Volume 5, Issue 7

July 2011

I. CAQ Provides Initial Views on Possible Changes to the Auditor’s Report

The PCAOB on June 21 issued a concept release on possible changes to the auditor’s reporting model, including the addition of an auditor’s discussion and analysis, required emphasis paragraphs, auditor assurance on other information outside the financial statements, and clarification of the standard auditor’s report.

The Center for Audit Quality (CAQ) welcomed the concept release and commended the PCAOB for its willingness to listen to the views of all stakeholders in crafting alternative approaches. On June 28, the CAQ submitted an initial comment letter that identified the following overarching principles to guide consideration of revisions to the auditor’s reporting model that are equally applicable to U.S. and non-U.S. auditor regulators:

• Auditors should not be the original source of disclosure about the entity; management’s responsibility should be preserved in this regard;
• Any changes to the reporting model need to enhance, or at least maintain, audit quality;
• Any changes to the reporting model should narrow, or at least not expand, the expectations gap;
• Any changes to the reporting model should add value and not create investor confusion. Specifically, any revisions should not require investors to sort through “dueling information” provided by management, the audit committee, and independent auditors; and
• Auditor reporting should focus on the objective rather than the subjective.

The CAQ’s letter also identified several significant modifications to the auditor’s reporting model that are responsive to investors and could be implemented over the short term. Further, as a demonstration of the profession’s commitment to meaningful change, the CAQ developed model disclosures for each of its recommendations for the PCAOB and other commenters to consider.

II. SEC Staff Discuss Financial Reporting Resources in CAQ Webcast

Nearly 900 firms and individuals associated with public company auditing and financial statement preparation registered for the CAQ’s June 24 Webcast providing a Securities and Exchange Commission (SEC) update on financial reporting matters.

The CAQ's Brian Wolohan (center) served as moderator of the June 24 Webcast focusing on financial reporting from the SEC’s perspective. His guests, all with the Commission’s Division of Corporation Finance, were (from left to right): Mark Shannon, associate chief accountant, Ryan Milne, associate chief accountant, Craig Olinger, deputy chief accountant, and Nili Shah, deputy chief accountant.

CAQ Senior Director of Professional Practice, Policy and Research Brian Wolohan was joined by four officials from the SEC’s Division of Corporation Finance (Corp Fin). Wolohan explained that the two-hour dialogue was “designed to provide both public company auditors and preparers of financial statements with the most up-to-date insights and observations from the SEC’s staff on a range of important matters relevant to financial reporting.”

In a discussion of SEC resources, Deputy Chief Accountant Nili Shah explained that, “If a registrant wants to do his or her own research before contacting us, there is quite a bit of information on the SEC’s Web site. These links include the Financial Reporting Manual…In addition there is a page that gives updates. It’s called the ‘What’s New’ page, and it will give an update on what’s been added to the Corp Fin Web page on a weekly basis.”

Associate Chief Accountant Ryan Milne told viewers there is a section on the SEC’s Web site for frequently requested materials, and specifically referenced slides and speaker notes related to last year’s Corp Fin presentation on "Common Issues Related to Smaller Reporting Companies." “It’s a very helpful presentation geared to smaller reporting companies, and I think a lot of the material could apply to all companies,” he said.

Mark Shannon, an associate chief accountant, pointed to the value of a document called Best Practices for Working with the SEC Staff. “We also have a document that provides a walkthrough and overview of the filing review process within Corp Fin,” he explained. “This provides a fairly detailed explanation of how Corp Fin staff performs filing reviews and how to request consideration of an issue.”

Deputy Chief Accountant Craig Olinger added that the staff is available to assist with general interpretative and other questions regarding federal securities law and reporting requirements. “Each legal and regulatory policy office, including our office, has staff members available to answer such questions on a daily basis. And, as an alternative to calling the office, registrants can expedite a response by using an online form.”

In related activity, CAQ Technical Director for Professional Practice Jeff Rapaglia was a guest on the AICPA’s SEC Quarterly Update Webcast on June 15. He and others discussed the PCAOB’s recent activities, including the testimony and speeches of Chairman James Doty and the Board’s Research Note on Chinese Reverse Mergers.

III. CAQ Leadership Participate in Financial Reporting Conference in China

Cindy Fornelli and CAQ Senior Director for External Relations Angela Desmond were guest speakers at the 2011 SEC Conference hosted by the Center for Professional Education, Inc. in Shanghai, China last month. The event is described as Asia’s premier conference for financial professionals serving U.S.-listed companies.

Fornelli’s June 21 keynote address discussed how financial reporting promotes confidence in capital markets – with a focus on public companies in the United States. In her prepared remarks, she explained that “auditors of publicly traded companies, while subject to differing regulatory regimes, all share a common purpose: to test the fairness and accuracy of financial statements of publicly traded companies for compliance with accounting standards and for evidence of material error or fraud. Investors everywhere rely on you to do your job well.”

Taking note of China’s interest in investing in U.S. securities (estimated by the Department of the Treasury at $1.6 trillion as of June 30), Fornelli told the gathering that “foreign private issuers and investors continue to be attracted to the U.S. capital markets due to numerous financial considerations such as increased liquidity, potentially lower cost of capital, and a desire to increase their U.S. investor base. Furthermore, foreign private issuers listed in the United States are subject to U.S. securities law, which some see as having a heavier oversight regime than many comparable regulatory regimes. Many investors see an issuer’s willingness to list in the United States as a signal of confidence about its reporting and earnings quality.”

Desmond provided an update on the work of the PCAOB in her remarks to the gathering the following day.