Hanson’s tongue-in-cheek comment came during his remarks regarding the “Auditor’s Reporting Model,” a proposal that touched a nerve in preparers concerned about new disclosures surrounding“Critical Audit Matters” to be made by audit firms. The proposal touches the most complex or challenging areas of audits many perceive is as heightening the responsibility for auditors.
As background, the concerns of preparers were exacerbated by direct and indirect messages that auditors were being "made" to do "more" work by the PCAOB, and thus audit fees were bound to rise.
Changes to CAMs
Hanson indicated PCAOB staff are likely to propose a different scope for CAMs when a reproposal comes before the PCAOB board, time timing of which could be early 2015.
Hanson referred to a past PCAOB roundtable on the auditor’s reporting model, which included, in his words, a “U.K. Love Fest Panel,” which looked at expanded auditor’s reports in the U.K., with Rolls Royce being the "mother of all audit reports," a report that goes even further than U.K. regulator’s rules.
Although many in the U.S. had voiced concern about going as far as the U.K. regulator in requiring more expansive or fluid audit reports, Hanson noted that in spite of the feared changes to the auditor’s reporting model in the U.K., “the world still turns in circles every day, goes in circles around the sun… the world has not ended” for those providing expanded auditor’s reports in the U.K.
Referring to Rolls Royce’s auditor’s report as an example, Hanson noted that auditors reporting under new rules of the U.K. Financial Reporting Council discuss critical or key audit matters as those that relate to material risks in the audited financial statements.
Hanson noted “I personally believe that the [auditor’s report] would be most informative,” if it addressed the most important risks relating to the audit.
In his opinion, the scope of Critical Audit Matters should be amended to incorporate a risk component, said Hanson, before the PCAOB takes the next step to re-issue the proposal. Of note: Hanson referred to the blending of "most important issues" and "most important risk" as a "narrowing" of the scope of the proposal. Although, the exact nature of the change in scope of the CAMs remains to be seen when the proposal is released, it struck me that this may in fact not be viewed as a ‘narrowing’ of scope but perhaps even a broadening of scope by some.
Another change in the reproposal reflecting commentary from audit firms and others, said Hanson, was that the proposed requirements in the original Auditor’s Reporting Model that would enhance auditor’s responsibilities for “other information” contained in a report with audited financial statements would likely be removed from the scope of the reproposal, and instead dealt with as part of a separate project.
Among the reasons why the PCAOB is leaning toward dropping the "other information" requirements from the reproposal is that although PCAOB staff’s initial analysis was that changing the current requirement that auditors "consider" other information to a requirement that auditors ‘evaluate’ that other information would not elevate the auditor’s responsibility , audit firms responded that use of that word would increase their responsibilities.
Secondly, concerns with the ability to receive "comfort letters from auditors if the changes to the auditor’s responsibilities for other information went through, was another reason the PCAOB decided to scope out tackling the ‘other information’ issue in the upcoming reproposal.
Getting back to the subject of cards and letters, or PCAOB fan mail in the form of Comment Letters, Hanson strongly encouraged the FEI conference attendees to provide feedback, but counseled them, “It’s your prerogative to say, ‘I hate it, don’t do it,” but that “it would be helpful if you could have something in your letter [that addresses]: ‘however, if you go with this proposal…” and then provide some suggestions or alternatives.
Perhaps for those why may question why the PCAOB is seemingly swimming upstream in its contemplating changes to the auditor’s report, as well as issuing alerts and staff consultation papers on matters ranging from auditing estimates and fair value, internal control over financial reporting, revenue recognition and going concern, Hanson posted the PCAOB’s mission statement on a slide at the beginning of his remarks for the FEI conference, emphasizing that many would presume that part of its mission of overseeing auditors relates to investor protection, but many may be less familiar with the second part of its mission, relating to “further[ing] the public interest in the preparation of informative, accurate and independent audit reports.”
AQI Concept Release in the Works
PCAOB Board Member Lew Ferguson provided the FEI conference with an update on the PCAOB’s initiative to identify a set of “Audit Quality Indicators” (AQIs). Ferguson explained that defining AQIs and how they are to be used/disclosed was just one of four actions in this area, the other three being the PCAOB’s Quality Control Standards, a Root Cause Analysis, and outreach to Audit Committees.
“The evaluation of our thinking has grown from the fact that we have inspected more than 200 audit firms,” and many deficiencies are found year after year, said Ferguson.
“In early years, firms said ‘we’ll do some more training,’ continued Ferguson. However, the deficiencies continued, and after doing a root cause analysis, the PCAOB believes that certain challenges include: cultural, institutional, intellectual, structural, and standards-oriented.
The PCAOB’s analysis of AQIs so far, narrowing down from an initial list of 80 AQIs to a list of 14, emphasizes issues such as: staffing levels, partner workload, staff expectations, outsourcing service centers.
“We are going to put out a Concept Release on this,” said Ferguson, adding, “we are interested in your thoughts.”
“If we find statistical correlation, we’ll go back and look at that,” he continued, while noting, “correlation does not mean causation.”
In remarks to FEI Daily after the panel, Hanson said he is optimistic the AQI Concept Release will be out in 'early 2015.'
Other areas of focus
Other areas of focus by the PCAOB, according to Hanson and Ferguson, include:
- Conscious shift in terminology by some, to not use shorthand term ‘audit failure’ which was misunderstood by some investors to mean ‘undetected material weakness in financial reporting’ – and instead to use the longer, but more accurate phrase, such as: “at the time the audit report was issued there was not enough work done to support the financial statements”
- Income taxes: the PCAOB is looking, said Hanson, “a lot around the controls around tax accruals, I wouldn’t be surprised if we don’t look more carefully at that.”
- Hanson added, “Congress is asking us about our rules for tax preparers,” raising questions relating to auditor independence, among others.
- Analytical testing: Hanson said, “A lot of the standards now, [largely eyeballing “…perhaps auditor needs to give greater concentration on: what it [the number] should be? “
- “Level of precision” and ‘management review controls”
Audit Firm Rotation
Audit firm rotation, which is no longer an active standard-setting project for the PCAOB, may have been dropped to an even lower perceived benefit, based on analysis done in the Europe, where certain changes the PCAOB had contemplated, have already been put in place.
Although some of the initiatives in Europe were aimed at increasing competition, the FEI conference was told, the opposite effect was found to have resulted in practice. Concerns have also been raised that lowering of fees attendant with audit firm rotation needs to be looked at vis-à-vis whether the lower fee impacts a reduction in audit quality.