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

Changes to the Auditor’s Reporting Model

In the past couple of years, the Public Company Accounting Oversight Board, PCAOB, has proposed several changes to auditing practices. On August 13, 2013, PCAOB issued Release 2013-005 which proposed two new auditing standards regarding to auditor’s reporting model and responsibilities  (Zietsman, Burns, Pruitt, & Simer, 2013).  Under Release 2013-005, the proposed auditing standard will keep the pass/fail model, but implements three significant changes to the auditor’s report  (PCAOB’s Proposed Changes to the Auditor’s Reporting Model and Responsibilities for Other Information, 2013).

PCAOB Release No. 2013-005. (2013, August 13). Retrieved from PCAOB

The first significant change would be adding a new section to the report where critical audit matters, as determined by the auditor, would be communicated (Zietsman, Burns, Pruitt, & Simer, 2013).  Auditors would be required to address topics that were discussed during the audit that either required complex auditor judgments, posed a difficulty in obtaining sufficient audit evidence, or posed difficulty in forming an opinion on the financial statements (Proposals to Enhance the Auditor’s Report, 2013). These critical audit matters relate to the current period, however, there is an exception. Auditors must consider communicating critical audit matters relating to the prior periods when the prior period’s financial statements are made public for the first time or previously issued auditor’s report could no longer could be relied upon (Proposals to Enhance the Auditor’s Report, 2013).

The next significant change would be enhancing the language within the audit report to include statements about the auditor’s responsibility for fraud and notes to the financial statements (PCAOB’s Proposed Changes to the Auditor’s Reporting Model and Responsibilities for Other Information, 2013).  With this change, the auditors will have to include the phrase “whether due to error or fraud” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements (PCAOB Proposes Two Auditing Standards to Enhance Auditor’s Report, 2013). Also, the phrase “and the related notes” would be added into the introductory paragraph in order to clarify that the financial statements include the related notes  (PCAOB Proposes Two Auditing Standards to Enhance Auditor’s Report, 2013).

The last significant change is that a new element would be added to communicate more information about the auditor independence, auditor tenure, and the auditor’s responsibility for the evaluation of other information outside the financial statements (Zietsman, Burns, Pruitt, & Simer, 2013). Under this change, auditors will have to describe the scope of “other information” and procedures that are required to be performed  (PCAOB’s Proposed Changes to the Auditor’s Reporting Model and Responsibilities for Other Information, 2013). This change also requires auditors to evaluate the “other information” for inconsistency regarding to the amount, information, or the manner of their presentation in the financial statements (Proposals to Enhance the Auditor’s Report, 2013). If so, the auditor is required to respond appropriately (Proposals to Enhance the Auditor’s Report, 2013). As a result, this will add additional audit steps for auditors to perform when evaluating other information based on relevant audit evidence obtained and conclusions reached during the audit  (Proposals to Enhance the Auditor’s Report, 2013).  Also, the last change to the auditor’s report will require auditors to include an information regarding when the firm began serving consecutively as the auditor  (Proposals to Enhance the Auditor’s Report, 2013).

References

PCAOB Proposes Two Auditing Standards to Enhance Auditor’s Report. (2013, August). Retrieved from KPMG: http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/Defining-Issues/Documents/Defining-Issues-O-1308-40.pdf

PCAOB’s Proposed Changes to the Auditor’s Reporting Model and Responsibilities for Other Information. (2013, September 13). Retrieved from Wall Street Journal : http://deloitte.wsj.com/riskandcompliance/2013/09/13/pcaobs-proposed-changes-to-the-auditors-reporting-model-and-responsibilities-for-other-information/

Proposals to Enhance the Auditor’s Report. (2013, October). Retrieved from AICPA: http://www.aicpa.org/interestareas/frc/auditattest/downloadabledocuments/enhanced_reporting/frc_asb_proposals_enhance_auditor_report.pdf

Zietsman, M., Burns, J., Pruitt, A., & Simer, B. (2013, August 13). PCAOB Proposes a New Auditing Standard to Enhance the Auditor’s Reporting Model. Retrieved from Public Company Accounting Oversight Board: http://pcaobus.org/News/Releases/Pages/08132013_OpenMeeting.aspx