Statement on Auditor's Reporting Model Outreach Efforts

Nature and extent of OCA outreach activities

Regarding the nature and extent of OCA's outreach, our focus in the outreach was primarily on improving the current, standard auditor's report considering the auditor's responsibilities today.

Before we began our outreach, we reviewed academic research, surveys, and other publications to inform the structure and nature of our outreach efforts. We also considered the input and advice of our Standing Advisory Group and Investor Advisory Group, as well as activities of other standard-setters and regulators.

We held in-person meetings and conference calls with more than 80 individuals, several of which are with large constituency groups.

Our first area of focus was to obtain investor views. The investors or investor groups represented money managers, asset management funds, pension funds, and wealth management funds, organizations that represent institutional investors, investor advocates, buy and sell-side analysts from some of the largest investment firms, and analysts from the largest credit rating agencies.

Our next area of focus was to obtain views from preparers, audit committee members and auditors.

  1. Participants in our preparer discussions included representatives from several Fortune 50 companies, Fortune 500 companies, and some smaller public companies.
  2. Participants in our audit committee discussions included representatives from small, non-accelerated filers to Fortune 50 companies.
  3. Participants in our auditor discussions included leaders from large and small accounting firms who audit both accelerated and non-accelerated filers.

We also obtained the perspectives of individuals who previously held leadership roles in the accounting profession or at regulatory organizations. Some of these individuals have contributed to several discussions and commissions that have resulted in recommendations regarding improving the auditor's report, such as the American Assembly, Cohen Commission, Panel on Audit Effectiveness, and ACAP.

In our outreach, we sought the participant's views on —

  1. Whether changes or improvements were needed to the auditor's report, and, if so, what types of changes or improvements were needed.
  2. Which types of changes or improvements were most important, and how the changes or improvements would be valuable to them.
  3. What were their preferences regarding the current pass/fail model and standard auditor's report.
  4. What were their views regarding the format of the audit report.

Let me turn to a discussion of the views we obtained from the various participants from our recent outreach starting with investors.

Key outreach views

Investor views —

Investors expressed a desire to obtain more information from the auditor in the auditor's report in a number of areas, which I will summarize into 5 key areas —

  1. The audit or what the auditor did (includes information about the risks identified by the auditor, materiality, engagement statistics, independence)
  2. The company's financial statements or what the auditor found (includes auditor's views on management's judgments and estimates, accounting policies, and difficult or contentious issues)
  3. Clarifications in the language of the standard auditor's report (such as the auditor's responsibility for fraud, the meaning of reasonable assurance, and the auditor's responsibility for disclosures),
  4. Clarity or enhanced responsibility for information outside the financial statements. For instance, some investors said they would like some level of auditor assurance on MD&A and other information outside the financial statements (for example, non-GAAP information and earnings releases). The auditor's responsibility today for other information is to read and consider whether such information or the manner of its presentation is materially inconsistent with the financial statements or represent a material misstatement of fact.
  5. Information similar to key issues shared between the auditor and the audit committee (for instance, auditors communicate with the audit committee about significant accounting policies, management judgments and accounting estimates, among others)

Preparer views —

Overall, preparers generally do not agree that the auditor should provide additional information about the company's financial statements in the auditor's report, although they are somewhat less concerned about providing more information about the audit.

Preparers are concerned about —

  1. Obscuring the responsibilities of management and the auditor
  2. The auditor disclosing information that would be in addition to, or potentially in conflict with, management's disclosures.
  3. The cost of additional auditor reporting, as well as the potential impact it could have on the overall auditor/management relationship.

While preparers would prefer that any additional disclosures come from them, not from the auditors, preparers said they would be supportive of changes to the auditor's report that are fact-based and not subjective in nature. Changes that are fact-based that they are supporting of including are —

  1. Clarifying certain language in the auditor's report,
  2. Clarifying in an auditor's report what an audit does and does not represent, and
  3. Referring readers to significant areas in the financial statements (such as critical accounting policies or estimates) by including references to management's disclosures.

Audit committee member views —

Overall, audit committee members' views are generally consistent with the preparers' views.

Similar to preparers, they are supportive of —

  1. Changes that clarify the language in the standard auditor's report,
  2. The auditor highlighting management's critical policies by including references to where those policies are disclosed by management.

However, audit committee members have expressed concern that —

  1. Additional auditor reporting may undermine the role of the audit committee, since management or the audit committees are in a better position to provide additional company information,
  2. And, since audit committees have oversight responsibility for the audit on behalf of investors, and meet regularly with management and the auditors, audit committee members have expressed that the investor may not have the appropriate context for audit committee communications.
  3. The possibility that auditor reporting on matters communicated to the audit committee might stifle otherwise candid discussions on issues between them.

Auditor views —

Overall, auditors' views are generally consistent with the preparers' and audit committee members' views regarding the fact that the auditor should not be the original source for providing additional information about the company or the financial statements. They believe additional information should be fact-based or objective, rather than subjective, and should not obscure the roles of the audit committee, management, and the auditor.

However, auditors are supportive of changes that clarify the language in the auditor's report. Additionally, some auditors have indicated the following as possible areas for change as it relates to the auditor's reporting model.

  1. Provide some type of auditor association with management's disclosure of critical accounting estimates in the MD&A, since this information includes much of the types of information requested by investors.
  2. If the audit committee report were to be expanded, auditors could explore providing some level of assurance on such report. This is similar to the type of reporting currently being considered by the U.K. Financial Reporting Council.
  3. Provide additional information with respect to audit scope and procedures including a discussion of client-specific audit procedures performed.

Overall, auditors are concerned about —

  1. Auditor litigation, client confidentiality and privacy concerns,
  2. The time and effort to prepare, review, and provide enhanced auditor reporting within the current public filing deadlines. Auditors believe a written Auditor Discussion & Analysis, or AD&A, of the financial statements would consume considerable time, including firm-wide review for consistency, resulting in a significant delay in the filing of an annual report.
  3. The impact to the relationship with management and the audit committee, as a result of the potential for additional public auditor reporting on the types of information being requested.

That completes the summary of the input we received on the "content" of the auditor's report

Developments of other regulators/standard setters

Many other organizations around the globe are revisiting the auditor's reporting model, such as IOSCO, the European Commission, the UK Financial Reporting Council, and the IAASB, reflecting the considerable attention focused on this matter. We've been monitoring these developments and it has informed our outreach efforts, as it will also inform our concept release.

Let me now turn it back over to Marty, where he will discuss areas of possible change to the report and possible challenges raised by outreach participants.

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