Momentum is building for major changes in independent audits. The new thinking follows a decade of economic turmoil in which investor confidence was shaken by high-profile accounting scandals, a severe financial crisis, and sustained volatility in the capital markets. These turbulent times are prompting regulators around the world to rethink the roles of audits and auditors. At the forefront of this movement, the European Commission recently adopted sweeping proposals to restore confidence in audited financial statements, and the US Public Company Accounting Oversight Board (PCAOB) has invited comments on fundamental changes ranging from expanded audit reports to mandatory auditor rotation. The purpose of this Messenger is to provide a framework for understanding the discussions and debates that may bring audits to a crossroads in 2012 as regulators focus on future directions.
How will the changes affect you?
The primary catalyst for change in US proposals is the goal of helping investors in public companies.
It is not clear how or if the trends may affect private companies or users of their financial statements. The major releases and potential changes are summarized in the table below.
Major Releases and Potential Changes
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Release
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Potential Changes
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PCAOB Concept Release 2011-003
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Changes to the audit report including an Auditor’s Discussion and Analysis.
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PCAOB Concept Release 2011-006
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Mandatory auditor rotation and other ways to improve perceptions of auditor independence.
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PCAOB Proposed Rule 2011-007
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Disclosure of the names of the engagement partners and other participants in the audit.
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Report to the U.S. Treasury Dept. by the advisory committee on the auditing profession
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Enhancements to make the auditor’s report more useful to investors and development of key indicators of audit quality
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Proposed directive and proposed regulation adopted by the European Commission
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Separation of audit from non-audit activities by large firms and mandatory auditor rotation with exceptions to encourage “joint audits.”
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Consultation paper by an international auditing standards board (IAASB), request for comments by the AICPA and observations by the US Center for Audit Quality
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Enhancements to the role of audit committees and assurance or related services by auditors on additional information
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Never before have so many changes in audits been considered at the same time. All these potential changes have advantages and disadvantages that can have significant effects on all the participants in the financial reporting process. In addition to users and auditors of financial statements, the changes would also affect preparers of financial statements, audit committees, and boards of directors or others charged with governance.
Additional details and key points are provided in the following attachments to this Messenger:
In reviewing the proposals, it is important to keep in mind that there are two sets of auditing standards in the US. The PCAOB rules and standards apply to audits of public companies and other issuers as defined in the Sarbanes-Oxley Act of 2002, while the American Institute of CPAs sets the standards for audits of non-issuers. Changes in one set of standards may affect changes in the other because both organizations coordinate closely with each other and with international regulators and standard-setters in an effort to harmonize auditing standards around the world.
For more information
MHM's Professional Standards Group will continue to monitor progress on the many issues and possible future directions in the US and around the world. As both a PCAOB registered firm and a member of the Kreston International global accounting network of independent accounting firms, we are interested in your views on any or all of the possible changes described in this paper. If you have any specific questions, comments or concerns, please share them with Rich Howard of MHM's Professional Standards Group or your MHM service professional. You can reach Rich directly by email at rhoward@cbiz.com and by telephone at 949-450-4402.