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

I want to begin by underscoring the importance of this project and the far-reaching impact it could have on auditing. Investors have been emphatic that they want more from auditors than the traditional pass/fail report. In particular, the perception that investors should have been alerted to the risks that ultimately triggered the financial crisis has reignited long-smoldering dissatisfaction with the current audit opinion.

In response, the Board has been looking for more than a year at how it can increase the relevance of the information that auditors communicate to financial statement users. That effort has included discussion with both the Standing Advisory Group and the Investor Advisory Group; a series of focus-group sessions with investors, preparers, and auditors; and a public Board-staff dialogue in March. The concept release and the proposed roundtable rest on what we have heard and learned.

Nonetheless, some difficult issues still need to be resolved. One threshold question is whether auditors should move beyond their traditional role of attesting to information that management prepares. Under some of the ideas floated in the concept release, auditors would be required to provide commentary on such matters as management's judgments and estimates and its selection of accounting policies and practices. The auditor might also be asked to characterize particular auditing judgments on which the decision to issue a clean opinion is based as "close calls".

I hope those who comment on the release will focus on whether or not the auditor should play that sort of role. These kinds of disclosures would provide some added insight into the company's financial reporting. At the same time, there is a risk of confusing users rather than enlightening them if management and the auditor present competing views of the financial statements. Also, "close call" or "contentious issue" disclosure might have the unintended effect of transforming disagreements that previously would have precluded the auditor from issuing a clean opinion into merely matters of disclosure in the auditor's discussion and analysis. In any event, the benefits and risks of this new kind of auditor reporting will need to be carefully weighed.

However, even without requiring auditor commentary, there is still plenty of room to expand the scope and relevance of the auditor's work. For example —

• Auditors could provide more detailed information about the audit. The auditor's view of the audit risks, and how the auditor addressed those risks, might give users fresh insight into the issues surrounding the company's financial reporting. Risk, including the risk of fraud, is something that the auditor is already forced to think about in planning and performing the audit.
• Auditors could also make greater use of emphasis paragraphs in their opinions. Emphasis paragraphs keyed to management disclosures would be a way for the auditor to indicate the matters that, in the auditor's view, are the most significant to understanding the company's financial reporting.
• Auditors could also be required to opine on information outside the financial statements. An auditor's opinion on the accuracy and completeness of Management's Discussion and Analysis would be a way of providing investors with more assurance about management's statements and management with more incentive to fully comply with MD&A requirements. This idea could be extended to other kinds of information, such as earnings releases or an expanded audit committee report.

Finally, I want to emphasize that deciding how the reporting model should change is just the first stage of this project. Turning any of the ideas in the concept release into a workable auditor's report would also require the Board to write new auditing standards. Without an infrastructure of auditing standards, comparability between reports would be impossible. In addition, there would be no yardstick to evaluate the adequacy of the auditor's work, if it is questioned, either in a Board inspection or in an enforcement action or private litigation. The Board has experience in fashioning auditing standards to govern a new type of audit report, and I am sure we could and would formulate effective standards for MD&A opinions or an auditor discussion and analysis. The standard-setting challenges in some of these areas could, however, prove to be formidable and time-consuming.

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Before I turn to questions, I want recognize the staff work that has gone into the concept release. Associate Chief Auditor Jessica Watts has been the able and tireless principal draftsperson, under the leadership of Chief Auditor, Marty Baumann, and Deputy Chief Auditor, Jennifer Rand. Bob Burns, Associate General Counsel, and Nina Mojiri-Azad, Assistant General Counsel, have also made significant contributions. I want also to note that, as always, the SEC's Office of the Chief Accountant has provided valuable insight and suggestions.