This study reported in Compliance Week may put some wind in the sails of those seeking to enhance the nature of the disclosures in standard audit reports and audit committee reports in the US. The study showed that, in the UK, which has already mandated expanded audit reports and audit committee reports, enhanced reports have led to better audits. The researchers speculated that the expanded requirements gave the auditors more leverage over management.
In the UK, auditing standards were recently amended to require auditors to discuss, in audit reports, “assessed risks of material misstatements, the materiality threshold, and the scope of the audit.” In addition, audit committees were required to discuss, in audit committee reports, “significant financial statement issues that were discussed by the audit committee and how they were addressed.” The study demonstrated that, following implementation of these changes, companies in the UK “began reporting fewer abnormal accruals and showed less tendency to just meet or beat analyst forecasts…without significant increases in audit costs or time taken to issue audit reports. ‘Taken together, this study documents that the new auditor and audit committee reporting requirements are associated with a significant improvement in audit quality without detecting a significant incremental cost,’ the study concludes.”
Here in the US, both the PCAOB and the SEC have been considering requirements for enhanced disclosures by auditors and audit committees. For several years, the PCAOB has been evaluating whether to require the disclosure of the audit firm’s tenure and the name of engagement partners either as part of or separate from the audit report (see this post), and the SEC has considered adding similar disclosure as part of the audit committee report (see this post). In addition, the PCAOB has proposed that the auditor be required to communicate “critical audit matters” in the auditor’s report, defined as matters that the auditor addressed during the audit that involved the most difficult, subjective or complex auditor judgments; posed the most difficulty in obtaining sufficient appropriate evidence; or posed the most difficulty with respect to forming an opinion on the financial statements. Essentially, the concept is intended to capture the matters that “kept the auditor up at night.” (See this post. ) The SEC is also seeking comment on a recent concept release suggesting potential changes to required disclosures that would “address the audit committee’s responsibilities with respect to the appointment, compensation, retention, and oversight of the work of the registered public accounting firm and better inform investors about how the audit committee executes those responsibilities.” These disclosures might include, for example, qualitative disclosures about the nature and timing of the required communications between the audit committee and the auditor, such as whether and when the required communications occurred and the audit committee’s consideration of the matters discussed; and communications with the auditor related to “the auditor’s overall audit strategy, timing, significant risks identified, nature and extent of specialized skill used in the audit, planned use of other independent public accounting firms or other persons, planned use of internal audit, basis for determining that the auditor can serve as principal auditor, and results of the audit, among others, and how the audit committee considered these items in its oversight of the independent auditor.” (See this post. ) Will this results of this study showing a positive impact in the UK be enough to tip the scales in the US?