Audit boards, academics to re-assess audit reports

Two auditing standards boards and an association of accounting academics are moving forward with a research project that could lead to significant changes in the content and phrasing of audit reports, perhaps even in the procedure of the audit itself.Concerned that investors and others may be misinterpreting the typical three-paragraph audit report, the boards are seeking a better understanding of what people think they're reading. In many cases, according to the American Institute of CPAs' director of auditing and attestation, Chuck Landes, some readers of audit reports are apparently seeing things that aren't there.

"We have quite a bit of anecdotal evidence of users perhaps misunderstanding what an audit is," Landes said. "I have talked with people who believe that a clean auditor's report means the company would be a good investment. Some have even thought that the report means the auditor thinks a company's strategic plan would be accomplished in the future. Some think that a clean opinion guarantees the company will be a going concern in a year."

On the question of whether the research will lead to changes in audit procedure, Landes said, "It all depends." While the results of the research aren't likely to go any farther than a rewording of the standard unqualified audit report, Landes acknowledged that if the researchers find a wide presumption that audits say something about future company performance, the institute's Auditing Standards Board may go to accounting standards-setters to suggest that financial statements report that kind of information.

The ASB writes standards for the auditing of non-public companies.

The project is a cooperative venture of the Auditing Standards Board, the International Auditing and Attestation Standards Board and the American Accounting Association. The three groups have settled on four research proposals that will be initiated this summer. The project may ultimately converge the ASB standard with that of the IAASB.

The IAASB's deputy director, James Gunn, said that the two boards are very close, but that only research would reveal how effective each is, and whether both should be looking for yet a better way for auditors to communicate with investors and others.

"The IAASB is confident that its international standard on the auditor's report produces a clear and understandable communication, having recently revised it in 2004 through extensive consultation and due process," Gunn said. "Nevertheless, gaining empirical evidence about users' actual perceptions is important in further validating this belief, and as part of the process of seeking convergence of auditing standards. Since the consideration of users' perceptions on auditors' reports is relevant globally, it makes sense to coordinate national and international research efforts towards the same common goal of promulgating effective, high-quality standards."

The IAASB's Gunn said that when his board re-wrote its standard on audit reports, the changes made it neither longer nor less technical. Rather, a tweaking of the language made the purpose and result of the audit more apparent.

Landes indicated that while the first phase will look at fundamental questions about audit reports, a second phase may explore ways to improve audit reports - or even audits themselves. "The basic intent of Phase One of the project is to learn from users of audit reports what their views are and what they believe an audit encompasses," he said. "We want a broad understanding of what people think an audit includes and what it doesn't include - what an audit is and isn't."

The second phase will explore and test ways to improve the wording of the report, and perhaps even to modify audits so that they deliver what people want to know.

A team of five professors led by investigators from the University of Southern California and the University of Memphis will conduct one project. Victoria University of Wellington, New Zealand, will look at audit statements in that country and in the United Kingdom. Professors at the University of Florida and Boston College will cooperate on a third project. A fourth will be conducted jointly by Germany's University of Muenster and the Netherlands' RSM Erasmus University.

Landes said that it was too early to suggest whether the research results might indicate a need for a longer audit report, a report in less technical language, or some other change.

The projects have no specific timeframe, but Landes believes that the first phase will take about a year.

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