Society comment letter critiques proposed audit report changes

The current format for the standard audit report is just fine the way it is, the NYSSCPA told the International Auditing and Assurance Standards Board (IAASB) in a recent comment letter, and, according to Julian E. Jacoby, vice chair of the Society’s Auditing Standards Committee, it soon plans to tell the Public Company Accounting Oversight Board (PCAOB) much the same thing.

“The Society will have a parallel response,” said Jacoby of the forthcoming comment letter to the PCAOB, noting though, that it will not be “exactly the same,” in order to account for any “presentation differences” between the PCAOB’s concept release and the IAASB’s consultation paper.

“Overall, we do not see an overriding need to revise substantively the format of the audit report, and believe that expanding the content and reorganizing the format would not have a considerable impact on the effectiveness of the audit report,” the NYSSCPA told the IAASB, which was taking public comments on a May 16 consultation paper that explores ways to enhance the usefulness of auditor reporting.

In June, the PCAOB also proposed a number of changes to the standard audit report model on the domestic U.S. level. As of press time, the Society was preparing a letter to the PCAOB about that same issue, Jacoby said. Comments were due on Sept. 30.

Narrowing the ‘information gap’
The IAASB paper describes problematic issues with current financial reporting, including a perceived “information gap” identified by some stakeholders, and then sets out possible options for change and seeks input as to whether such options might be effective in enhancing auditor reporting and the communicative value of the auditor’s report.

The IAASB’s paper also said that while users seem to generally recognize and value the independent auditor’s opinion on an entity’s financial statements, it is not as useful or informative as it could be, and that the standard audit could include more and better data about the entity than it currently provides. Such information coming from an independent auditor would help users more accurately assess an entity’s financial condition, the IAASB said.

One way auditors could address what the IAASB calls the information gap is through additional reporting by either management or the auditor, the board said. Such information—including potential key risks, changes to accounting policies with likely significant impact, unusual transactions, and the auditor’s perspective on key assumptions underlying judgments that materially affect the financial statements—could help narrow the information gap perceived by users.

Although the Society acknowledged that investors may not understand the audit report’s objectives, it said that changes should be made to the financial reporting framework, not the auditing standards.
“[I]f the financial reporting framework is not robust enough to provide information in a form that appropriately communicates the information needed by investors, then the financial reporting framework would be the place to make improvements,” the Society said in the Sept. 14 letter, which was drafted by members of the SEC Practice, Auditing Standards and International Accounting and Auditing committees.

Adding content and additional reporting responsibilities beyond the standard audit report will, the letter said, not change the basic objective of the audit, which is to confirm that a financial statement is accurate and written in conformance with appropriate accounting standards. The auditor’s role is to issue an opinion, “and then it’s [up to] the users to decide whether they like that or not,” said International Accounting and Auditing Committee Chair Renee Mikalopas-Cassidy, one of the letter’s principal drafters. “So putting in an analysis starts to blur the distinction from this traditional role.”
Beyond that, including auditor discussion and analysis in the standard report would be “highly problematic,” said the letter, as it might be confusing to the users of financial statements or “become self-serving and redundant.” Possible “dueling information” between the auditor and management could also lead to credibility issues for both the entity and the auditor.

Requiring these additional responsibilities will “change the fundamental role of the auditor, which is to detect material misstatements,” the Society stated.

Emphasis paragraphs
Financial statement users could more easily navigate and understand financial statements through increased, or even required, use of “emphasis of matter paragraphs,” the IAASB said, which would highlight specific parts of the audit report to draw a user’s attention to sections that may be particularly important, such as key risk areas of material misstatement, areas of significant auditor judgment, the level of materiality that the auditor applied, or areas of significant difficulty encountered during the audit.

The Society, however, found this suggestion problematic as well, saying that, in many cases, it would diminish the effect of the auditor’s opinion—the large number of issues that would warrant an emphasis paragraph would ultimately “dilute the reporting objectives.” The use of such paragraphs could also open up auditors to legal liabilities, said Mikalopas-Cassidy.

“There are certain things that have been established where you indicate an item of emphasis, should it be required, and … to require an emphasis paragraph would lead to people perhaps coming up with things to put in the paragraph rather than be in a position of saying there is nothing of emphasis required,” she said.

The Society’s comment letter did support requiring auditors to include certain information normally outside the sphere of financial statements, such as, management’s discussion and analysis, the examination standards for which have been in place in the United States since 2001; and possibly adding a glossary of terms to accompany the auditor’s report “until such time as users become more comfortable with the terms and concepts used.”

“There have always been, for public companies, financial statements and annual reports, and there would be a reading of those documents to make sure there isn’t anything inconsistent,” said Mikalopas-Cassidy.

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