As described in the September 2013 Update, the PCAOB has proposed farreaching changes to the auditor’s report. In early April, the Board held a public roundtable discussion on these proposals. The 36 roundtable panelists –including six public company board members -- expressed a wide range of views, pro and con, concerning the proposals.
The Board’s proposals have two basic elements. First, auditors would be required to include in the audit report a discussion of "critical audit matters" (CAMs). CAMs are matters that involved the most difficult, subjective, or complex auditor judgments or posed the most difficulty to the auditor in obtaining audit evidence or forming an opinion on the financial statements. CAMs would be unique to each audit, and, as a result, audit reports would differ between companies.
Second, the PCAOB’s proposals would expand the auditor’s responsibility for information outside of the financial statements. The auditor would be required to evaluate information, other than the financial statements, included in a company's annual report filed with the SEC. For Form 10-K filers, this would include Selected Financial Data, MD&A, and exhibits. The audit report would include a description of the auditor’s responsibility for this information and the results of the
The January 2014 Update includes a summary of written comments from audit committee members submitted to the PCAOB on CAM reporting. Those comments were highly critical of the idea. The views expressed by audit committee members and other public company director panelists at the PCAOB’s April 2-3 roundtable on the reporting proposals were more mixed.
Below are excerpts from the written statements of the six roundtable panelists identified on the PCAOB’s witness list as public company board members. Two of those panelists, Messrs. Johnson and Land, were invited primarily to discuss their experience with expanded auditor reporting in the United Kingdom; it appears that they serve on boards of U.K. companies that are not U.S.-listed.
Joan C. Amble: “I feel compelled to note that I strongly disagree with the direction the Board has taken on this proposal and do not support it as currently written. Along with the vast majority of audit committee members with whom I have had the opportunity to discuss this matter since the exposure draft was issued, I believe including Critical Audit Matters in the auditor’s report would lead only to much longer, but not more useful, reports by including information already adequately provided by management in footnotes or MD&A” Ms. Amble is a member of three public company audit committees. She is also a member of the NACD’s Audit Committee Chair Advisory Council.
Alan Beller: “I believe the proposed standard relating to disclosure of critical audit matters (“CAMs”) will not improve financial reporting or investors’ understanding for a number of reasons, including * * * the disclosure will not in many cases be likely to convey meaningful information regarding financial reporting or its quality * * * [and] [t]he proposed standard raises significant risks of adversely impacting the relationship between audit committees and external auditors. The proposed other information standard * * * also raises concerns for a number of reasons, including * * * [t]here is no persuasive indication that the proposed standard will lead to better financial reporting * * * [and] [t]he scope of the information to which the proposed standard will apply is overly broad in that it will require auditors to ’evaluate’ information and make judgments as to inconsistency, inaccuracy and materiality that are outside their expertise * * *.” Mr. Beller recommended that the PCAOB instead develop a proposal that would require auditors to provide negative assurance in the audit report on the company’s disclosure concerning critical accounting estimates. Mr. Beller is a member of the audit committee of a public company. He is also a law firm partner and former Director of the SEC’s Division of Corporation Finance.
Peter Clapman: “In my view, the PCAOB has proposed very modest
changes in the reporting system that should be widely embraced. For
example, in proposing better disclosure regarding “critical audit matters”,
the current “pass‐fail” system is retained but not to the exclusion of
providing additional information to investors. Often a company might
“pass” but only after the auditor had to reconcile serious questions in the
audit process. In my view, the fact that serious questions surfaced should
be disclosed to investors.” The PCAOB’s panelist list describes Mr.
Clapman as a public company board member and former Chief
Investment Counsel of TIAA--‐CREF. His statement indicates that he is a
also former chairman of the International Corporate Governance Network.