Response of a Subgroup of the PCAOB's Investor Advisory Group to the PCAOB's Concept Release Concerning Reports on Audited Financial Statements and Related Amendments to PCAOB Standards

Abstract

SUMMARY Recently, the Public Company Accounting Oversight Board (PCAOB) released a concept release concerning possible revisions to PCAOB standards related to reports on audited financial statements and related amendments to PCAOB standards. The comment letter below, written by a subgroup of the PCAOB's Investor Advisory Group, was recently submitted to the PCAOB in response to the Board's concept release. The subgroup believes that the four most important changes to the audit report would require the auditor to: (1) discuss the auditor's assessment of the estimates and judgments made by management in preparing the financial statements and how the auditor arrived at that assessment, (2) disclose areas of high financial statement and audit risk and how the auditor addressed these risk areas, (3) discuss unusual transactions, restatements, and other significant changes in the financial statements (including the notes), and (4) discuss the quality, not just the acceptability, of the issuer's accounting practices and policies. They further assert that the disclosure of this information will improve investors' ability to make informed buy/sell decisions, which should result in higher returns to investors and improved capital allocation within society.

Are Auditor and Audit Committee Report Changes Useful to Investors? Evidence from the United Kingdom

“…Indeed, with the possible exception of senior financial management, in most cases, the auditor knows more about the financial statements and financial reporting risk of the audited company than other individuals, both inside and outside the company (including members of the audit committee). Notwithstanding this significant accumulated knowledge, the only communication between the auditor and investors is typically a boilerplate three-paragraph letter (hardly a ''report,'' despite the commonly used title) that is essentially identical for the overwhelming majority of all public companies" (Blake et al 2011).…”

“…Many stakeholders have expressed concern that the current reports provide little informational value and desire a revision to existing standards (Blake et al 2011;Turner et al 2010). In response to these concerns, regulators worldwide have taken action to improve the transparency of the audit report as well as the audit committee report (IAASB 2013b;Cohn 2014).…”

Communicating Measurement Uncertainty: An Experimental Study of Financial Reporting Implications for Managers and Investors

“…A prominent theme in PCAOB and IAASB discussions and proposed standards about potential changes to the auditor's report is auditor communication to investors about areas of significant management judgment, including accounting estimates and the 2 uncertainty in these estimates (Blake et al 2012; PCAOB 2012 PCAOB , 2013 IAASB 2012b IAASB , 2013. The SEC and roundtable participants have also discussed the importance of communicating measurement uncertainty to investors, possibly in the form of range disclosures of estimates made by a firm's management or by the auditor (SEC 2011).…”

“…x uncertainty in these estimates (Blake et al 2012;PCAOB 2012PCAOB , 2013IAASB 2012bIAASB , 2013. The SEC and roundtable participants have also discussed the importance of communicating measurement uncertainty to investors, possibly in the form of range disclosures of estimates made by a firm's management or by the auditor (SEC 2011).…”