Potential Changes on the Horizon from the PCAOB

POTENTIAL CHANGES ON THE HORIZON FROM THE PCAOB

By Tammy Gamble

The Public Company Accounting Oversight Board (PCAOB) intends to propose a new auditors’ reporting model in the second quarter of 2012. In June 2011 the PCAOB board issued a concept release which presented several alternatives for changing the auditors’ reporting model. These potential changes include:

• The addition of an auditor’s discussion and analysis (AD&A);

• Mandatory and expanded use of emphasis paragraphs;

• Auditor assurance on other information outside the financial statements; and

• Clarification of language in the standard auditor’s report.

This concept release comes in response to investors who have expressed concern that the current auditor reporting model doesn’t provide investors with adequate forewarning of a company’s financial trouble. Investors are seeking more information from auditors about risk and what auditors have done to respond to risk. Many investors want to better understand materiality levels and factors used to determine such levels and significant estimates and judgments made by management and how the auditor assessed those.

The Board held a public roundtable in mid-September. Comments on the concept release were due by September 30, 2011. The Board will be considering the feedback received in developing and proposing a new model during 2012.

The PCAOB is also considering a requirement for mandatory audit firm rotation for public companies. The PCAOB in August 2012 issued a concept release examining potential limits on audit firm tenure with public companies.

Although mandatory firm rotation may be a difficult concept to grasp and implementation may prove to be costly, the concept has gained momentum in Europe. On November 30, 2011, the European Commission released a proposal which included mandatory audit firm rotation. The European proposal, if approved, will result in significant changes between public companies and their auditors including: limiting the period that an outside auditing firm can perform audits for a company to six years followed by a four-year cooling off period; prohibiting audit firms from providing nonaudit consultancy services to their audit clients; and requiring public companies to have an "open and transparent tender procedure" for selecting a new auditor.

The PCAOB concept release seeks comments on questions such as whether the Board should consider a rotation requirement only for audit tenures of more than 10 years or only for the largest issuer audits and whether mandatory firm rotation would enhance auditor independence, objectivity and professional skepticism. The Board will conduct a roundtable discussion in March 2012.

Stayed tuned as the PCOAB continues to refine its position on these matters. The potential changes on the horizon, if approved, will have a significant impact on public companies and accounting firms.