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Expanded auditors' reports shouldn’t lead to disclosure overload: CAQ

Cindy Fornelli: critical audit matters should focus on those things the auditor discusses with the audit committee

Executive director of the US Center for Audit Quality (CAQ) Cindy Fornelli told The Accountant that, while she supports the US Public Company Accounting Oversight Board's (PCAOB) attempts to expand the auditor report, elements of the proposal need to be looked at.

The PCAOB proposals largely focus on adding "critical audit matters" (CAMs) into the auditor's report. CAMs are issues addressed in the audit which involved the most difficult, subjective or complex auditor judgement.

Fornelli's main criticism is that the PCAOB's implementation critical audit matters are so broad that she is concerned it will result in hundreds of critical audit matters, leading to disclosure overload.

To explain these concerns she described what according to her a common practice in the US is: "you want more disclosure? Here, we'll give you reams of paper".

The CAQ has found dissatisfaction at the sheer quantity of information present in management reports. The problem here was that disclosures made are rarely removed from future reports, but are often added to, leading to an ever increasing amount of information.

"I would hate to make the same mistake with the auditor's report," Fornelli said.

Concerns over the current form of CAMs were also noted at a PCAOB public meeting at the start of April.

At this meeting EY Americas vice-chair Kevin Reilly said the PCAOB proposal required "significant revision to, and clarification of, the manner in which the CAM disclosure concept is expected to be applied in practice."

To resolve these concerns, the CAQ has looked for ways to increase disclosure, while narrowing the definition of CAMs.

"Our approach is to narrow the CAMs to those things the auditor discusses with the audit committee. That is a good first screen to make it rise to the level where it would be important to an investor," she said.

The situation is a complicated one, and another suggestion has been a gradual move away from paper reports towards electronic reports, something Fornelli described as "scary."

On the one hand, she pointed to people in their twenties, who barely use paper, but on the other hand said "we have to consider those who aren't so computer literate, or don't even have a computer. So where do you make that switch over?"
Overall, Fornelli predicted a gradual, slow evolution to more and more computer based disclosure.

Naming the partner
Another proposal the PCAOB has suggested is adding the name of the engagement partner to the auditor's report. And while Fornelli is not against the naming of the engagement partner per se, she did point out that adding this information to the auditor's report could become a legal issue.

She noted "In order to name the partner in the auditor's report you would have to get the companies permission and consent. So it's an administrative hassle."

Instead, Fornelli suggested putting the names somewhere else, to escape what she described as an "administrative hurdle."

She also acknowledged that, for some, the naming of the audit partner could be an emotional issue, as by having their names in the report; partners would be opening themselves up for personal attacks.

Related stories
Watershed moment for auditor's report reform: Doty

PCAOB to reconsider engagement partner disclosure

Related link
The Center for Audit Quality

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