Auditors aren't completely opposed to expanding audit reports, but they point out they need a lot more guidance from audit regulators on how to do it, and it will come at a cost.

In two days of roundtable discussions with the Public Company Accounting Oversight Board, dozens of panelists picked apart the board's proposal to make the first substantive change in the standard auditor's report in more than 70 years. The PCAOB's proposal is to give investors a better view into the audit by requiring auditors to describe in their audit reports the “critical audit matters” that were most difficult to resolve. Auditors also would be required to make some further disclosures regarding their independence from company's management, their tenure on the audit engagement, their responsibilities for fraud, their role with respect to notes to the financial statements, and their evaluation of other information outside of financial statements.

Jeff Mahoney, general counsel for the Council of Institutional Investors, reminded the PCAOB that discussions around improving the audit report to provide more than a boilerplate description of a passing audit have occurred off and on for decades with no change. He encouraged the board adopt the proposal, and require auditors to provide their own independent assessment of the critical accounting judgments and estimates reached by management. “In our view, this modest revision to the proposed model would result in an auditor's report that provides the kind of independent auditor insights that are reflected in our policies and are more responsive to investors' information needs,” he said.

Lynn Turner, former chief accountant of the Securities and Exchange Commission also has worked as an auditor and preparer during his career, said investors have called for disclosures directly from auditors. “Having performed audits in the past, I believe that is a unique perspective informed by a significant amount of work performed and evidence obtained” while complying with auditing standards, he said.

“When we find, as we have in the past, auditors are aware of information important to investors but fail to disclose it to investors, it stands to reason that any trust in an audit, and its value quickly evaporate. A model that fails to provide independent auditor insights or simply repeats the disclosures made by management should not be accepted.”

Kevin Reilly, a partner with Ernst & Young, said the requirement to disclose critical audit matters, or CAMS, is the most problematic part of the proposal. As written, the proposal would lead to a lot of questions around what CAMs should be disclosed and what auditors should say about them. Acknowledging a long list of concerns raised by auditors, the firm believes they can be addressed with some revisions and clarifications to the proposal, he said.

At Deloitte, Joseph Ucozoglu, shares the concern about whether auditors should take on the role of providing original information, but is not dismissive of the proposal. “The very act of an auditor crafting a tailored communication to external constituencies stands to enhance the connection of the auditor to the user of the audit report, the investing public,” he said. The firm conducted some field testing of the proposal to get a sense for how it would work in practice, he said, and it revealed the typical audit of larger companies will identify anywhere from a dozen to 120 potential CAMs to disclose and explained, with the average number around 40. After paring those down to the most critical matters that must be disclosed, the average number to disclose was 4, with the range from 1 to 12.

“Some level of incremental costs will of course result from the application of the Proposals,” Ucozoglu said. He said the firm had some ideas on how to help manage those costs, and it's prepared to “take a leadership role in the profession” to help determine the best way to improve the auditor's report.

The PCAOB is accepting comments on the proposal through May 2.

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