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.

CAM disclosure was first bruited about in a 2011 “concept” release, along with proposals to require an “auditor’s discussion and analysis” and greater auditor involvement in information outside of the financial statements.  The concept release met with broad criticism, but that did not deter the PCAOB from pursuing some of the proposals – including CAM disclosure – in 2013.  And here we are again.

Aside from the concerns noted above, a few more troubling aspects of CAM disclosure:

  • It would lengthen – possibly significantly – the standard audit report. Longer reports will inevitably be viewed as – and will, in fact, be – more complex and more tedious.  As it is, the discussion of CAM disclosure in the reproposal takes up nearly 30 pages of snooze-inducing prose, and given the complexity of the issues involved, there’s no reason to think the resulting disclosures will be succinct.  (Among other things, the reproposal contains a flow chart reminiscent of the one in the SEC’s adopting release on conflict minerals; we all know how succinct those disclosures turned out to be.)
  • It would not clarify the key issues that puzzle readers of audit reports, such as where responsibility lies for preparation of the financial statements (i.e., not the auditors). In fact, there’s a fair chance that CAM disclosure will convey the impression that the auditors are more, rather than less, involved in preparing the financial statements.
  • There’s no evidence that this change is really needed. The reproposal states that this group or that group believes that CAM disclosure would be beneficial.  I get that, but I question whether the PCAOB’s job is to act on every request for more disclosure.  Isn’t this kind of thinking precisely what’s led to disclosure overload?

The reproposal also suggests some other changes in the auditor report, most notably a requirement to disclose the auditor’s tenure.  This is another zombie proposal that seems to make no sense as, among other things, there’s no empirical evidence that longer tenure leads to poorer audits.

A larger concern is that from 2011 on, the PCAOB has proposed add-ons to the standard auditor report that would lengthen it without clarifying what the auditor does (and does not do).  That might be acceptable if the current form of auditor report were clear; instead, it’s convoluted and difficult to parse.  Why not start from scratch and make it simpler and more straightforward and in plain, readable (and comprehensible) English?

Beyond that, and even assuming that disclosures of CAMs and auditor tenure are advisable, it would be nice if the PCAOB could decide once and for all whether or not it’s happy with the pass/fail audit report approach and, if not, deal with it rather than make endless peripheral changes that don’t address its real concerns.

I’m not optimistic about this.  Over the years, the PCAOB has demonstrated an indifference to critics and a penchant for seeking solutions to problems that don’t necessarily exist.