PCAOB considers mandatory rotation and audit reports

THE US Public Company Accounting Oversight Board is to address the relevance and value of the audit report in a series of papers to be published in the coming months.

Two projects will run simultaneously: the first will examine possible changes to the audit reporting model with a view to adding value for the investor; the second looks at enhancing the relevance of the report by boosting confidence in the audit.

Chairman James R Doty (pictured) addressed the Securities and Exchange Commission and the Financial Reporting Institute at a conference in California yesterday. He said: “the current auditor’s report, which provides only a pass-fail option, is of limited relevance,” claiming investors want “deeper insight” in the aftermath of the credit crisis.

Following consultations with account users and preparers, the PCAOB has developed several suggestions for changes to the auditing model, to be issued later this month. It is hoped these will give more insight into existing audit procedures – such as areas of disclosure – as well as options used in other systems.

The second project will look at confidence in audit and revisit one of firms’ major bugbears – mandatory rotation. The PCAOB said: “An audit has value to the public only to the extent that it is performed by a third party who is viewed as having no financial stake in the outcome,” but acknowledged there remains “a disturbing lack of scepticism” among auditors.

Firm tenure will be reopened for debate and term limits will come under the microscope, as well as the “inherent conflict” of auditors being paid by their clients.

Doty’s speech delved into the issue of independence, saying it could be compromised both for new auditors – who might be trying to build a long-term relationship with the client – and those with a long-standing relationship, where the incentive is to avoid being the engagement partner who lost the contract.

He said adding value to the audit through strengthening the reporting model is fruitless if confidence in quality and independence are not strengthened; for this reason, the two papers will be released simultaneously to allow holistic consideration of the issues.

This will be followed by long comment periods to allow for evidence gathering and a series of public roundtables, with a view to developing “effective solutions” to the myriad issues.