Impact on Financial Issuers and Users

In previous blogs, I mentioned that Release No. 2013-005 was issued to improve the audit report for financial report users. As a result, Release No. 2013-005 will have a significant impact on auditors and the audit report. Since the Release No. 2013-005’s objective was to enhance the audit report, the financial users and issuers will be effected by these changes as well.

There are several different impacts that Release NO. 2013-005 could have on financial users. The first possible impact is that financial users may become confused with the discussion of audit procedures since these readers lack a proper understanding of the audit process and audit procedures (Yungmann & Drula, 2013). In addition, financial statement users may lack the context for the discussion of discrete audit procedures for a particular financial statement line item (Yungmann & Drula, 2013). The changes in the audit report could cause financial users to read duplicated information which would make the report not nearly as effective (Yungmann & Drula, 2013). In addition to making financial users read duplicated information, the Release No. 2013-005, may force financial users to read extensive discussion topics that are unimportant for them (Dalkin, 2013).  As a result of adding addition disclosures about auditor independence, financial users may have a difficult time fully understanding the concepts regarding to auditor independence without an extensive discussion afterwards (Dalkin, 2013). This will cause the report to be cumbersome, which will hinder the benefit associated with this change. The changes created by Release No. 2013-005 have a potential to mislead financial users to believe that the auditors have an authoritative basis to conclude on the sufficiency, accuracy, or completeness of the other unaudited information (Yungmann & Drula, 2013). This would create an expectation gap between the financial users and the auditors which in the past has caused several law suits to arise.  The changes associated with Release No. 2013-005 regarding to audit tenure can lead financial users to an incorrect interpretations about the company, its current fiscal situation, and the auditors (Dalkin, 2013).

As for financial issuers, they will also be significantly impacted by the changes stated in Release No. 2013-005. The first major impact would be that financial issuers will have to spend more on audit fees since auditors will have to spend more time on conducting the additional audit procedures. The higher fees have the potential to outweigh the benefits to the investors. In addition to spending more on audit fees, the changes stated in Release No. 2013-005 open up situations where the financial issuer will disclose sensitive information that normally would have not been required to be disclosed (Yungmann & Drula, 2013). An example of a possible situation is when a company discloses information regarding to control deficiencies that are less severe than a material weakness noted in the Company’s internal controls (Yungmann & Drula, 2013). The information regarding to this disclosure will be presented with a limited context and give the issuer a minimal opportunity to clarify the discussion during the audit committee meeting regarding this matter (Yungmann & Drula, 2013). Besides spending more money, financial statement issuers will have to spend more time in the later stages of the audit where the issuers’ time is already limited (Yungmann & Drula, 2013).

References

Dalkin, J. R. (2013, December 11). PCAOB Rulemaking Docket Matter No. 034. Retrieved from U.S. Government Accountability Office: http://gao.gov/assets/660/659649.pdf

Yungmann, G. L., & Drula, C. T. (2013, December 11). PCAOB Rulemaking Docket Matter No. 034. Retrieved from National Association of Real Estate Investment Trusts: https://www.reit.com/sites/default/files/media/2013/NAREIT%20Comment%20Letter%20on%20PCAOB%20Auditor%20Report%20and%20Other%20Information%20Proposal.pdf

Release 2013-005 Impact on Auditors

As mentioned previously, the Public Company Accounting Oversight Board, PCAOB, issued Release 2013-005. This release proposed two new auditing standards in order to improve the auditor’s reporting model and increase auditor’s responsibilities which is discussed more into detail in the Changes to the Auditor’s Reporting Model. These changes would impact several different parties such as auditors, auditor’s clients, and the client’s audit committee. This post will mainly focus on Release 2013-005 impact on auditors and the audit report. In future posts, there will more of a focus on Release 2013-005 impact on clients and their audit committee.

The first possible impact on auditors is that they could become responsible for being their client’s spoke person to shareholders (Zwick & Gibbons, 2013). Since Release 2013-005 requires auditors to put their analyses and judgement of the company in the annual report, shareholders could accidently expect that auditors will now be responsible for speaking for the company regarding certain company matters (Zwick & Gibbons, 2013). As a result, the extinction between auditors and the client could be further blurred together which could hinder auditor’s independence. When Release 2013-005 is mandated, auditors’ litigation risk has the potential to increase since auditors are required to disclose their subjective analysis on the company (Zwick & Gibbons, 2013). By disclosing auditor’s subjective analysis on the company on the annual report, auditors will become subject to liability in areas where they previously had a limited exposure to (Zwick & Gibbons, 2013).

Another impact of this release is that the proposed changes regarding the communication of CAMs could create a conflict with the governance and oversight role of the audit committees (Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report, 2014). This could impair the open communication and transparency among auditors, management, and the audit committee (Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report, 2014). As a result, management could avoid asking for auditor’s help when addressing complex financial issues since communication during the audit is required to be disclosed (Zwick & Gibbons, 2013). This could result in a negative impact on the audit quality (Zwick & Gibbons, 2013).

Auditors will be required to perform additional audit procedures that could be unnecessary  (Wagner, 2013). In addition, this release will make the auditor’s job of developing and performing audit procedures on forward-looking information more difficult (Wagner, 2013). As a result, auditors will have to spend more time on each engagement which may create additional time pressure to complete engagements and meet the SEC filing deadlines (Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report, 2014). In addition, the proposed changes will increase audit firm’s expenses which may hinder the firm’s ability to grow.  By requiring auditors to evaluate other information for any material inconsistency may create an expectation gap regarding the auditor’s performance requirements (Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report, 2014).

As for the audit report, the discussion of CAMs may reduce the clarity of the audit and internal control opinions because discussing CAMs provides a less clear picture to investors about the financial statements taken as a whole and the overall effectiveness of the internal controls (Wagner, 2013). Another impact on the audit report, is that the report can cause investors to become overloaded with information because auditors could report too many CAMs or have lengthy descriptions of the audit procedures performed (Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report, 2014).

References

Heads Up- PCAOB gathers more input on proposed changes to the auditor’s report. (2014, April 30). Retrieved from IAS Plus: http://www.iasplus.com/en/publications/us/heads-up/2014/pcaob-auditors-report

Wagner, D. (2013, December 11). Comments on PCAOB Release 2013-005. Retrieved from The Clearing House: file:///C:/Users/Ashley/Downloads/2013%2012%2011%20TCH%20Comments%20on%20PCAOB%20Revisions%20to%20Auditor%20Reports.pdf

Zwick, P. C., & Gibbons, A. J. (2013, September). PCAOB Proposes Important Changes to Audit Report. Retrieved from Jones Day: http://www.jonesday.com/files/Publication/63c3939b-f9e0-4093-a4a1-afa9c3a1ebd4/Presentation/PublicationAttachment/99e7b963-1d4c-4be3-b525-085c7e6fa539/PCAOB%20Proposes.pdf