Company Audits — Are Shareholders Getting Enough?
The Center for Audit Quality (CAQ) has weighed in on the issue of what information investors should receive in the report from a company’s auditor. In a 9 June letter to the Public Company Accounting Oversight Board (PCAOB) chief accountant, the CAQ outlines its plan.
For years, the report that comes from the company’s audit firm has been criticized as providing very little useful information for investors. True, the audit report expresses an opinion on whether the company financial statements pass muster. That is, whether they are fairly presented in accordance with applicable accounting standards — what analysts commonly refer to as a “clean opinion.” Investors, for the most part, have become accustomed to this basic “pass/fail” report card. (To see what investors really think about audit reports, view the latest CFA Institute survey.)
But after decades of debate, it looks like audit regulators may actually upgrade this bare-bones reporting model to better reflect the key judgment calls made by management, and accounting and auditing risk issues identified during the audit process.
There have been dozens of surveys and articles from investors detailing what they believe would enhance the value of the auditor’s report. Nothing really complicated, just better disclosures on the types of issues that would help reduce uncertainty by providing investors a better understanding of the quality of the company’s corporate reporting and the quality of the audit. Things that seemed to catch the auditor’s eye, for example.
Check out the CAQ letter and see what you think. Does it outline the things investors have repeatedly been asking for? Based on the stated ”overarching principles” of the CAQ approach (below), we hope this is not just more smoke and mirrors.
In evaluating this topic, the CAQ working group established the following overarching principles, with “investors in mind,” to guide further possible revisions to the auditor’s reporting model:
- Auditors should not be the original source of disclosure about the entity; management’s responsibility should be preserved in this regard.
- Any changes to the reporting model need to enhance, or at least maintain, audit quality.
- Any changes to the reporting model should narrow, or at least not expand, the expectations gap.
- Any changes to the reporting model should add value and not create investor confusion. Specifically, any revisions should not require investors to sort through “dueling information” provided by management, the audit committee, and independent auditors.
- Auditor reporting should focus on the objective rather than the subjective.