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

The auditor's report has been the subject of an ongoing debate due to questions about its form, content, and overall informational value. Today, the Board takes a step forward in the decades-long effort to narrow the gap between what investors and other financial statement users expect of independent auditors and what the auditors deliver through their end product — the audit report. I fully support the Board's engagement in these efforts and I compliment the staff of the Office of the Chief Auditor, the Office of the General Counsel, and the Office of Research & Analysis for their hard work and creative thinking reflected in the proposal currently before us.

The discussion we are advancing today has been long-standing. In 1978, the "Cohen Commission" confirmed in its comprehensive final report that a multifaceted historical "expectations gap" existed between financial statement users and independent auditors. This gap involved misperceptions about the responsibilities of auditors, as well as problems related to the adequacy of the information that auditors communicate in their audit reports. [1]

Despite the steps taken by regulators and the profession since 1978 and even after the enactment of the Sarbanes-Oxley Act of 2002, a number of advisory groups, academics, investor groups, and other stakeholders have concluded that significant elements of this expectations gap persist.[2]

Some of these stakeholders have recommended that, among other things, the Board consider improvements to the auditor's report to require auditors to convey more clearly the auditor's responsibilities, the nature of the work performed, the level of assurance provided by the audit, and additional information about significant matters in the financial statements or the audit.

They also have recommended changes to the responsibilities of the auditor with respect to examining the possibility of fraud and "other information" that accompanies audited financial statements.

The Board's project examining the auditor's reporting model was initiated in response to these continuing calls to address the expectations gap through enhanced auditor reporting.[3] The Board's Concept Release on the auditor's reporting model, issued in June, 2011[4] summarizes the history of these recommendations and the alternatives considered by the Board and others over the years to address certain elements of the problem.

Academic research describes the expectations gap broadly as "a gap between the information that is currently provided about the entity in the financial statements and through the audit report and the information that users perceive to be useful." This gap includes the difference between (1) what users expect from the financial statement audit and what the audit actually represents; (2) the information that users want and what is conveyed in the financial statements and the auditor's report; and (3) what the auditors communicate and what users desire as part of the auditor's communications. [5] It is important to remember that this gap, due to its multifaceted nature, cannot be fully addressed by a single proposal or by the auditors alone.

During the course of this project, the Board has identified complicating factors resulting from the competing viewpoints and roles of the various stakeholders in the financial reporting and disclosure regime. [6]

Those factors include:

  • the distinction between management's responsibility for financial reporting and disclosing information about the company and the auditor's independent attestation role;
  • investors' desire for additional information about (1) the company's financial statements, including the auditor's views on management's judgments, estimates, accounting policies and challenging issues, and (2) the audit process, including auditor judgments and assessments of risks related to the financial statements; and
  • the need to balance additional auditor disclosure of information with various potential risks, including (1) obscuring the responsibilities of management and the auditor, (2) undermining the traditional value of the "pass/fail" audit opinion, (3) competing interpretations of information in the financial statements, and (4) stifling communications between the auditor and the company's audit committee.

The proposal the Board is issuing today presents a balanced conceptual approach to addressing these competing factors and interests, while being mindful of the auditor's role of attesting on information prepared by management. The numerous questions throughout the Release are designed to solicit comments related to this approach and feedback on how successfully the Board has balanced these competing factors.

I would like to highlight some key elements of the proposal and significant matters that the Board will need to decide after considering public input.

Reporting "Critical Audit Matters" as Part of the Auditor's Report

The proposed standard is intended to make the auditor's report more informative, thus increasing its relevance and usefulness to investors and other financial statement users.

The approach proposed today would require the auditor to report on "critical audit matters" that are specific to each audit. These matters are defined in the proposal as those that (1) involved the most difficult, subjective or complex auditor judgments; (2) posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or (3) posed the most difficulty to the auditor in forming the opinion on the financial statements.

The proposal anticipates that in most audits the auditor would determine that there are critical audit matters and, depending on the facts and circumstances of an audit, there may be several critical audit matters. This approach is based on the auditor's role of attesting on information prepared by management.

The release accompanying the proposed standard states that, "The proposed auditor reporting standard is intended to provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past."

There are a number of fundamental questions about this approach for which we are seeking feedback from commenters. For instance, would auditor reporting of "critical audit matters," as defined and required under the proposed standards, provide investors with valuable information? How would investors and other stakeholders use such information? Also, would this type of information help to alleviate the information asymmetry that exists between company management and investors?

Would the audit-specific approach of providing additional information through reporting of "critical audit matters" result in unintended consequences, such as would auditor reporting no longer be comparable or consistent across entities? Or would the value of the additional information provided in the critical audit matters on an audit-specific basis outweigh any such potential challenges?

