New York CPAs: Don’t Change Audit Report Model

The New York State Society of CPAs has written a comment letter opposing changes in the format of audit reports.

The comment letter was sent to the International Auditing and Assurance Standards Board, which proposed changes in the audit reporting model in May (see IAASB Looks to Revamp Auditor Reports).

“Overall, we do not see an overriding need to revise substantively the format of the audit report, and believe that expanding the content and reorganizing the format would not have a considerable impact on the effectiveness of the audit report,” said the letter.

The NYSSCPA plans to send a similar comment letter to the Public Company Accounting Oversight Board, which has also proposed changes to make the audit reports more informative for investors (see PCAOB Proposes Changes in the Auditor’s Reporting Model).

While the Society acknowledged that investors may not understand the audit report’s objectives, to address this issue, changes should be made to the financial reporting framework, not the auditing standards.

The NYSSCPA contended that adding content and reporting responsibilities beyond the standard audit report would not change the basic objective of the audit, which is to confirm that a financial statement is accurate and written in conformance with appropriate accounting standards.

The auditor’s role is to issue an opinion, “and then it’s [up to] the users to decide whether they like that or not,” said International Accounting and Auditing Committee chair Renee Mikalopas-Cassidy, one of the letter’s principal drafters. “So putting in an analysis starts to blur the distinction from this traditional role.”

Beyond that, including auditor discussion and analysis in the standard report would be “highly problematic,” said the NYSSCPA, because it might be confusing to the users of financial statements or “become self-serving and redundant.” Possible “dueling information” between the auditor and management could also lead to credibility issues for both the entity and the auditor.

Requiring these additional responsibilities would “change the fundamental role of the auditor, which is to detect material misstatements,” the NYSSCPA said in its letter. “[I]f the financial reporting framework is not robust enough to provide information in a form that appropriately communicates the information needed by investors, then the financial reporting framework would be the place to make improvements.”

The Society does support requiring auditors to include certain information normally outside the sphere of financial statements, such as management’s discussion and analysis, the examination standards for which have been in place in the U.S. since 2001, and possibly adding a glossary of terms to accompany the auditor’s report “until such time as users become more comfortable with the terms and concepts used.”

“There have always been, for public companies, financial statements and annual reports, and there would be a reading of those documents to make sure there isn’t anything inconsistent,” said Mikalopas-Cassidy.