I would like to join Chairman Doty in welcoming the roundtable panelists and in thanking you for your willingness to provide the Board with your views regarding ways in which the auditor's reporting model could be improved.
Exploring whether to expand what auditors communicate to financial statement users raises fundamental issues about the purpose of the audit and about what it means to be an auditor. The Board has heard repeatedly that investors want more from auditors than the assurance that the traditional pass/fail report provides. Frustration over financial institution disclosures in the run-up to the economic crisis crystallized dissatisfaction with the current reporting model.
To address these concerns, the Board's concept release floats a series of alternatives. At one end of the spectrum, auditors might be required to create an auditor's discussion and analysis commenting 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 accounting or auditing decisions as "close calls" and to describe the underlying issues and risks. The AD&A proposal rests partly on the notion that auditors had insight into undisclosed risks and dubious judgments on which the pre-crisis reporting of major financial institutions rested and should have alerted investors.
In contrast, other concept release alternatives would expand auditors' reporting responsibilities by building on their traditional attestation role without requiring the auditor to compete with management as an information source. For example, emphasis paragraphs keyed to management's disclosures would be a way for the auditor to indicate the existing disclosures that, in his or her view, are the most significant to understanding the company's financial reporting. Auditors could also be required to opine on the accuracy and completeness of information outside the financial statements that management already provides, such as in MD&A or in earnings releases.
I have serious doubts about whether financial reporting would benefit from requiring auditors to move from attesting to, or emphasizing the importance of, information that management presents and into creating their own information about the company's financial reporting. As the concept release discusses, even without requiring auditor-created commentary, there is still room to expand the scope and relevance of auditor communications. In any event, this is a threshold issue with which the Board will have to grapple as this project moves ahead. I am looking forward to hearing the views of roundtable participants on that question and on the full range of possible ways of making auditor reporting more relevant to users.