US accounting regulator, the Public Company Accounting Oversight Board (PCAOB) is to consult on proposals for two new standards designed to enhance the auditor's reporting model.
These are an auditor reporting standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and a standard covering other information in the annual report, The Auditor's Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor's Report.
The PCAOB says both have been developed following a three-year outreach exercise and are intended to provide more informative reports which offer more useful and relevant information for investors without increasing the burden of financial reporting for companies.
The proposed auditor reporting standard retains the pass/fail model, including the basic elements of the current auditor's report, but will require the auditor to communicate 'critical audit matters' specific to each audit.
It also calls for new elements in the auditor's report relating to auditor independence, auditor tenure, and the auditor's responsibilities for, and the results of, the auditor's evaluation of other information outside the financial statements, as well as enhanced explanations of the auditor's responsibilities for fraud and notes to the financial statements.
The second standard describes the scope of 'other information' and procedures the auditor is required to perform, including procedures when the auditor identifies a material inconsistency between the other information and the audited financial statements, a material misstatement of fact, or both.
The regulator says the aim is to give investors potentially valuable information that they have expressed interest in receiving but have not had access to in the past. The focus will be on those matters the auditor addressed during the audit of the financial statements that involved the most difficult, subjective, or complex auditor judgments or posed the most difficulty to the auditor in obtaining sufficient appropriate audit evidence or forming an opinion on the financial statements.
PCAOB chairman James Doty described the release of the proposed standards as a 'watershed moment', saying: 'These proposed changes will make the auditor's report more relevant to investors. More robust audit reports that demonstrate the strength and value of the audit also should lead to better public awareness of, and appreciation for, auditors' skill and insight.'
In developing its new approach, the PCAOB said it had taken into account recent developments including the IAASB project on auditor reporting and Financial Reporting Council's revised auditing standard.
In comparison with IAASB's proposals, which are also out for consultation, the PCAOB said its definition of 'critical audit matters' is more comprehensive than IAASB's 'key audit matters', while it had also included a documentation requirement. However, the regulator said it had rejected proposals that the new standards should require details of the auditor's discussion and analysis, or that auditor should be required to evaluate either the audit committee or the company's own estimates of performance.
The PCAOB's consultation on the proposed standards and related amendments is open for comment until 11 December 2013.