Does the standard clearly articulate the definition of "critical audit matter," the related auditor procedures and documentation requirements to facilitate implementation if such an approach were adopted? Finally, what types of implementation challenges and cost considerations are presented by this proposed approach?

Auditor's Responsibilities Regarding Other Information in an Annual Report

This standard is intended to respond to investors' interests in obtaining enhanced information about the auditor's responsibilities for and their conclusions regarding the "other information" included in an annual report containing audited financial statements and the related auditor's report.

The proposed approach is designed to improve the auditor's identification of material inconsistencies and material misstatements of fact between the company's financial statements and the other information in the company's annual report filed under the Securities Exchange Act of 1934.

The release states that, "As a result of the auditor's evaluation of other information and communication of any potential material inconsistencies or material misstatements of fact to the company's management, the proposed other information standard could promote consistency between the other information and the audited financial statements, which in turn could increase the amount and quality of information available to investors and other financial statement users."

There are a number of fundamental questions regarding this portion of the proposal for which we are seeking feedback. For instance, are the objectives and scope of the requirements sufficient to improve the auditor's identification of material inconsistencies and material misstatements of fact in the other information in annual reports?

To what extent would the auditor's evaluation and communication about this process increase the quality of information available to investors? Would there be advantages to extending the same requirements to filings under the Securities Act of 1933, and what would the related challenges be? Are the auditor's requirements to "evaluate" certain aspects of the other information clear?

Could this approach increase an expectations gap, or would the auditor performance and reporting requirements about the other information reduce the expectations gap?

Finally, what types of implementation challenges and cost considerations are presented by this proposed approach?

Other Changes to the Auditor's Report, Including Information about Fraud and Auditor Tenure

The Board is proposing certain clarifications of the standard language in the auditor's report, while maintaining the basic elements of the auditor's report in existing standards. The proposed standard also would add new elements to the report, including additional language about the auditor's responsibility for fraud, and information about auditor tenure.

Auditor's Responsibility for Fraud

The proposal would add language in the auditor's report about the auditor's responsibility for planning and performing the audit based on the risks of material misstatement, whether due to error or fraud.

A fundamental question about this approach is whether this is helpful in clarifying the auditor's responsibility for fraud, and are there other alternatives the Board should consider?

Auditor Tenure

The proposal would also add a new element to the report dealing with auditor tenure—a statement containing the year the auditor began serving consecutively as the company's auditor. The Release states that investors and other financial statement users have indicated a strong interest in this information.

The academic research on the impact of auditor tenure on audit quality is inconclusive. After extensive outreach and research on the issue, including consideration of inspections (which are not designed to determine a relationship between audit quality and auditor tenure), the Board has not found evidence that would allow generalized conclusions about the impact of auditor tenure on audit quality.

The fundamental question about auditor tenure is whether the single data point of auditor tenure belongs in the auditor's report?

I am concerned that by including auditor tenure in the auditor's report, there may be an implication that there is an analytical basis for interpreting such information. In addition, this information is already available in the Securities and Exchange Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.


In closing, this is a significant proposal that represents an important step forward with the objective of making the auditor's report more informative and useful. The Board has arrived at this point after years of extensive outreach activities, including issuing a concept release for public comment and hosting a public roundtable, to engage investors and other statement users.

I welcome input from commenters on key elements of this proposal and the significant matters that the Board will need to decide as we move forward.

I want to thank the staff of the Office of the Chief Auditor, the Office of the General Counsel, and the Office of Research and Analysis for the hard work put into this proposal. In particular, I would like to recognize Jessica Watts, Lillian Ceynowa, Elena Bozhkova, Bob Burns, Jennifer Williams, Karen Burgess, Andres Vinelli, and John Powers for their contributions.

[1] American Institute of Certified Public Accountants, The Commission on Auditors' Responsibilities: Report, Conclusions, and Recommendations (New York: 1978).

[2] See, e.g., U. S. Department of the Treasury, Final Report of the Advisory Committee on the Auditing Profession to the U.S. Department of the Treasury (October 6, 2008), available at:, p. VII:13.

[4] Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements and Related Amendments to PCAOB Standards, PCAOB Release No. 2011-003 (June 21, 2011), available at

[5] Theodore J. Mock, Jean Bédard, Paul J. Coram, Shawn M. Davis, Reza Espahbodi, and Rick C. Warne (2013) The Audit Reporting Model: Current Research Synthesis and Implications. AUDITING: A Journal of Practice & Theory: 2013, Vol. 32, No. Supplement 1, pp. 323-351.

[6] See, e.g., Statement on Auditor's Reporting Model Outreach Efforts, PCAOB Open Board Meeting, March 22, 2011 (describing some competing factors described by different stakeholders to PCAOB staff), available at

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