The Society is one of a number of organizations that urged the SEC via the just-closed comment letter process to revise or reject the PCAOB's proposed new auditing standard that would expand the auditor's report to include "critical audit matters" (most recently reported on here and here).
Comments about the proposed standard - and CAM disclosure specifically - raised common themes among corporate interests including concerns that the proposal would: (i) effect significant, adverse deviations from the current financial reporting framework, and auditor/client roles and relationship; (ii) undermine the role of the audit committee; (iii) chill communications between auditors and management/audit committees; (iv) motivate auditors to err on the side of overdisclosure; and (v) increase audit costs.
The Society's letter - filed on Thursday - made these three broad points:
· Mandatory communication of critical audit matters will alter the fundamental relationship between auditor and audit client; may require the auditor to disclose sensitive information about the client - resulting in harm to the client; and may reduce disclosure effectiveness;
· The compilation and disclosure of critical audit matters would require significant time and attention from the auditor, the company’s audit committee and management; and
· The cost of reporting critical audit matters would greatly outweigh any actual or perceived benefits.
The Society (and other commenters) reiterated concerns expressed in earlier comment letters that the standard would likely result in the auditor's disclosure of sensitive or confidential information about the company that the company otherwise has no obligation (or intention) to disclose - which would likely trigger a whole host of adverse implications for companies, including the concerns noted above. Alternatively, communications with the auditor that the company anticipated may prompt CAM disclosure would be curtailed so as to avoid that risk. The Society's letter (and others) also identified a number of factors inherent in the proposed standard that would impose pressure on auditors to over-disclose CAMS, including expectations explicitly set forth in the PCAOB's release.
The Society's letter concludes with yet another observation in common with that expressed by other commenters relating to the inadequacy of PCAOB's cost-benefit analysis of the proposed standard: "The Society respectfully submits that, in weighing the costs and benefits of the Proposed Rules, the PCAOB did not adequately assess the above-outlined direct and indirect costs of the Proposed Rules to issuers or the indirect impact of such costs on capital markets, investors and the overall economy."
Those who have served in-house or advised in-house personnel intimately involved in the audit/financial reporting process and/or supporting management and the audit committee vis a vis that process will easily relate to the legitimacy of these concerns.
Stay tuned for further comment letter analysis in this week's Society Alert.