Friday, September 23, 2011

The Auditor’s Discussion and Analysis (AD&A), the new improvement of the auditor’s reporting model

On June 21, 2011, the Public Company Accounting Oversight Board (PCAOB) issued the Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements.

As stated in the publication, the purpose of issuing this concept release is to seek public comment on potential changes to the auditor’s reporting model based on concerns of investors and other financial statement users. Auditors, as a result of the performance of required audit procedures, often have significant information regarding a company’s financial statements and the audit of such financial statement, that is not today reported in the standard auditor’s report to the financial statements users. This information might be useful to investors and other financial statement users and could lead to more efficient markets and improved allocations of capital.

The objective of this concept release is to discuss several alternatives for changing the auditor’s reporting model that could increase its transparency and relevance to financial statement users, while not compromising audit quality.

The alternatives presented in the concept release are :

  • Auditor’s Discussion and Analysis (AD&A),
  • Required and expanded use of emphasis paragraphs,
  • Auditor assurance on other information outside the financial statements, and
  • Clarification of language in the standard auditor’s report.

The above alternatives are not mutually exclusive. A revised auditor’s report could include one or a combination of these alternatives or elements of these alternatives. Additionally, there may be other alternatives to consider that this concept release does not present.

Regarding the Auditor’s Discussion and Analysis (AD&A), the concept release proposes that a revised auditor’s reporting model could include a supplemental narrative report, which some have described as an Auditor’s Discussion and Analysis (AD&A). An AD&A could provide investors and other financial statement users with a view of the audit and the financial statements “through the auditor’s eyes.”

Further, the concept release described that the intent of an AD&A would be to provide the auditor with the ability to discuss in a narrative format his or her views regarding significant matters. The AD&A could include information about the audit, such as audit risk identified in the audit, audit procedures and results, and auditor independence. It also could include a discussion of the auditor’s views regarding the company’s financial statements, such as management’s judgments and estimates, accounting policies and practices, and difficult or contentious issues, including “close calls.”.

Additionally, an AD&A could provide the auditor with discretion to comment on those material matters that might be in technical compliance with the applicable financial reporting framework, but in the auditor’s view, the disclosure of such matters could be enhanced to provide the investor with an improved understanding of the matters and their impact on the financial statements.

Read further the full version of the Concept Release in here : PCAOB : Concept Release.

The comment period for the concept release ends on September 30, 2011.

Read also another related article : What were the Auditors Thinking?