PCAOB Proposes Additional Information in Public Audit Reports

The Public Company Accounting Oversight Board this morning proposed that additional detailed information be included in the public audit report to investors and other financial statement users.

One new standard would require auditors to explain critical matters that arose during the audit. The other standard would require auditors to look for inconsistencies or misstatements in financial reports that fall outside of the audited financial statements, Compliance Week reported. The proposal will undergo a public comment period.

The proposals “mark a watershed moment for auditing in the United States,” said PCAOB Chairman James Doty, according to Compliance Week. “The standard form audit report was designed by the audit profession more than 70 years ago. While it serves a critical purpose, many question whether it could do more.”

This would be the first significant change made to the auditor’s report since the 1940s. The reports basically say whether the financial statements fairly present the company’s financial condition and whether they followed generally accepted accounting principles (GAAP). Critics have said the reports fail to give investors enough insight into the auditor’s findings, including any concerns that may have arisen during the audit, Reuters reported.

Lynn Turner, a former chief accountant at the SEC, would like to see an end to what he calls an “abusive practice.” He told Reuters, “For too long, auditors have been found to have known about serious problems with financial reports they failed to tell investors about, instead choosing to protect management.”

If the PCAOB proposal is adopted, auditors will be required to communicate so-called “critical audit matters,” issues that involved the most difficult or subjective judgments, or issues that posed difficulties for the auditors to obtain sufficient evidence. The proposal also proposal calls for auditors to make several other disclosures related to their independence and the amount of time they have reviewed the books of their clients.

The proposal will undergo a public examination. The PCAOB has conducted extensive outreach efforts over the last three years to investors, auditors, preparers of financial statements, audit committee members, and others. Many audit report users have said that they want more insightful information about the results of the audit.