The PCAOB has again delayed finalizing a rule to expand the auditor’s report and make it more useful for investors, according to the updated standard-setting agenda published on April 3, 2017.
The long-running project has been a priority for PCAOB Chairman James Doty, who pushed for completion by the end of 2016. At the end of December, the board said it wanted to wrap it up in the first quarter of 2017. With the most recent agenda, the anticipated publication has been pushed back to the second quarter.
The latest delay is not a surprise because the board normally does not make major decisions until the chairman of the SEC has reviewed the board’s work. The SEC has to approve all important PCAOB decisions, including its standards and annual budget. The Senate Banking Committee approved President Donald Trump’s nominee, Jay Clayton, to head up the SEC on April 4. But the full Senate has yet to vote on the nomination. Clayton is a partner with the law firm Sullivan & Cromwell LLP.
It has taken the board a few tries before moving close to finishing the standard because the auditor’s reporting model has been a controversial project among companies, and to a lesser extent, among audit firms.
The rule, if finalized, will represent a major change in the content of the auditor’s report and require auditors to describe the critical audit matters (CAMs), or issues they found the most challenging, subjective, or complex while examining a client’s financial statements. The standard is expected to be based on a revised proposal issued in May 2016 as Release No. 2016-003, Proposed Auditing Standard—the Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards.
The current auditor’s report is a pass-fail model and investor advocates want more insight from auditors who know critical details about the company’s financial conditions that are not divulged to the public. Critics of the bare-boned auditor’s report pointed out in the aftermath of the 2008 financial crisis, some large companies failed or had to be rescued by the government soon after receiving clean audit opinions. But companies and auditors have been concerned that new requirements may cause auditors to overstep their role and reveal information that management has not disclosed. The PCAOB addressed the concerns and big accounting firms were largely satisfied with the planned changes. But public companies said they remain worried.
In the meantime, it is unclear whether the PCAOB will finalize a small but controversial provision in Release No. 2016-003 that requires auditors to disclose in the audit report the number of years they have worked for a client.
Companies and auditors say that putting tenure in the auditor’s report could give the false impression that there is a link between tenure and audit quality when there is no evidence to support that argument.
Some investors want the information because they believe a long tenure leads to too close of a relationship between auditors and their clients and chips away at an auditor’s skepticism and independence.
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