Earlier today, the Center for Audit Quality (CAQ) announced it will launch a profession-wide pilot test of the CAQ’s Approach to Audit Quality Indicators (AQIs). The potential development of, and use of AQIs is being considered by the Public Company Accounting Oversight Board (PCAOB). In a related announcement, the CAQ noted that the pilot test will include engagement teams and their related independent audit committees, adding, “The pilot testing will run through the completion of the 2014 audit cycle.
Separately, organizations representing investors’ and auditors’ interests as well as preparers of corporate financial reports are calling on the PCAOB to carefully consider the cost-benefit of proposed changes to the auditor’s reporting model, with some calling for a field test to be part of this analysis.
FEI’s Committee on Corporate Reporting (CCR), in addition to commenting specifically on the PCAOB’s call for auditors to add a new disclosure for Critical Audit Matters (CAMs), and to enhance the current requirement that auditors “read and consider” other information contained in a report that includes audited financial statements and the auditor’s report (by instead requiring auditors to “read and evaluate” that “other information”), emphasized the need for the PCAOB to field test this proposal:
CCR believes that a comprehensive field test …will be useful and insightful for the [PCAOB] board and staff to determine whether the proposal will produce the information investors are seeking at an acceptable cost to preparers and auditors.
We also believe that this work will provide the board with the opportunity to study the impact that this proposal would have on the audit process to ensure the additional work does not unintentionally adversely affect audit quality.”
The letter, signed by CCR chairman Stephen J. Cosgrove, vice president, corporate controller and chief accounting officer at Johnson & Johnson, spoke of the pros and cons of having the responsibility for field testing of the proposal led by the PCAOB itself (vs. relying on field testing conducted by the profession), stating:
It is the responsibility of the PCAOB to evaluate the benefits and costs of its proposals.
CCR believes that by playing a leading role in the conduct of a field test, the board would gain valuable insights into the usefulness of the resulting disclosure and the likely costs (including those related to unintended consequences) of these requirements.
It is possible that many of the issues that arose in the application of Auditing Standard (AS) 2 - An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements could have been avoided had there been some form of field testing performed prior to issuance of the final standard.
While we are aware that the major audit firms have undertaken some informal work on their own to assess the effect of the proposal, we also understand the scope of this work is limited and unlikely to serve as an effective substitute for formal field testing conducted by the Board.
CCR, therefore, believes that the Board should directly undertake this work as part of its due process.
CAQ Leads Field Test; Comments on Cost-Benefit
The Center for Audit Quality (CAQ) initiated a field test of the PCAOB’s proposal last fall, and shared with FEI Daily a synopsis of what its field test entails, noting that it anticipates releasing the results in time for the PCAOB’s Standards Advisory Group (SAG) meeting slated for June.
CAQ Field Test of PCAOB’s Auditor Reporting Model Proposal: Synopsis
- General: In the fourth quarter of 2013, the CAQ began working with a number of audit firms to develop a consistent approach to field-testing to help ensure the results would be as comparable as possible.
- Focus: This effort is focused primarily on determining and communicating CAMs, but includes efforts to understand the level of work associated with evaluating Other Information (as contemplated under the proposal) and reporting on this evaluation.
- Methodology: Engagement teams were asked to field-test elements of the PCAOB’s proposal on completed FY 2012 audits, so field-testing could begin in the fourth quarter of 2013.
- Objective: Broadly, through field-testing, the public company auditing profession is seeking to understand the effect the proposed standards would have on the auditor’s current responsibilities and the company’s financial reporting process (including the interaction of management and the audit committee in finalizing CAMs), help assess the costs and benefits of the proposed standards, and identify challenges and areas for improvement.
- Status: The profession is still concluding the field-testing, which will be followed by an analysis of the results. We expect that we will be able to provide some insights related to this effort in time for the PCAOB’s June SAG meeting.
Source: The Center for Audit Quality
Cindy Fornelli, executive director of the CAQ, added, “The public company auditing profession has been proactive in its efforts to field test the PCAOB proposal because we believe it could help inform discussions about the effect the proposed standards could have on the audit and on the company’s financial reporting process.”
My Two Cents
(I remind readers of the disclaimer applicable to this column, that remarks cordoned off as ‘my two cents’ do not represent the views of FEI, its members, other staff or board):
The CAQ calls itself an ‘autonomous’ organization that works in the interests of investors, auditors and the capital markets. At the same time, it is an affiliate of the AICPA, and a majority of positions on its governing board are allocated to the audit profession. While some may be skeptical of the results of the field test it has led, the CAQ – like FEI’s CCR, agrees that the ultimate responsibility for cost-benefit analysis lies with the PCAOB itself.
As stated by CAQ’s Fornelli: “The CAQ encourages the Board to conduct a robust analysis of the costs and benefits of the proposed auditor reporting standard that addresses the potential effects on key stakeholders including companies, audit committees, and investors.”
Give Due Process Its Due
In the related article that appeared in FEI Daily on April 11, 2014, Don’t be an Audit Model Cynic, to clarify –whether you are cynical about the current costs or benefits of audits, or how the PCAOB’s proposed changes to the Auditor’s Reporting Model may impact you – don’t ignore this proposal just because it has been issued by a regulator/standard-setter that sets rules that are required to be followed by auditors.
If you prepare public – or private – company financial statements, take a look at the proposed rule (linked at the top of this column) and consider filing a comment letter by the recently extended May 2, 2014 comment deadline. In addition to reading the proposal, you can gain insights by reading comments filed by the original (Dec. 11, 2013) comment deadline, and other material on the PCAOB’s website, including links to archived material from the public roundtable conducted by the PCAOB earlier this month.
If you are an investor, audit committee member, or other interested member of the public, read the proposal, consider its impact on your role, and consider filing a comment letter.
This proposal, as noted in the FEI CCR comment letter, can truly affect YOU. Your comments are invited by the PCAOB. Its rulemaking influences the actions and behaviors of auditors directly, with knock-on effects (such as actions, documentation requests of auditors to clients, ensuing costs and benefits) to other constituents indirectly. There can be a trickle-down effect to private companies as well, including when audit firms with both public and private company clients move to implement requirements of the PCAOB practice-wide for the sake of efficiency, or if the AICPA adopts similar standards.
So take a look at the proposal, consider sending your comments by May 2, and help give due process its due.