by Ken Rankin

Washington -- New rules proposed by the Public Company Accounting Oversight Board to require auditors to document their work and justify their conclusions could create new litigation exposure for accountants, representatives of the American Accounting Association’s Auditing Section warned.

The proposal was advanced by the oversight body late last year in response to provisions of the Sarbanes-Oxley Act that direct the PCAOB to develop standards requiring public accounting firms to prepare and maintain for at least seven years audit documentation “in sufficient detail to support the conclusions reached” in the auditor’s report.

The board’s proposal, however, requires auditors to do more. “In addition to the documentation necessary to support the auditor’s final conclusions, information the auditor has identified relating to significant findings or issues that is inconsistent with or contradicts the auditor’s final conclusion must also be included in the audit documentation,” the PCAOB said.

Even “differences in professional judgment among members of the audit team” would have to be documented and retained as part of the record.

In formal comments filed with the PCAOB by the AAA’s Auditing Standards Committee, the professional group comprised of accounting educators and researchers acknowledged the “apparent goal” of these provisions, but questioned “the practicality of this given the reality of auditor litigation.”

The AAA suggested that such a requirement might be the equivalent of “handing the plaintiffs’ bar ammunition for their lawsuits” against accounting firms.

The group further expressed concern that auditors may be obliged under these provisions to retain conflicting information that has low credibility.

“In cases of refuted or low- quality information, would the auditor be required to document such evidence?” the AAA asked the board.

The organization also raised concerns about separate provisions of the proposed standard that would require accountants to complete the audit before granting the client permission to use the auditor’s report.

“We wonder whether the board has considered an auditor workload or documentation ‘hurdle’ at the time the auditor approves the client’s release of earnings to the media,” said the Sarasota, Fla.-based professional organization.

“Earnings releases provide significant information to investors, and we believe that there may be merit to considering a formal requirement that the auditor have completed and documented the portions of the audit that could reasonably affect the figures in the client’s earnings release before the auditor ‘signs off’ on the release,” the group said.

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