Auditor Reports Frequently Misunderstood

Auditor reports are oftentimes misinterpreted, misread or not read at all, according to a new study that calls for significant changes in the reports.

Based on focus group discussion with chief financial officers, bankers, analysts, non-professional investors and external auditors, the recently published paper aims to help U.S. and international auditing standard setting agencies modify the auditor’s report in light of auditing and accounting scandals at companies over the past decade and more. The Public Company Accounting Oversight Board has proposed changes in the auditor’s reporting model, as has the International Auditing and Assurance Standards Board (see PCAOB Plans Changes in Auditor Reports and IAASB Looks to Revamp Auditor Reports).

“This paper documents that there are important misperceptions about auditor’s reports,” said co-author Ted Mock, a distinguished professor of audit and assurance in the University of California Riverside’s School of Business Administration, who has been involved with auditing research since its infancy more than 30 years ago. “In a sense, the findings in this paper serve as an incentive for the profession to improve.”

The paper was published in December in Accounting Horizons, a journal of the American Accounting Association. Mock’s co-authors were Glen L. Gary, a professor at California State University, Northridge, Paul J. Coram, an associate professor at the University of Melbourne in Australia, and Jerry L. Turner, a professor at Texas Christian University.

The researchers found from their interviews with the focus groups that the auditor’s report is frequently considered to be just boilerplate text and not read. However, users do look to see if the report includes an unqualified audit opinion and whether a Big Four audit firm conducted the audit.

The study also found that the concepts of “level of assurance,” “reasonable assurance” and “high level of assurance” are not well understood by many users of the auditor reports. If the report doesn’t mention fraud, users believe auditors tested for it thoroughly, even though they are not required to do so. Most users believe the modern PCAOB audit, with its explicit requirement for an internal control opinion, is superior to audits conducted using prior AICPA audit standards.

Suggestions and challenges for improving the auditor’s report include having the auditor’s signature in the report, saying something explicit about fraud in the report, and adding granularity to the report, such as a grading scheme, instead of merely a pass/fail opinion.