June 22, 2011

PCAOB Launches Effort to Revamp Reports on Audited Financial Statements

Yesterday, the PCAOB issued a concept release on possible revisions to PCAOB standards related to reports on audited financial statements. As noted in this statement by PCAOB Chairman James Doty, the effort to look at the PCAOB standards applicable to audit reports comes out of concern as to “whether audits adequately served investors’ needs in the months and years before and during the [financial] crisis.”

The concept release highlights several alternatives to the auditor reporting model that would facilitate the communication of information from the auditor to investors. The concepts include: (1) an Auditor’s Discussion and Analysis to be included as a supplement to the auditor’s report, in order to provide the auditor with the ability to discuss his or her views regarding significant matters, as well as information about the audit (such as audit risks identified in the audit, audit procedures and results), auditor independence and the auditor’s views regarding the company’s financial statements; (2) required and expanded use of “emphasis paragraphs” in all audit reports that would highlight the most significant matters in the financial statements and identify where those matters are disclosed in the financial statements, such as significant management judgments and estimates, areas with significant measurement uncertainty and other areas that the auditor determines are important for a better understanding of the financial statement presentation; (3) auditor assurance on information outside of the financial statements, such as MD&A, non-GAAP information or earnings releases; and (4) clarification of the standard auditor’s report, whereby clarifying language would be added about what an audit represents and the related auditor responsibilities, including language regarding reasonable assurance, the auditor’s responsibility for fraud, the auditor’s responsibility for financial statement disclosures, management’s responsibility for the preparation of the financial statements, the auditor’s responsibility for information outside of the financial statements, and auditor independence. The PCAOB has noted that these potential alternatives are not mutually exclusive, therefore a revised auditor’s report could include any of these alternative concepts or a combination of concepts, as well as elements of these concepts.

The PCAOB is soliciting comments on the concept release until September 30, 2011, and plans to convene a roundtable in the third quarter of 2011 to discuss these issues.

Unfinished PCAOB Business and Your Proxy Statement

With the PCAOB now taking on such a significant topic as the content of auditor’s reports, it is still important to keep in mind that, 8 years into its existence, the PCAOB continues to slog through many of the auditing standards that pre-dated the creation of the Board for the purpose of adopting new PCAOB standards.

Some confusion can arise, however, because the AICPA (who used to the the principal arbiter of all auditing standards for public and private companies) continues to promulgate its own auditing standards, notwithstanding the fact that the PCAOB has taken over as the sole authority on auditing standards for public companies. In this regard, I continue to see incorrect auditing standard references in proxy statements in the context of the audit committee report required by Item 407(d)(3) of Regulation S-K. Among the items required in the audit committee report is that “[t]he audit committee has discussed with the independent auditors the matters required to be discussed by the statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T.”

In complying with this requirement, some issuers have become confused because in December 2006, the AICPA issued Statement on Auditing Standards No. 114, The Auditor’s Communication with Those Charged with Governance (“SAS 114”). SAS 114, by its terms, supersedes SAS 61, but because the standard was adopted after April 16, 2003 and was not subsequently adopted as an Interim Auditing Standard by the PCAOB, SAS 114 is not applicable to the audits of public companies. As a result of the understandable confusion about the applicability of this standard, some issuers have incorrectly replaced the reference to SAS 61 in their proxy statement with a reference to SAS 114.

To compound the problem, in March of last year the PCAOB proposed a new auditing standard, Communications with Audit Committees, which if adopted would supersede the Board’s interim standards on the topic. The comment period for this proposed standard closed in May 2010, and commenters suggested that the PCAOB needed to gather more information regarding the operation of the proposed standard. The PCAOB conducted a roundtable on auditor communications with the audit committee in September 2010. A final standard has not been adopted to date, and as a result the Interim Auditing Standard pursuant to PCAOB Rule 3200T firmly remains SAS 61 (as in effect on April 16, 2003).

More on our “Proxy Season Blog”

Even though the proxy season is winding down, we still are posting new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– They Held a Revolution and Nobody Came
– Proxy Season: The Latest Voting Results
– More on “Annual Meetings: The Use of Floor Proposals”
– The Best Annual Report of 2011? Acuity’s “Storybook Year”
– Advisory Votes Help Shield Directors From Investor Dissent

– Dave Lynn