I support the reproposal before us today to expand auditor reporting to include "critical audit matters" and other enhancements in the auditor's report.
With today's action, the Board is taking another step forward in addressing questions about the relevance and usefulness of the standard auditor's report. This action helps to address the usefulness of the auditor's report; it deals with one of the many elements contributing to the long-standing and multifaceted "expectations gap" between what investors and other financial statement users expect of independent auditors and what auditors deliver.
Although this is a significant step forward in auditor reporting, it is a small step forward when considering the overall expectations gap related to auditor performance and reporting.
Unfulfilled investor needs and expectations related to auditor performance and reporting can create, among other problems, inefficiencies in the capital markets and suboptimal incentives for auditors to carry out their duty to protect investors' interests and serve the public trust.
Investors and other users of audited financial statements have called for auditors to convey more information in their audit reports about 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 called for increased auditor responsibilities and communications with respect to "other information" that accompanies audited financial statements.
As described in today's reproposing release, the PCAOB has further analyzed these problems as they pertain to auditor reporting through its consideration of 248 comment letters on the 2013 proposed standard, views of the participants in a 2014 public roundtable discussion, at meetings of the Boards Investor Advisory Group and Standing Advisory Group, and through performing additional economic analysis.
Today's reproposal focuses on enhancements to the standard auditor's report. The staff continues to analyze potential actions related to the auditor's responsibilities for "other information" included in an annual report containing audited financial statements, which continues to be an important area of interest to investors and others.
The reproposal refines the requirement to identify and communicate Critical Audit Matters in the standard audit report in the following three key areas to address comments and further analysis related to several competing viewpoints that we highlighted at the proposing stage:
- limiting the source of potential critical audit matters to matters communicated or required to be communicated to the audit committee,
- adding a materiality component to the definition of a Critical Audit Matter, and
- narrowing the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment.
The reproposed standard would require an auditor to identify as a Critical Audit Matter any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.
In particular, consistent with the discussion and questions posed in the reproposing release before us today, I am interested in views and data related to:
- The definition and source of a Critical Audit Matter — Do stakeholders agree that such matters are valuable to investors and other financial statement users and, if so, would such benefits warrant any related costs, including any unintended consequences?
- How the auditor addressed the Critical Audit Matter in the audit - Do stakeholders agree that the auditor's response to a Critical Audit Matter is relevant and important? If so, is it relevant and important in all cases?
- The communication of a Critical Audit Matter - Do stakeholders agree that the requirements for communicating Critical Audit Matters in the standard audit report (including not reporting any) would provide useful information to investors and other financial statement users and, if so, is the information useful in all circumstances?
- Analysis and discussion of the potential benefits and costs of the revised requirements for Critical Audit Matters - The reproposing release contains extensive discussion of potential benefits and costs. What other data or theories should be Board consider in assessing the potential benefits and costs? Are there additional operational matters that the Board should consider?
The reproposal also refines some of the other proposed changes to the standard auditor's report to address the role and responsibilities of the auditor. These proposed clarifications of the auditor's responsibilities relate to auditor independence, the addressees of the audit report, and certain elements related to the scope and nature of the audit, including the relationship of the audit to the financial statement notes, the responsibility of the auditor to detect material financial statement fraud, and the nature of the audit under PCAOB standards. I am interested in whether and to what extent these refinements add value and help to clarify the role and responsibilities of auditors.
Finally, I call attention to the reproposed requirement to include information about the tenure of the auditor in the standard auditor's report. This was also included in the 2013 proposal, at which time I expressed skepticism about the usefulness and appropriateness of including this data point in the auditor's report. I continue to have the same questions with this reproposal, as I have not seen additional convincing evidence to indicate that this information should be included in the auditor's report.
Do stakeholders agree that the data point related to auditor tenure, which in most cases is already available to investors, is relevant and meaningful when provided by the auditor in the auditor's report? Would this information be more relevant and useful if provided in the context of how the audit committee considered it in the oversight of the company's auditor?
In closing, this reproposal is a significant step forward in making the auditor's report more informative and useful.
I welcome input from commenters on the refinements to key elements of the 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 Center for Economic Analysis for the hard work put into this reproposal.
 See PCAOB, Standard-Setting Agenda of the Office of the Chief Auditor, pg. 4 (Mar. 31, 2016). Other on-going Board initiatives and projects address aspects of the expectations gap; among them are the projects on the auditor's evaluation of a company's ability to continue as a going concern, quality control standards and firm supervisory responsibilities, audit quality indicators, and the auditor's role in preventing and detecting financial statement fraud.