Washington - Regulators at the Public Company Accounting Oversight Board are wrestling with proposals to abandon the current "pass/fail" auditor reporting model for informing investors of the accuracy of corporate financial statements - a move that could require independent accountants to provide considerably more information about the veracity of their clients' financial reports.Whether the additional work and information will translate into more useful data for investors was a matter of considerable debate during the latest meeting of the PCAOB's Standing Advisory Group.
Critics of the plan for requiring auditors to provide a more detailed discussion of their views of corporate financial statements warned the PCAOB that such a shift in auditors' reporting standards would create more confusion than enlightenment for most investors.
Under the current ground rules, auditor reports filed with the Securities and Exchange Commission must include unqualified opinions "stating that the company's financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of the entity in conforming with generally accepted accounting principles."
Some members of the board's advisory committee contended that this approach effectively establishes a "pass/fail" system under which investors are provided with no useful information to distinguish between companies with borderline financial statements and those with highly accurate statements.
"The problem with the current model is that if you have a company that is trying to push the line as far as they can get away with, the auditor's report would provide that company with essentially the same rating as one that does an excellent job of providing high-quality financial information," said Barbara Roper, director of investor protection at the Consumer Federation of America.
At last month's meeting of the board's advisory panel, Roper argued that a change in the auditor reporting model to allow accountants to provide more insight into the audit report would make it more difficult for companies to do the bare minimum to achieve a passing GAAP grade.
Other SAG members disagreed, warning that providing anything more than the auditor's pass-or-fail rating might confuse investors.
"The investing public should be able to read a financial statement and pretty much get out of it what's good and what's bad," Dallas CPA Wanda Lorenz told the board. Providing more detailed - but potentially more ambiguous - information about the auditor's opinion may not be helpful to the average investor, she maintained.
Those views were echoed by SAG member Lynn Turner, who told the PCAOB that, "Because of the level of sophistication of the average investor, you have to keep it simple."
In voicing concerns about a shift to more detailed auditor disclosures, Turner - a former Securities and Exchange Commission chief accountant and now managing director at proxy researcher Glass Lewis & Co. - urged the oversight body to be sensitive to the needs of investors who already find financial reports difficult to understand. "You have to keep it simple," he said. "You have to tell them whether the numbers are right or not right ... in simple language."
Other SAG members also voiced concerns that a multi-grade system of auditor evaluations would contribute to the financial "information overload" that already discourages many investors from reading corporate financial statements thoroughly.
Retired Florida CPA Lee J. Seidler worried that a change from the current pass/fail approach would merely lead to more "boilerplate" verbiage in financial statements, while AFL-CIO associate general counsel Damon Silvers warned that "adding a lot of words" to the auditors' report would not necessarily make it any more valuable to investors.
In addition, Silvers told the PCAOB that he was suspicious that a shift to a multi-grade approach for auditor reports would quickly revert back to a pass/fail system of some type, because auditors "would have to draw the line somewhere."
Signing on the bottom line?
The advisory panel produced even less consensus on a separate proposal requiring individual accountants to sign their names to audit reports.
Although the current practice is for only the firm's name to appear on these reports, board officials explained that some advocates of expanded financial disclosure have called for new requirements obliging the audit partners responsible for the work to personally identify themselves.
Just as top corporate officials are required under the Sarbanes-Oxley Act to personally certify the accuracy of their company's financial reports, critics contend that audit partners and concurrent review partners "should likewise take such personal responsibility for the audit reports they sign off on," the board said.
That view drew strong support from several SAG members, who told the PCAOB that individual accountants will be more likely to take their audit responsibilities seriously if they are required to sign the reports they prepare.
"I very much support the individual's name being on the auditors' report along with the firm's name," said Eli Lilly chief accounting officer Arnold C. Hanish. "You get a different behavior when somebody puts their name on something. We'll never know if the partners at Arthur Andersen would have had a different perspective on the Enron account if they would have had to sign their names" on the company's audit reports.
Those views were echoed by SAG member Cynthia Richson, the corporate governance officer at the Ohio Public Employees Retirement System. "Accounting is the only profession that allows the release of such a very important report in the generic name of a firm," she said. "If for no other reason, the individual auditor's name should be disclosed simply for informational purposes."
Opponents of such disclosures, however, contend that "individual partners should not be named in auditors' reports because the firm takes overall responsibility for the audit report," the board said. They argue that "limiting the signature to the names of individual partners could be perceived as a limitation of responsibility" by the firm itself.
Representatives from several major accounting firms sided with the opponents of individual signatures, arguing that identifying audit partners by name would provide no advantage for investors.
"If the underlying premise of this [proposal] is that it would cause the auditor to be more careful, that may be a questionable presumption," BDO Seidman national director of assurance Wayne Kolins said. Kolins said that the belief that such disclosures would make accountants more responsible "ignores the potential for PCAOB sanctions of the individuals."
Deloitte & Touche national partner Robert Kueppers also challenged the need for identifying the individuals responsible for each audit report. Such disclosures would provide no additional benefit, he said. "The entire firm stands behind the report; the entire system of quality control stands behind the report."
