Over the years, the PCAOB has developed a reputation for pursuing zombie proposals – proposals that appear to be dead due to widespread opposition and even congressional action. Remember mandatory auditor rotation? It practically took a stake through the heart to kill that one off, and I’m informed that even after it was presumed to be long gone some PCAOB spokespersons were telling European regulators that it might yet be adopted.
Well, here we go again. The latest zombie proposal (OK, reproposal) would modify the standard audit report in a number of respects, the most significant of which would be to require disclosure of “critical audit matters”. The headline of the PCAOB’s announcement of the reproposal says that it would “enhance” the auditor’s report; not clarify, just “enhance”. And, as is customary whenever the PCAOB proposes to change the fundamental nature of the audit report, the proposal starts out by sayng that’s not the intention at all: “The reproposal would retain the pass/fail model of the existing auditor’s report,” it says. It seems to me to lead to the opposite result – the introduction of critical audit matter (“CAM”) disclosure could easily lead to qualitative audit reports; one CAM would be viewed as a “high pass”, two would be ranked as a medium pass, and so on, possibly even resulting in numerical “grades” based upon the number of CAMs in the audit report. And let’s not fool ourselves into thinking that any audit firm would ever issue a clean – i.e., CAM-free – opinion. I just can’t envision that happening, ever.