Change Ahead for Auditor Reporting?

The Public Company Accounting Oversight Board has a proposal that might result in significant changes to the information that will be reported by public company auditors.  Their proposal is available here: http://pcaobus.org/Rules/Rulemaking/Pages/Docket034.aspx

Not to be outdone, the International Audit and Assurance Standards Board and the U.S. Auditing Standards Board have issued a consultation paper called “Enhancing the Value of Auditor Reporting: Exploring Options for Change.”  That paper can downloaded here: http://www.ifac.org/Guidance/EXD-Outstanding.php

Both papers are exposure drafts for consideration of future standard-setting.  Apparently, users of auditor’s opinions would like the auditor to provide more information about the process used to reach their conclusions and the information  supporting the conclusions reached. 

Both papers refer to the presence of a gap between what is reported in the auditor’s report and the information expected (or needed) by some users of that report.  The IAASB/ASB consulting paper refers to an information gap, along with an expectations gap.  But, long-time observers of the the financial reporting/auditor reporting environment, know this on-going debate well.  After every major economic downturn and the resulting public company failures, bankruptcy filings, etc., including the related fraudulent financial reporting that sometimes occurs, investors ask, “where were the auditors.”

I have no doubt that the proposals will result in changes to auditor reporting, but, I’m not convinced that a more informative auditor report will be sufficient to prevent future unanticipated market downturns.  The flow of information on the market, particularly between financial reporting dates remains largely unsubstantiated.  How can an auditor’s report on the December 31 financial statements benefit a market participant that is evaluating an investment on March 8th of the subsequent period?  Those December financials are part of history.   The March 8th investment must consider waht’s happened subsequent to December and into the future beyond March 8th.  Again, most of the factors influencing those issues are unsubstantiated and not subject to “substantiation.”  But, okay, let’s reconsider the auditor’s report again.  Why not?

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About docjonz

I am an Associate Professor of accounting at Hofstra University in Hempstead, NY. Additionally, I have more than 30 years of professional accounting experience in various capacities including auditing, accounting standard setting and corporate accounting policy.
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