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 Statement on Proposed Auditing Standards Regarding the Auditor’s Report and the Auditor’s Responsibilities Regarding Other Information 

DATE: Aug. 13, 2013 
SPEAKER: James R. Doty, Chairman 
EVENT: PCAOB Open Board Meeting 
LOCATION: Washington, DC 

The proposed standards to enhance the auditor's reporting model mark a watershed moment for auditing in the United States.

To arrive at an opinion as to whether financial statements are fairly presented, the auditor amasses a great body of evidence. The auditor then distills that evidence into a collection of judgments, which form the basis for the auditor's opinion.

Investors depend on the opinion and, necessarily, on those underlying judgments. Yet the judgments themselves are merely implied, assumed to stand behind the opinion, but out of reach to the typical investor.

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.

Broad popular participation has made our public markets strong and deep with liquidity. But dispersed, diversified ownership has its weaknesses, including no direct access to the auditor's insights on the most significant matters the auditor addressed in the audit.

The proposed standards before the Board today would make the audit report more relevant to investors by establishing criteria and a framework for providing deeper insights from the audit, based on information the auditor already knows from the audit. The proposed standards are based on extensive outreach and public comment on both what would make the auditor's report more useful as well as what auditors are in a position to deliver.

I see the proposed standards as a first step. They have been a long time coming, more than 10 years after Enron and other financial reporting failures that led Congress to establish the PCAOB to devote close, independent oversight to the audit, and nearly five years after the first effects of the financial crisis that still looms over sectors of the U.S. and European economies.

Now having opened the audit report to address the needs of users, it will likely not be another 70 years before it is opened again. Changes may be incremental, as we evaluate the usefulness of improvements and, if successful, engender further change as demand for more kinds of auditor assurance grows.

For now, by requiring and providing a framework to report critical audit matters, the proposed standards would keep the auditors in their area of expertise — the audit. No one wants to return to the days before the pass-fail model was instituted, when auditors' free-form writing could obscure disclaimers of assurance on financial statements. There is a real public interest in retaining the binary, pass-fail opinion. The proposed framework provides concrete criteria and factors to consider and apply in light of the specific audit at issue, in order to limit both the discretion to avoid disclosure as well as the opportunity to fall back on boilerplate.

Today's proposal would also require auditors to evaluate certain other information, besides the financial statements, such as the company's annual report and management's discussion and analysis. And, for the first time, the audit report would describe this evaluation and its results. We retain management's responsibility for the financial information.

The proposal stops far short of requiring a full audit of such information. Annual reports include a range of information and business metrics that the auditor does not audit. The auditor by no means knows everything about those metrics. But the auditor does learn a great deal about the company through its audit. When that knowledge reveals a discrepancy, the auditor should see that it is fixed or report it. Here, too, today's proposal seeks to capitalize on auditor's knowledge and ensure that the audit retains its value in the eyes of investors.

These are, in my view, more than just promising ideas: today's proposal presents a coherent, intellectually rigorous and disciplined analytical model, designed to promote more useful reporting to the public. That said, we all know that any proposal can be improved, and I look forward to public comment that will help us shape the new audit report in the most useful ways practicable.

 

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