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State Board Report

December 2013

The train is on the track for changing the auditor’s report, according to multiple speakers at Baruch College’s Eighth Annual Auditing Conference, cosponsored by the NASBA Center for the Public Trust, held December 5, 2013 in New York City. Martin F. Baumann, the Public Company Accounting Oversight Board’s Chief Auditor, cautioned that the change is “just leaving the station, not racing by.” He explained that the PCAOB’s proposed auditor reporting standards (see SBR 9/13) would retain the pass/fail model and the basic elements of the current auditor’s report, but would require the auditor to communicate a wider range of information specific to the particular audit, the critical audit matters.

The PCAOB’s proposal differs with the International Auditing and Assurance Standards Board’s proposed changes to the auditor’s report in that it calls for the communication of KAM “key audit matters” (rather than CAM “critical audit matters”) which must have been also communicated with those charged with governance. Also, the IAASB’s proposal would not require disclosure of the auditor’s tenure. The IAASB addresses reporting on other information in a separate project, as the PCAOB addresses reporting on going concern and disclosure of the name of the engagement partner in separate projects. Mr. Baumann said there are more similarities between the PCAOB’s and IAASB’s proposals than differences.

Audit Quality Indicators are being studied by the PCAOB and a concept release is anticipated in the first quarter of 2014, Greg Jonas, PCAOB Director of Research, told the conference. The staff is setting as a definition for audit quality: “Operating in full compliance with PCAOB standards and SEC requirements in or to (1) meet the needs of an issuer’s investors and the marketplace for independent, skeptical, and reliable audits of the issuer’s financial statements and (2) facilitate the timely and effective supply of information to the issuer’s audit committee.” Mr. Jonas explained the framework sets out audit quality indicators divided among audit inputs, audit processes and audit results. Some of the audit quality indicators will be seen as controversial, but others will not, he said.

“It’s a political discussion now as to what audit quality is,” Phil D. Wedemeyer, a retired Grant Thornton partner and present audit committee member, observed. “Under the Sarbanes-Oxley Act, the PCAOB is to improve the quality of audits. It is important to know the definition of what audit quality is so that we can agree on what we want to improve.”

Introduced by Center for the Public Trust Chairman David Costello, IAASB Chairman Arnold Schilder told the conference that the auditor’s report change train has definitely left the station in some parts of the world, like the United Kingdom. Some countries have already decided to use KAM and the first experiences are encouraging, he noted. The next meeting of the IAASB will be in March and they intend to finalize the reporting ISAs by the end of 2014.

“We already have a project on other information, but we are looking at the PCAOB’s proposal and will be studying the comments it receives,” he said. “Where we are developing standards, we try to stay as close as possible.”

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