Of what use is the auditor’s report?

Erik writes:

I was reading a blog found on reThe Auditors, and this excerpt stuck out to me:
“It is worth noting that a number of other parties agree that the current form of the auditor’s report fails to meet the legitimate needs of investors. First, the U.S. Treasury Advisory Committee on the Auditing Profession (ACAP) called for the PCAOB to undertake a standard-setting initiative to consider improvements to the standard audit report. The ACAP members support “… improving the content of the auditor’s report beyond the current pass/fail model to include a more relevant discussion about the audit of the financial statements.”

Second, surveys conducted by the CFA Institute in 2008 and 2010 indicate that research analysts want auditors to communicate more information in their reports.

Finally, even leaders of the accounting profession have acknowledged that the audit report needs to become more relevant. In testimony before ACAP, Dennis Nally, Chairman of PwC International stated, “It’s not difficult to imagine a world where the … trend to fair value measurement — lead one to consider whether it is necessary to change the content of the auditor’s report to be more relevant to the capital markets and its various stakeholders.”

Finally, leaders of the accounting profession have previously stated that changes to the audit report should reflect investor preferences. In their 2006 White Paper, the CEOs of the six largest accounting firms stated, “The new (reporting) model should be driven by the wants of investors and other users of company information …” (their emphasis).

Before we turn to a discussion of the IAG investor survey, we believe it is important to underscore the fundamental but often overlooked fact that the issuer’s investors, not its audit committee or management team or the company itself, are the auditor’s client. It is therefore not only appropriate, but essential, that investors’ views and preferences take center stage as the PCAOB considers possible changes to the format and content of the audit report.”

After reading this, I realized that this is completely true. I never really though twice about the information contained in audit reports other than everything is fairly stated and free of material misstatements. I do agree that the current information in audit reports is almost completely useless to the true users of financial statements, investors. No relevant information is contained in the audit report that will help the users make a more informed decision. I’m not sure where to begin in regards to what information to include in audit reports because there is so much information that could possibly be put in them. Maybe the report should include more information that provides clarification of certain line items, footnotes, and non-recurring or special situation transactions. No matter what changes the PCAOB decides, I think they should definitely make the audit report actually useful to investors. What do you think?

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

3 comments

  1. As someone who hopes to eventually be signing Audit Reports one day, I am not a fan of the idea. That is just my opinion of course. Our job is to agree with the financial statements. If we start guiding investors we open ourselves up to more liability. If the users of financial statements are looking for something specific that would benefit them, then it should be up to management to report what they want and our jobs to say if that is reasonable or not.

  2. This goes along with previous posts that weve had. People need to realize that the auditors job is simply to test a sample of the population to obtain a reasonable understanding that there is not a material inefficiency or lack of controls. While auditors do not necessarily bring something extra to the financials, the somewhat assurance that they provide is enough. BY changing that, it would expose auditors to more liability and in turn be more costly and time consuming for companies.

  3. I do not feel that it is the auditor’s job to provide information more useful for investors. The primary responsibilities of auditors is to certify that the financial statements of a company are free of material misstatement and that they comply with GAAP. It is not their responsibility to give information to help investors as that can open the door to lawsuits. If investors are looking for more information to help make investment decisions, they should rely on their own analysis of financial statements through research and ratios, not by looking at the audit report.

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