During 2010 and 2011 there have been far-reaching changes proposed that address virtually all areas of financial reporting and impact substantially all issuers of financial statements. These changes impact widely-applicable accounting standards (revenue recognition, leases), form and content of financial statements, and even potential alternatives to current GAAP for private companies. Until now, the auditor's report has received little attention; but that may be changing.


In late June, the Public Company Accounting Oversight Board (PCAOB) issued a concept release which exposed for comment certain alternatives that would impact the current form and scope of auditor reporting. While the PCAOB has jurisdiction only over auditors of public companies, its conclusions are sure to impact the broader audit community, and ultimately the users of private company financial statements.


Why the focus on the auditor's report? It's all about relevance. The auditor's report must evolve to meet users' needs within the constraints of what is appropriate to report based on the scope of an audit. The current largely "pass-fail" approach may not be meeting the needs of users. The PCAOB focused on four possible changes:

  Auditor's discussion and analysis - This supplemental report would expand on aspects of the audit and allow the auditor to explain, for example, significant judgments. This is potentially more expansive than the emphasis paragraphs discussed in the next point.
  Required and expanded use of emphasis paragraphs in the existing report - This change could require expanded use of required disclosures to address significant estimates, judgments and other matters that the auditor believes are particularly important to the user's understanding of the financial statements.
  Auditor assurance on other information filed with the financial statements - The cited example would be some level of assurance on information in the required Management Discussion & Analysis (MD&A) section required in SEC filings but could apply to other information in filings and news releases .
  Clarification of language in the standard auditor's report - This could be perceived as enhancing the understanding of terms used and the nature of the auditor's report itself, whereas the other proposals address greater understanding of the underlying financial statements.


Of these proposals, the first two present opportunities for increased relevance to users of private company financial statements. Changes that provide useful auditor perspective and are not boilerplate would appear to be welcome to users. The obvious difficulty will be establishing an expanded reporting framework that does not substantially increase the auditor's effort (and thus fees) or increase the perceived risk to the auditor. The avoidance of risk by auditors inevitably leads to reduced or standard disclosures by auditors that provide little relevant information in individual situations.


The above are the views of the author. If you would like more information on this topic, please contact your representative at Kieckhafer Schiffer & Co. or Mark Merriman.


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