[US] Auditors Pan Bid to Report Their Own Financials as Too Rigid
USA, June 20, 2024
Accounting firms ask to preserve confidential, flexible reporting
Investors demand more insights into auditors’ work
US accounting firms want more flexible rules for how they disclose details about their own finances, operations, and audit performance, calling proposals to expand mandatory reporting too rigid and costly.
Firms want to continue reporting details about major changes in their business and their financial results as part of routine audit inspections to ensure sensitive or competitive details remain confidential, according to comment letters submitted to the Public Company Accounting Oversight Board over the past month.
Details about how firms manage and staff audits of corporate accounting should continue to be discussed in voluntary transparency reports, rather than a standardized form, they said.
“Allowing firms to report in a way that follows how they manage their own businesses would give the PCAOB and other stakeholders more valuable insight into the unique qualities of each firm,” Deloitte & Touche LLP said in a letter to the board.
Draft rules the PCAOB introduced in April would require firms to submit formal financial statements to the regulator and provide more details about their ownership and governance, plus material changes in their business. A related proposal would require firms to publicly report specific metrics that investors and corporate directors could use to compare firms based on the quality of their audits.
The pair of rules responds to years of investor demands for more insights into the work of auditors. Investors seeking to unlock more details have pitched various proposals to the board stretching back more than a decade.
The proposals would codify what is currently common practice. Audit firms already provide details about their financial health and significant changes in their business during routine PCAOB inspections. Many also publish reports that discuss governance of their audit practice and recent inspection results, they said.
Firms, which are private partnerships, want to continue providing custom financial information to the regulator and not adhere to US generally accepted accounting principles, known as GAAP, or international accounting standards when compiling their financial statements. The proposal would expose firms to similar requirements as the public companies they are hired to audit.
“US GAAP financial statements would exist solely for the purpose of reporting to the PCAOB and would result in the divergence of resources to establish and prospectively maintain an incremental set of accounting records that would otherwise have no purpose,” Ernst & Young LLP said.
Various disclosures duplicate information the board already receives from auditors during routine inspections plus information many firms already make public, KPMG LLP said. The firm also questioned how the disclosures “would support audit quality.”
Stakeholders also questioned the board’s legal authority to demand such detailed disclosures. The Center for Audit Quality, which represents the interests of public company auditors, argued the proposals stretch the bounds of the board’s congressional mandate, the 2002 Sarbanes-Oxley Act.
The board’s own Investor Advisory Group supported the proposal but pushed to make firms’ financial statements public, rather than submitted privately to the regulator, and to require that they be audited.
Voluntary reporting hasn’t provided investors with enough information to vet the work of auditors who check the reliability of corporate financial statements or corporate directors who serve on audit committees, the Council of Institutional Investors, which represents major pension funds and endowments, told the board.
A Scorecard
Feedback on a related proposal—an auditor scorecard that would detail nearly a dozen metrics—echoed concerns about the expanded reporting to PCAOB.
The proposal’s requirements, which include specific metric calculations, would “compromise rather than improve audit quality” by drawing firms’ attention away from the core work of auditing, PwC LLP told the board in its 106-page letter.
Investors might misinterpret the figures because the size and nature of each firm’s client portfolio varies too much to make reliable comparisons, said PwC, also known as PricewaterhouseCoopers.
The PCAOB proposed 11 figures meant to capture the performance of a firm and its individual audit teams, pulling from a 2015 concept release the board issued to gain initial input on possible reporting rules. Firms would have to report details on the workload of staff, industry expertise of their auditors, their restatement record, and the use of service centers and specialists.
“Audit committees are best positioned to determine what engagement-level metrics are meaningful in their oversight and to request such metrics from the auditor,” Grant Thornton said in its letter. “We are also concerned that public reporting also puts a company’s sensitive or nonpublic information at risk.”
A dozen progressive organizations and labor unions including Americans for Financial Reform and the American Federation of Labor and Congress of Industrial Organizations, or the AFL-CIO, jointly backed the board’s proposal. But the groups asked the PCAOB to require more detailed figures on specialists hired to help with the audit and how much time auditors spent on fraud detection.
“We strongly support this proposal, as it would provide investors, audit committees, and other stakeholders critical information to compare audit firms, make better-informed decisions, and enhance auditor accountability,” the groups said.
The detailed reporting would spark competition among firms, ultimately boosting audit quality, said Amy McGarrity, chief investment officer for the Colorado Public Employees’ Retirement Association.
[Bloomberg]
