The future of auditor reporting in North America: A doomsday scenario?

There is the prospect that imminent auditor reporting standards in the United States (U.S.) and internationally will be different causing significant market confusion and compliance burden, particularly for Canadian cross-listed entities.

There is the prospect that imminent auditor reporting standards in the United States (U.S.) and internationally will be different causing significant market confusion and compliance burden, particularly for Canadian cross-listed entities.

The International Auditing and Assurance Standards Board (IAASB) and the U.S. Public Company Accounting Oversight Board (PCAOB) have important auditor reporting proposals out for comment this fall. They represent the most significant changes to auditor reporting for decades. The changes are designed to address user demands that auditor’s reports be more informative. Unfortunately, they are not consistent in their requirements. In fact, there are some significant differences. Just to give you a flavour for what I mean:

  • The IAASB exposure draft would require the auditor to include a separate “Going Concern” section that includes a statement whether management’s use of the going concern basis of accounting is appropriate, and a statement whether the auditor has identified a material going concern uncertainty. The PCAOB is not proposing these requirements.
  • The PCAOB and the IAASB propose requirements for auditors to perform work and report on “other information” that contains the audited financial statements (such as the annual report), but which information the requirements apply to, the scope of the auditor’s procedures and how the auditor reports the results are quite different.
  • Both bodies are introducing requirements for auditors to provide more informative reporting about significant matters arising during the audit – the IAASB would require the auditor to report “key audit matters” and the PCAOB would require the auditor to report “critical audit matters”. Although the approaches appear to be very similar, the definitions, requirements and application material guiding this reporting are not identical and it is not clear why there is a need for differences.

Improving the information value of the auditor’s report is a laudable goal and could enhance audit quality, but it worries me that reporting in North America (and, for that matter, globally, because the United Kingdom, for example, is not totally onside with the IAASB either) will not be consistent, particularly as the report is the key output from the audit process. Over 300 Canadian public companies are listed in the U.S., more than any other foreign country, so this seems to me to be a big issue. Up to now, Canadian auditors of such entities have been able to issue one report that complies with both Canadian securities regulatory and PCAOB requirements. Will this still be feasible in the future? It is hard to say but I am not optimistic. To have different auditor’s reports on the same financial statements in similar markets, would be really confusing and likely not in the public interest. This is certainly the view of the auditor reporting working group of the Enhancing Audit Quality (EAQ) initiative, a collaboration of CPA Canada and the Canadian Public Accountability Board.

So what is to be done? First of all, Canadians have to get engaged and understand the proposals and their implications. Secondly, Canadians need to speak out. I am not just talking about auditors. I mean all participants in the financial reporting process – preparers, audit committees, analysts, investors and others.

The changes are significant and they will be long lasting. If we don’t get them right now, we are going to have to live with them for a long time. So your views need to be heard. The IAASB proposals are open for comment until November 22, 2013; the PCAOB proposals open for comment until December 11, 2013.

Keep the conversation going….do you think it matters whether auditor’s reports are consistent in the North American marketplace? What do you see as the implications if they are not consistent?

Post a comment below; or email me directly.

Eric

Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.

About the Author

Eric Turner, CPA, CA

Director, Auditing and Assurance Standards, CPA Canada

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