State Board Report

October 2011

A roundtable discussion on how the Public Company Accounting Oversight Board can improve the relevance and usefulness of auditors’ reporting on the results of their audits of public company financial statements was held on September 15 including 32 investors, auditors, corporate board members, financial statement preparers and academics. The discussion covered many of the areas raised in the PCAOB’s concept release on the topic, to which NASBA sent a response on September 28.

PCAOB Chairman James R. Doty, who will be the keynote speaker at NASBA’s Annual Meeting, explained: “The PCAOB’s consideration of the audit reporting model is intended to confront questions that recur in times of economic crisis. In the concept release we attempt to identify meaningful opportunities to enhance the relevance of auditors’ communications with investors.” He said the September PCAOB roundtable would not be the last discussion of this topic.

“Investors clearly do not believe the current three paragraph, largely boilerplate, binary audit report, is either sufficiently informative or serves their needs,” PCAOB Member Steven B. Harris stated at the roundtable’s start.

He continued, “There was a time – going back to the days of Arthur Andersen and Leonard Spacek – that the profession embraced their obligation to safeguard investors’ interests. I think we need to return to that mindset and provide investors with more of the information they are asking for.”

Of the 32 participants in the roundtable, there were 16 who represented investors and of those 10 supported an “Auditor’s Discussion and Analysis” being added to the auditor’s report, while three said they would favor requiring emphasis paragraphs, and the other three not voicing support for any of the proposals under discussion. Allen L. Beller, an attorney and director on the board of a public company, said he was in favor of “changing the pass/fail model” of the auditor’s report, but he did not favor an AD&A. He predicted such a report would “become boilerplate.” He said he wanted auditors “to tell investors about the things they know about.” While he favored more disclosures, he said, “Do you want auditors to second-guess what the competition is doing? I don’t.” Steven Buller, managing director of BlackRock, Inc., suggested there be parameters around the AD&A. He thought such a report could provide insight on uncertainties and general observations on the auditor’s independence, on the overall relationship, the tenure of the audit relationship, audit procedures and identification of areas that required management or auditor judgment.

In the comment letter on the concept paper sent to the PCAOB by NASBA Chair Michael Daggett and President David Costello on September 28, they stated: “Requiring the auditor to have ‘more relevant insight,’ which is different from having an understanding of the client, its business and the business environment, could require development of an auditing standard that would by its very nature be vague and, therefore, unenforceable. As regulators, the enforceability of auditing standards is essential to the State Boards.”

The investors’ call for additional information comes down to their saying, “We don’t trust audit committees,” Sam Ranzilla, national managing partner of KPMG observed. He told the PCAOB, “I don’t think this board can on its own overcome this distrust.” Investors are asking for improved disclosure and greater disclosure around critical accounting estimates, he said.

“How would the auditor’s AD&A differ from the MD&A?” asked Peter Nachtwey, CFO of Legg Mason, Inc. If they were not different, why bother having them and, if they were, there would be a tremendous amount of time spent in reconciling the differences. “The costs would be borne by the investors,” he said.

Lynn Turner, of LitiNomics and former SEC chief accountant, said he favors the AD&A: “Rather than ‘do no harm,’ the PCAOB should look at doing something that is right.” He warned, “If all we do is incremental change, then we will be having this same discussion again 30 years from now.”

The Webcast of the roundtable has been archived and can be found on www.pcaobus.org.

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