Taking responsibility: IAASB and PCAOB disagree on auditor’s report disclosures

In support of a broad objective of making the auditor’s report, and the audit process, more transparent, standard setters have been examining whether there should be disclosure in the auditor’s report of the involvement of other auditors that participate in group audits.

In support of a broad objective of making the auditor’s report, and the audit process, more transparent, standard setters have been examining whether there should be disclosure in the auditor’s report of the involvement of other auditors that participate in group audits. They seem to be coming to different conclusions.

In many audits of group financial statements, the group auditor may request one or more other auditors to perform work on the financial information of some subsidiaries or activities within the larger group. In Canada, and under international auditing standards, the auditor issuing the group auditor’s report is responsible for the direction, supervision and performance of the group audit, must take sole responsibility for the work of other auditors, and must not reference other auditors in the report. In the United States (U.S.), auditing standards provide group auditors with the option to divide responsibility for the group audit with other auditors, and to make reference to this divided responsibility in the auditor’s report.

The U.S. Public Company Accounting Oversight Board (PCAOB) issued a release in 2011, re-proposed with amendments in December 2013, that would require the auditor to disclose in the auditor’s report the name, location and the extent of participation (as a percentage of total audit hours) of certain other audit firms that participate in the audit. The auditor’s report would also include the location and extent of participation of certain persons not employed by the auditor who took part in the audit. The PCAOB believes that knowing this information would allow users of the auditor’s report to research publicly available information about these participants and to understand whether the other participants are headquartered or reside in the group auditor’s home country or in other jurisdictions, as well as how much of the audit work they performed.

In 2012, the International Auditing and Assurance Standards Board (IAASB) considered the PCAOB’s 2011 release in the context of its own auditor reporting proposals. The IAASB consulted with its stakeholders about possible disclosures but these did not garner sufficient support. Many stakeholders believed such disclosures contradict the sole responsibility principle in the group audit standards and therefore could confuse readers about the quality of the audit. The IAASB noted that these standards (which are also used in Canada) are intended to provide adequate safeguards to using the work of other auditors by requiring the group auditor to have significant involvement in the planning and review of the work of other auditors, in particular when such work is done on a significant component of the entity. As a result, the IAASB’s 2013 auditor reporting exposure draft did not contain a proposal for disclosure of the involvement of other auditors.

The IAASB and PCAOB auditor reporting discussions are not yet complete, but current indications are that requirements relating to disclosure in the auditor’s report about other participants in the audit will diverge in the final standards. If the PCAOB release is finalized as proposed, some U.S. auditors say there will be practical challenges for them to implement the PCAOB proposals. I can see that challenges might be magnified for auditors that do not operate extensively in the U.S. market. Consider audits of Canadian U.S.-listed entities for example:

  • Will Canadian auditors be willing to incur the costs to develop and maintain systems to compile and report the proposed information if their U.S.-listed clients only represent a small portion of their client base?
  • Will auditors of subsidiaries be reluctant to provide consent for their name to be included in the group auditor’s report if it might create additional legal liability?
  • Will auditors (particularly smaller firms) end up declining engagements as a result of the proposed disclosures because of these concerns?

Keep the conversation going….where do you stand on disclosing information about other participating auditors in the auditor’s report? Would the PCAOB requirement posed significant challenges for Canadian auditors of cross-listed entities?

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