While CFOs have opposed proposals to make auditor reports more than pass-fail check-offs of company financials, adding information to the report could attract capital markets investment, the chief auditor of the Public Company Accounting Oversight Board contends.
Speaking at the eighth annual auditing conference held by the Zicklin School of Business and Baruch College, Martin Baumann, the chief auditor of the PCAOB, said that two new board proposals to expand the auditor’s report could lead to improvements in financial reporting that investors have been seeking. “I think both those standards will have a benefit to financial reporting quality and to capital formation overall,” he said.
Yet by and large, the attitude of financial preparers toward adding more information to the auditor’s report has been that “we should be talking about the financial statements and auditors should simply say whether they are presented fairly or not,” according to Baumann.
Among finance chiefs who commented on the idea prior to the PCAOB’s issuance of its August 13 proposal to amplify the auditor’s report, Carol Tomé, CFO of Home Depot, seems fairly typical. She wrote, for example, that management, “with the oversight and input from the audit committee, is in the best position to determine whether our financial disclosures are complete, accurate and provide our investor community with appropriate insight into our business.”
In contrast, the company’s auditor “is not well suited to independently report information about the company beyond what is required to be disclosed by management under GAAP and [Securities and Exchange Commission] regulations,” Tomé wrote.
While the proposed standard would retain the pass-fail model in the auditor’s report, it would mark the first substantial changes to the report since the 1940s, according to Baumann — changes that could provide a view of an auditor’s state of mind as he or she assesses whether a client’s financials have been represented fairly. (The comment period on the proposal ended Dec. 11, and Baumann said that the PCAOB would hold roundtable discussions on the comments, “probably at the end of the first quarter of 2014.”)
In one of the more prominent changes, the PCAOB proposed that the auditor’s report detail “critical audit matters [CAM] as determined by the auditor.” Such matters would be the ones “the auditor addressed during the audit of the financial statements that involved the most difficult, subjective, or complex auditor judgments or posed the most difficulty to the auditor in obtaining sufficient appropriate audit evidence or forming an opinion on the financial statements.” If the auditor found no critical matter, he or she would have to state that in the report.
The proposed additions also would include “new elements” related to auditor independence and auditor tenure and “enhancements to existing language in the auditor’s report related to the auditor’s responsibilities for fraud and notes to the financial statements.”