Introduction to Auditor's Reporting Model Update

The last agenda topic is an update on the Board's review of the auditor's reporting model. The objective of this project is to determine whether the Board should expand what auditors report to financial statement users — that is, whether the end product of an audit should be more than the traditional, standardized, pass-fail report. In my view, this initiative is the most significant item on the Board's docket. It raises fundamental questions about the purpose and value of the audit. Expanding the contours of what auditors communicate could have a profound impact on investors, auditors, and public company financial reporting managements and directors.

The Board has been looking for nearly two years at how it can increase the relevance of the information that auditors provide to financial statement users. That effort has included public discussion with both this advisory group and with the Board's Investor Advisory Group. During 2010 and early 2011, we also held focus-group sessions with investors, preparers, auditors, and others. In June, the Board issued a concept release outlining alternatives for expanding auditor reporting. We followed up with a public roundtable in September at which those alternatives were hotly debated.

The staff is now analyzing what we have learned from the comments on the concept release. The file is voluminous, with 151 letters at last count and additional submissions still arriving. We have heard from a wide range of perspectives, including pension and fund managers, investor associations, analysts, investment advisors, public companies, audit committee members, accounting firms, academics, and other regulators. Jennifer Rand, the Board's Deputy Chief Auditor, is going to give you an overview of the comments. Before she does that, however, I would like to highlight some of the issues that the letters suggest the Board will have to grapple with as this project moves ahead. These views are, of course, solely my own.

If the comment file makes one thing clear it is that investors deeply believe that they deserve more from auditors. There is strong support for requiring the auditor to provide insight into financial statement risk, significant judgments and estimates, and the quality of the company's accounting choices. If we were to treat the comment process as an investor plebiscite, it's quite clear that a broad auditor's discussion and analysis requirement would be the winning choice.

However, we have also received thoughtful views that raise some warning flags. For example —

  • A theme expressed in many comments is that management, not the auditor, should remain the primary source of information and insight regarding the company's financial reporting. Managements and directors see a serious risk of investor confusion if there are competing analytical presentations from the company and the auditor.
  • Some commenters have also told us that the audit committee's governance role in overseeing financial reporting could be undermined by a broad auditor reporting requirement. In particular, audit committee members believe that the quality and candor of information they receive could be compromised, if the kind of information about financial reporting risk and accounting judgments that the auditor provides them today routinely become public.
  • Questions have also been raised about whether the training and standards that currently define the profession equip auditors to create and communicate new information, as opposed to providing assurance on information created by others. Some auditors fear that the effect of that kind of responsibility could be to widen, rather than narrow, the expectations gap that already bedevils the profession and ultimately to decrease public confidence in auditing.

The Board's mission is to protect the interests of investors and further the public interest in the preparation of informative audit reports. In light of that mission, we obviously need to give considerable weight to the investor views we have received. But we also need to test potential changes in the reporting model against the goal of promoting full and fair disclosure. The Board is committed to increasing the usefulness and relevance of the auditor's report. But, in my view, despite the volume and sophistication of the comments, the solution to the issues raised in the concept release is not self-evident, and creating a workable new reporting model will require the Board to make some difficult judgments.

I am looking forward to the discussion this morning and to hearing any additional thoughts any of the SAG members have on how the Board should modernize the reporting model. I will now turn the floor over to Jennifer, who will take you through the comments in more detail.

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