The Public Company Accounting Oversight Board (PCAOB) held a public meeting on the auditor’s reporting model in early April. Panellists from the United Kingdom (UK) reported that, at least so far, the new UK model is being well received by auditors, audit committees and investors.\nThe UK Financial Reporting Council (FRC) introduced new auditor reporting standards effective for financial statement periods commencing on or after October 1, 2012, so the UK is now seeing a significant number of the new reports. The standards are similar to the International Auditing and Assurance Standards Board (IAASB) proposals being considered for adoption in Canada, and include reporting of assessed risks of material misstatement identified by the auditor and their effect on the overall audit strategy.\nHere is some of what the UK panellists highlighted:\n\n Auditors find the new reporting refreshing as it underscores their responsibility to work in the public interest, and the importance of audit quality. It instils a greater sense of purpose in what they do. Sir David Tweedie, in particular, sees the new reporting model as a great opportunity for the audit profession to show that it works for the shareholders and not for the company. It will help to reestablish the value of audit as reports will bring out how auditors use their experience, independent mindset and skepticism on the audit.\n The topics covered in the auditor’s report were already well aired with management and the audit committee through the audit process – there were few surprises; identifying the number of issues to report and the level of detail did not prove problematic either. There has been little evidence of boilerplate wording. One panellist noted, for example, how different risks were identified in a report on a financial institution compared to one for a television broadcaster. Additional audit costs, primarily arising from quality control over the report, were not significant.\n There was increased engagement with the auditor by management and the audit committee. In fact, some UK listed companies, wanting to be industry leaders, adopted the new model early and gave their auditors flexibility to push the envelope. The Rolls Royce audit report was frequently referred to during the PCAOB public meeting. This report included not just a summary of each risk and the auditor’s response, but went a step further to also discuss the auditor’s findings. The findings often gave a sense of whether the auditor considered the company’s judgments to be conservative, aggressive or balanced, without implying that the auditor was providing an opinion on the judgments.\n Investors like the risk-based approach to reporting, not a laundry list of procedures. It gives them a hook to further challenge management and hold the audit committee and external auditor to account. This should contribute to enhanced trust between management and investors and, ultimately, lower the cost of capital.\n\nNow, I would be naïve to conclude that the snapshot perspective presented to the PCAOB reflects the full spectrum of UK audits – that is likely too much to hope for. Further, the UK experience will not necessarily be shared in Canada because there are significant differences between our respective marketplaces and corporate governance regimes. Nevertheless, the panellist presentations were impressive and, in my view, provide some comfort that improving the auditor’s report is the right thing to do.\nIt was also good to hear that all the UK panellists strongly support consistency between the resulting UK, PCAOB and IAASB reporting standards. International consistency is of great interest to Canada too.\nMany Canadian stakeholders expressed concern about the IAASB proposals during the exposure period. Some of their fears, such as excessive boilerplate and lack of information value, have not yet materialized in the UK. Perhaps this bodes well as the IAASB and Canada move to finalize their reporting standards.\nKeep the conversation going….you can listen to the PCAOB webcast or read a transcript of the meeting, and download the Rolls Royce auditor’s report at the links below.\nPost a comment below; or email me directly.\nEric\nConversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.