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 Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements

DATE: June 21, 2011
SPEAKER: James R. Doty, Chairman
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

The proposed concept release on the auditor's reporting model before the Board today is an important step to enhance the relevance of audits to the investing public.

The recent financial crisis has prompted serious concerns about the role and value of audits. While auditors most certainly did not cause the financial crisis, some people have legitimately questioned whether audits adequately served investors' needs in the months and years before and during the crisis.

For decades, the auditor's report has identified the financial statements that were audited, described the general nature of the audit, and presented the auditor's opinion as to whether, taken in their entirety, those statements present the company's financial results and position fairly in all material respects.

Given the effort involved in an audit of a large company, and the complexity of many financial statements, investors want deeper insight from the auditor. This concept release explores several ways that audit reports could better serve investors.

The alternatives the release describes are not mutually exclusive. A revised auditor's report could include one or a combination of these alternatives, or elements of these alternatives. Commenters may also suggest other alternatives to consider.

I commend the staff for bringing these alternatives forward. They are the result of several months' of engagement with investors and others to identify concrete ways in which audit reports can be improved. This outreach was critical, since unlike most other standard setting projects, this project required us to understand user needs before we could develop means of meeting those needs.

In this regard, we have come a long way. In the early stage of the project, we faced generalized investor dissatisfaction with the pass-fail model, and generalized frustration with auditors who had issued unqualified opinions on the financial statements of banks that later failed. (This dissatisfaction was not new. It has been studied by various groups over many decades.)

The project thus began as an inquiry into the phenomenon called the "expectation gap." Depending on where one sat, this meant either that investors expect too much from audits or that auditors do too little.

This concept release, however, carries the discussion well beyond any expectation gap. It's not about deciding that investors should expect less than absolute assurance, or that auditors should do more to obtain reasonable assurance.

This project is about what investors want from audit reports in the future, and how audit reports can be more useful to society. It's about how audits can provide investors more insightful assessments of management stewardship.

The alternatives described in the release are thus focused on enhancing the relevance of the auditor's communication to investors. They would not change the fundamental role of the auditor to perform an audit and attest to management's assertions as embodied in management's financial statements. They are not intended to put the auditor in the position of reporting financial information for management.

That said, together with several other initiatives the Board will consider in the coming weeks, they are intended to spur debate over how to change auditing, from a culture that emphasizes client service to a culture that emphasizes public service. Our oversight should foster conduct consistent with the franchise our federal securities laws accord the audit profession.

I am mindful that culture does not change quickly. It would be naïve to think that merely changing the auditor's report would trigger the culture change we need. This is why I have advocated a holistic approach aimed at enhancing the credibility and transparency of audits as well as their relevance.

Before I turn to my fellow Board members for discussion, let me say a word about costs. Depending on the nature and extent of additional information to be communicated in the auditor's report, new auditing requirements might be necessary or appropriate. Further, some alternatives might increase the scope of audit procedures to extend to disclosures beyond the financial statements.

These possibilities may prompt some commenters to point out that increasing scope will likely increase audit fees. To be sure, increasing procedures or scope involves cost, but so does investor doubt about the reliability of management's statements. I will be interested in feedback on all of these kinds of costs.

 

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