Statement on Reproposed Auditing Standard on the Auditor's Report
Good Morning. We are here today to consider revisions to a proposal first made in August 2013 to require auditors to expand the content of the auditor's report to include "critical audit matters."
This is a continuation of a long process which the Board began in 2010 with outreach to a variety of stakeholders to discuss possible improvements to the auditor's report. Since then, the Board has issued a concept release, a proposed standard, conducted a public round table, and held discussions with our Standard Advisory Group and Investor Advisory Group. We have received hundreds of comment letters. While reactions to the proposal varied, and comments were nuanced, several themes emerged:
First, many commenters supported the concept of critical audit matters ("CAMs") but believed that the 2013 proposal was too broad, because the potential sources of CAMs was unnecessarily broad. Second, there was concern that the definition of CAM's was also too broad and could require disclosure of immaterial information that would not be useful to investors, or, in some cases, information that explicitly does not have to be disclosed by issuers under applicable laws and regulations. Many auditors who commented believed that the documentation requirement also was too burdensome – requiring not just documentation of matters determined to be CAMs but also matters that might be CAMs but later were determined not to be. And while investors were largely supportive of the proposal, some believed the proposal did not go far enough in mandating that auditors share their expert opinions of risks in, for example, the company's accounting, financial reporting or operations.
We have carefully considered all of these perspectives in an attempt to find the right balance between providing investors with useful information while not imposing on auditors requirements that are unduly burdensome or outside of their expertise. The proposal we are considering today includes several changes in order to accommodate commenters' views.
First, it narrows the source of CAMs to matters communicated or required to be communicated to the audit committee. This is a limited universe of information that is already required to be documented by the auditor, thus narrowing the population of topics that may give rise to a CAM but capturing the most important information in an audit.
Second, we are proposing to require CAM disclosure only to the extent the audit matter relates to accounts or disclosures that are material to the financial statements, in order to avoid auditor disclosure of information that is immaterial and unlikely to be of interest to investors.
And, third, the proposal includes a less burdensome documentation requirement. While auditors will be required to document why material matters communicated to the audit committee are not CAMs, the universe of such potential matters is limited by the audit committee communications filter, making the documentation requirement less onerous.
Finally, preparers should feel more comfortable that CAM disclosures under the reproposal would start with a reference to disclosures made by management in material financial reporting areas and otherwise focus on the work of the auditor. This should generally eliminate the need for auditor's to disclose any original information about the company, except to the extent the auditor's stated reason for identifying a CAM involves reference to facts not already disclosed by the company. I would hope that such circumstances will be infrequent.
In my view, the staff's recommendation is responsive to the comments we received and strikes a reasonable balance. For that reason, I support issuance of the reproposal.
Our work, however, is not done. We have already benefitted from observing events in the United Kingdom, where expanded auditor reporting began two years ago. However, the results from research analyzing the usefulness to investors of information provided in expanded auditor reporting are limited. Collectively, research results are ambiguous as to whether the expanded auditors' reports have provided investors with new information beyond what is contained in the financial statements. We will continue to learn from the evolution in the United Kingdom and in countries that will begin to report under new requirements issued recently by the International Auditing and Assurance Standards Board. In addition, we would benefit from additional academic studies that can help shed light on the use and impact of critical audit matters (or the analogous requirements under international or European requirements).
In the Economic Considerations section in the release, we assert that the information asymmetry between investors and auditors should decrease as a result of our proposal. In other words, investors will gain more information about the audit generally, and CAMs specifically. But, in addition to providing information, the proposed requirements will impose costs and burdens on auditors, preparers and audit committees, which we have tried to minimize. They may also have some unintended consequences. Our goal, then, cannot be merely to reduce information asymmetry by requiring the disclosure of information, but making sure that the information to be provided will be valuable to investors such that it justifies the imposition of the related costs. Therefore, it is important that we hear from investors about whether they believe CAM's will provide relevant, helpful information and how the information is likely to be used. Is there value in highlighting certain aspects of the financial statements and related auditing challenges? Or does doing so create a distraction from other important (but easier to audit) areas of the financial statements that may not be communicated as a CAM? I urge investors and other financial statement users to provide us with your feedback.
In addition to CAM's, the reproposal also would require certain additional information to be provided in the auditor's report, including a specified addressee for the report and statements regarding independence requirements and the auditor's role. I support these clarifications and believe they will help narrow the expectation gap about the roles and responsibilities of auditors.
I continue to be troubled, however, about the proposed requirement to include auditor tenure in the audit report. The evidence about the impact of tenure on audit quality continues to be mixed, at best, and I share commenters' concern that disclosing tenure could lend credence to the theory that long auditor tenure necessarily results in poor audit quality. Moreover, for those who believe it is relevant, auditor tenure information for most companies is not difficult to determine, and many companies are providing this information voluntarily. Given those circumstances, I am not yet convinced that a regulatory requirement is appropriate, and I look forward to exploring this question through the comment process.
Finally, I would like to ask preparers of financial statements, in particular, to provide us with detailed comments. Many of you have expressed concern about this project. It is my hope that some of the revisions in today's reproposal address those concerns. To the extent you continue to oppose the project, it would be helpful to the Board to receive your nuanced and specific feedback, including the aspects of the proposal that concern you the most, how we could improve the proposal, and how you believe auditors can provide more useful information to investors.
In closing, I would like to join my fellow Board members in thanking the staff in the Chief Auditor's Office, the Office of General Counsel, the Office of Research and Analysis, the Center for Economic Analysis, and everyone else who lent a hand. This continues to be a challenging project, and I appreciate your dedication in getting us to this point. I would also like to thank our colleagues at the Securities and Exchange Commission, who, as usual, provided food for thought and helpful comments.