Proposed changes to auditor reporting (Part 1)

Amara Miller, GUEST COLUMNIST

Over the past decade, there has been increased effort to converge the standards affecting the global financial reporting framework. The corporate scandals in the United States (US), United Kingdom and Europe resulted in revisions and clarifications of accounting and auditing standards, as well as increased regulation of auditors and listed companies, for the protection of investors.

In 2002, the US passed the Sarbanes-Oxley Act, which created the Public Company Accounting Oversight Board (PCAOB), which requires that auditors of US public companies and their foreign subsidiaries be subject to external and independent oversight. The US Securities and Exchange Commission (SEC) has regulatory oversight of the PCAOB, including the approval of the board's rules, standards and budget.

On June 21, the PCAOB issued a concept release on possible changes to the auditors' report. On May 11, the IAASB issued a consultation paper titled Enhancing the Value of Auditor Reporting: Exploring Options for Change. Comments on the concept release issued by the PCAOB and the consultation paper issued by the IAASB are due September. Both papers present similar potential changes to the auditor's report.

The PCAOB's fact sheet, issued with the concept release, presents four possible changes to the auditor's report:

1. Auditor's Discussion and Analysis (AD&A)

The AD&A is intended to be a supplemental narrative report to the auditor's report, where the auditor would discuss his/her views regarding significant matters. The AD&A would include information about the audit such as audit risks identified, audit procedures and results, and independence. The AD&A could also include a discussion of the auditor's views regarding the company's financial statements such as management's judgements and estimates, accounting policies and practices, and difficult or contentious issues.

The AD&A could also require the auditor to communicate some of the same information that the auditor communicates to the audit committee. The PCAOB clearly stipulates: "The AD&A, as contemplated in the concept release, is not intended to provide separate assurance on individual balances, disclosures, transactions, or any other matters discussed." The AD&A is intended to facilitate an understanding of the auditor's opinion on the financial statements taken as a whole.

2. Required and Expanded Use of Emphasis Paragraphs

This alternative would require inclusion of an expanded emphasis paragraph in all audit reports and would highlight significant matters in the financial statements and to identify where these matters are disclosed in the financial statements. The emphasis paragraphs may be required in areas of critical importance to the financial statements, including significant management judgements and estimates, areas with significant measurement uncertainty, and other areas the auditor determines are important for a better understanding of the financial statement presentation.

The PCAOB also stipulates: "With respect to each matter of emphasis under this alternative, the auditor also could be required to comment on key audit procedures performed pertaining to the identified matters."

Currently, the emphasis paragraphs are not required but may be added, at the auditor's discretion, to emphasise a matter regarding the financial statements.

3. Auditor Assurance on Other Info Outside Financial Statements

This would require auditors to provide assurance on information outside the financial statements, such as management's discussion and analysis (MD&A) or other information. The concept release says: "An auditor providing assurance on information outside the financial statements could improve the quality, completeness and reliability of such information and provide investors and other users of financial statements with a higher level of confidence in that information."

Auditors are not required to provide assurance on MD&A or other information outside the financial statements. The PCAOB attest standards, however, provide requirements for the auditor concerning the performance of an attest engagement on MD&A.

4. Clarification of the Standard Auditor's Report

his involves clarifying the language about what an audit represents and the related auditor responsibilities. The language and concepts that could be clarified in the auditor's report include: reasonable assurance, auditor's responsibility for fraud, auditor's responsibility for financial statement disclosures, management's responsibility for the preparation of the financial statements, auditor's responsibility for information outside the financial statements, and auditor independence.

The proposed changes (alternatives) presented in the PCAOB's concept release are not mutually exclusive. The revised auditor's report could include one or a combination of the alternatives not currently presented in the concept release. The PCAOB indicates: "These alternatives would likely require the development of additional auditing standards or rules through collaboration with the SEC."

Part 2 of this article will next week outline the proposed changes to auditor reporting being considered by the International Auditing and Assurance Board.

Amara Miller is a chartered accountant in Jamaica and a US-certified public accountant. Email feedback to columns@gleanerjm.com and amcsjamaicaltd@gmail.com.