Earlier this week, the Board heard a presentation from Marty Baumann and his team on the staff's outreach efforts to investors, preparers, audit committee members, auditors, academics and others on possible changes to the auditor's report. At that meeting, Chairman Doty instructed the Office of the Chief Auditor to move forward on development of a concept release for the Board's consideration on or about June 30, a roundtable discussion in the fall and a proposed standard in the first quarter of 2012.
Today, you will hear an overview of the staff's findings and have an opportunity to discuss some possible changes to the auditor's report.
As I said at Tuesday's open meeting, the Board's mandate from the Sarbanes-Oxley Act of 2002 is "… to protect the interests of investors … in the preparation of informative, [accurate and independent] audit reports," and I believe that this project is an important step for the Board to take in fulfilling that directive.
The usefulness of the auditor's report has been studied by various groups and organizations for decades — both domestically and internationally — resulting in virtually no change. The fact that questions about the usefulness of the audit report have resurfaced around the world is not surprising. Given recent events — and I am referring to the financial crisis as well as the increasing complexity of business and financial reporting standards — and, the fact that, as former SEC Chairman Manuel Cohen said as far back as 1978, "… the standard [auditor's] report compresses … considerable expenditure of skilled effort into relatively few words and paragraphs," it is no wonder investors are asking for more information.
Last week, at a meeting of the PCAOB Investor Advisory Group, Professor Joseph Carcello, [who is also a member of that Advisory Group in addition to this one], made a compelling presentation regarding investors' key views on improving the auditor's report. Gus Sauter of Vanguard, Norman Harrison (formerly) of Breeden Capital, and Ann Yerger of the Council of Institutional Investors joined Professor Carcello in making this presentation. Also participating in the research and preparation of the presentation were Brandon Becker of TIAA-CREF, Michael Head of TD Ameritrade, Bonnie Hill of Icon Blue, Peter Nachtwey of Legg Mason, Anne Simpson of CalPERS, and Eric Vincent of Ospraie Management.
Under Professor Carcello's leadership, the group surveyed leaders from investment banks, hedge funds, private equity funds, mutual funds, endowments, and pension funds on the usefulness of the current auditor's report and their suggestions for improvement.
Responses to that survey represented well over eight trillion dollars under management and it was clear that investors want more from auditors. In particular, the survey results indicate that investors want auditors to discuss their assessment of management's estimates and judgments, and how the auditors arrived at that assessment. They also want auditors to discuss areas of high financial statement and audit risk, unusual transactions, and the quality of an issuer's accounting practices and policies.
Investors have indicated a need for this type of information to better anticipate certain events or issues having an impact upon the financial statements. They cite the recent financial crisis as an example of where expanded auditor reporting in advance of the crisis may have been helpful in assessing the quality of the financial statements underlying their investments.
The auditor's reporting model has been discussed several times over the past few years by both this group and the Board's Investor Advisory Group. Investors have long indicated that they are the auditor's customer and, therefore, the auditor's responsibility is to report in a manner that meets their needs. It is clear that investors are seeking more useful and relevant information from the auditor beyond the current pass/fail auditor's report. And investors are looking to the auditor, not management or the audit committee, for this additional information.
Before turning the discussion over to Jennifer, I would like to commend you and your team, Marty, for your dedication to advancing this project. And I will leave you with one last quote from Michel Barnier, the Commissioner for Internal Market and Services at the European Commission, who said at a recent EC conference on its Green Paper, "The status quo is not an option for the auditing world. It's not about changing for the sake of change, but to reply to very real needs which we can no longer ignore."
Jennifer, I look forward to a robust discussion.