Audit regulators are preparing to issue a final new standard to overhaul the audit report and to propose new rules to beef up audit requirements for accounting estimates and using the work of specialists.
The Public Company Accounting Oversight Board has scheduled an open meeting for Thursday, June 1, to “consider adopting a standard” that will give auditors new requirements to provide new information in the standard audit report. The board says its agenda also includes considering “proposing amendments to standards that would strengthen and enhance requirements for auditing accounting estimates, including fair value measurements, and using the work of specialists in an audit.”
The PCAOB first floated the idea of a new audit report in 2011 with a concept release that explored a number of possible ways to give investors more information about what auditors did and learned during the course of an audit. The board issued a proposed standard in 2013 that would have dramatically increased the auditor’s narrative about significant audit findings, but curtailed the proposal in 2016 to narrow and define the “critical audit matters” that auditors will be required to describe.
The proposal also sought to compel auditors to include some new information in audit reports about their tenure on the engagement and their responsibilities. While the tenure disclosure would give investors greater transparency around how long the same firm has conducted the audit, the clarification of responsibilities would let investors know auditors are required to be independent and that auditor are providing reasonable assurance regarding material misstatements, whether misstatements might be due to error or fraud.
The disclosure regarding how long the same firm has audited the company is all that remains of an early drive by PCAOB Chairman James Doty to set term limits for audit firms, effectively rotating audit firms on a mandatory basis. Doty regarded the idea as a way of wringing more skepticism out of auditors, who would always operate under the knowledge that another auditor would be coming along in a few years to check their work.
Separately, the PCAOB is poised to issue a long-awaited proposal on how to improve the audit requirements around accounting estimates, which includes fair value measurements. The board issued a consultation paper in 2014 to illicit feedback on a variety of approaches, including issuing staff guidance, amending existing standards, and developing new standards. The board discussed ideas with its Standing Advisory Group on a few occasions, but has taken no other public action.
The audit of accounting estimates is a common sore spot in PCAOB inspections. It remains one of the most common areas of error called out by inspectors. The use of specialists work also has been a sore spot, with companies and auditors both reminded that the can't rely blindly on such work but must understand it and explain it if it forms the basis for their own assertions.