academic research indicating that investors view long-term auditor-company relationships as adversely affecting audit quality.”
Jack Ciesielski, president of R.G. Associates and longtime publisher of the Analyst’s Accounting Observer, also said he supported the new standard in his comment letter. “Over the lifespan of this project, the PCAOB has consistently modified its planned requirements to allay the fears of its critics,” he noted. “I believe there will be no unreasonably lengthy audit reports resulting from the Board’s most recent iteration. I urge the Commission to approve the Board’s proposal for the benefit of investors, as soon as possible.”
Elizabeth Mooney and Dane Mott, accounting analysts with the Capital Group Companies, a global investment management firm, also said they supported the new standard. “We appreciate that the SEC and PCAOB are pursuing this advancement and support SEC approval of the Proposed Standard without delay,” they wrote in their comment letter. “It is long overdue for auditors of U.S. issuers to provide meaningful information about audits to investors, the customers of independent audits. Audit committees and investors should know about critical audit matters from the perspective of the independent auditor. It’s important for investors to have an understanding of the auditor’s perspective on the financial statements including their risk assessment and what they ultimately found.”
Paul Lee, head of corporate governance at Aberdeen Asset Management, said he supports the PCAOB proposals on auditor reporting. “We firmly encourage the Commission to approve the proposed PCAOB standard on auditor reporting,” he wrote. “We believe that extensive due diligence, over a remarkable 6 year period, has led to a proposal that will add real value to investors’ understanding of corporate reporting and so lead to greater accountability, as well as shine a light on the delivery of audits and so raise the quality of auditing over time. We have been active users of auditor reports in other markets over the time since they have been enhanced and have seen significant benefits emerge in terms of investor confidence and understanding; we believe that the PCAOB proposal offers the prospect of similar benefits in the US market.”
However, Michael Jones, a CPA, expressed his opposition in a comment filed earlier this month. “Having auditors include Critical Accounting Matters in the audit report is a horrible idea,” he wrote. “You have huge differences based on different individual partners, you will chill communication to auditors for fear of what they will add in the report and it will needlessly increase audit costs as the most expensive audit team members will pour over this wording the last few days (instead of doing real audit work). Then companies will have to run edits through the report late as the auditors change the wording which is hard to do and time consuming late in the process with the auditors. At the end of the day, these will become boiler plate and have no value to investors anyways. It will just increase costs and take focus was from real audit work right before filing.”
Another negative comment from a CPA came from Bruce J. Nordstrom of Nordstrom Associates in Flagstaff, Ariz., chairman of the audit committee at Pinnacle West Capital Corporation. “While I appreciate the PCAOB's efforts to improve and enhance the auditor's report, I do not support the proposed rule changes,” he wrote. "I strongly disagree with the PCAOB's requirement to include critical audit matters (CAMS) within the audit report. I believe the inclusion of CAMS in the audit report undermines the role of the audit committee, will impede open communications between the auditors and the audit committee, and inappropriately shifts the auditor function from that of an attest function to a management role. Furthermore, I do not support the PCAOB's proposal to disclose audit tenure within the audit report, as that information is irrelevant.”
