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Issues & Trends

©2001-2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperat ive (“KPMG International”), a Swiss entity. All rights reserved. KPMG and

the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Defining Issues® June 2011, No. 11-39

PCAOB Requests Feedback on Auditor’s

Reporting Model

The Public Company Accounting Oversight Board (PCAOB) recently issued a concept

release on the auditor’s reporting model.1

The concept release requests input from

stakeholders on alternatives for changing the auditor’s reporting model that could

increase the transparency and relevance of financial statements and the audit

process without compromising audit quality. This edition of Defining Issues

summarizes the perceived issues with the current auditor’s reporting model and

potential alternatives for changes to that model, as outlined by the PCAOB.

Through its concept release, the PCAOB intends to determine whether there are

common views among stakeholders about the usefulness of the current auditor’s

reporting model. The PCAOB is soliciting feedback about the potential direction of aproposed standard-setting project on the content and form of auditor reports to

provide more relevant and useful information to investors and other financial

statement users. Comments are due September 30, 2011.

The concept release describes issues with the current auditor’s reporting model

identified by some stakeholders, provides potential alternatives for change, and

requests input about whether these alternatives might be effective in enhancing the

communication value of the auditor’s report.

Other standard setters and regulators, such as the International Auditing and

Assurance Standards Board, the International Organization of Securities

Commissions, the United Kingdom's Financial Reporting Council, and the European

Commission have been considering potential ways to enhance auditorcommunications, including enhancing the auditor's report.

Current Auditor’s Reporting Model

The PCAOB developed the concept release in response to criticism of certain

aspects of the current auditor’s reporting model by investors and other financial

statement users. The current auditor's reporting model identifies the financial

statements that were audited, describes the nature of the audit, and presents the

auditor's opinion about whether the financial statements present fairly, in all material

respects, the financial position, results of operations, and cash flows of the company

in conformity with the applicable financial reporting framework. The current auditor's

reporting model is commonly described as a pass/fail model because the auditor

opines on whether the financial statements are fairly presented (pass) or not (fail).

From October 2010 through March 2011, PCAOB staff conducted outreach activities

with investors, financial statement preparers, auditors, audit committee members,

regulators and standard setters, and representatives of academia. There was

consensus among investors that auditors have significant insight into the companies

they audit and that auditor reports should provide additional information based on

1 PCAOB Release No. 2011-003, Concept Release on Possible Revisions to PCAOB Standards

Related to Reports on Audited Financial Statements, available at www.pcaobus.org.

Contents

Current Auditor’s Reporting Model 1

Potential Alternatives 2

Request for Input 4

Next Steps 4



©2001-2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent

member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and

the KPMG logo are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Defining Issues® / June 2011 / No. 11-39 2

that insight to make them more relevant and useful. The PCAOB believes this

information might be useful to investors and other financial statement users and

could lead to more efficient markets and improved allocation of capital.

Potential Alternatives

The concept release outlines four alternatives for possible changes to the auditor’s

reporting model and is seeking specific comments on these or other alternatives that

could provide investors with more transparency into the audit process and more

insight into companies' financial statements or possibly other information outside the

financial statements. The alternatives would retain the pass/fail opinion of the current

auditor's reporting model and are not intended to alter the auditor's responsibility to

obtain sufficient and appropriate audit evidence to support the audit opinion. The

concept release also states that the alternatives are not intended to qualify or

piecemeal the auditor's opinion or to shift the requirement to assess the risk of

material misstatement of the financial statements from the auditor to investors or

other users of financial statements.

The four alternatives presented in the concept release are:

• Auditor's Discussion and Analysis;

• Required and Expanded Use of Emphasis Paragraphs;

• Auditor Assurance on Other Information Outside the Financial Statements; and

• Clarification of the Standard Auditor's Report.

The alternatives are not intended to be mutually exclusive. A revised auditor's report

could include one alternative, a combination, or elements of each one. The PCAOB

also is requesting input on other alternatives that it should consider.

The alternatives are primarily focused on enhancing communication to investors by

improving the content of the auditor's report rather than changing the fundamentalrole of the auditor in performing an audit of financial statements. However, the

PCAOB acknowledges that, depending on the nature and extent of additional

information to be communicated in a revised auditor's report, new auditing

requirements and coordination with the SEC would likely be necessary. Further,

certain alternatives might result in an increase in the scope of audit procedures

beyond those currently required, which would require new auditing standards and

increase cost.

Auditor’s Discussion and Analysis. Under this alternative, the auditor would

provide a supplemental narrative report, which some have described as an Auditor's

Discussion and Analysis (AD&A). An AD&A would provide the auditor with the ability

to discuss their views about significant matters. The concept release outlines the

type of information that could be included in an AD&A, such as information about theaudit (e.g., audit risks identified in the audit, audit procedures and results, and auditor

independence) and discussion of the auditor's views about the company's financial

statements (e.g., management's judgments and estimates, accounting policies and

practices, and difficult or contentious issues). The concept release also indicates that

the AD&A could provide the auditor with discretion to comment on material matters

for which the auditor believes disclosure could be enhanced to improve investor

understanding and highlight areas in which the auditor believes management could

have applied different accounting or disclosures. An AD&A also could require the



The descriptive and summary statements in this newsletter are not intended to be a substitute for

what might be adopted or for any other potential or applicable PCAOB requirements. Companies

applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations,

and accounting requirements, consider their particular circumstances, and consult their accounting

and legal advisors. Defining Issues® is a registered trademark of KPMG LLP.

©2001-2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the

KPMG network of independent member firms affiliated with KPMG International Cooperative

(“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered

trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Contact us:

This is a publication of KPMG’s

Department of Professional Practice

212-909-5600

Contributing authors:

Thomas J. Ray

John McMahon

Earlier editions are available at:

http://www.kpmginstitutes.com/financial-reporting-network

Request for Input

The PCAOB is soliciting stakeholders’ concerns about the current auditor's reporting

model, potential alternatives for change to the current auditor's reporting model, the

potential direction of a possible standard-setting project, and potential other

considerations associated with changes to the current auditor's reporting model.

The PCAOB also is seeking feedback on possible effects of each of the alternativeson:

• Audit effort, including timing and cost;

• Relationships between the auditor, management, and the audit committee;

• Audit committee governance;

• Auditor and issuer liability; and

• Confidentiality of company information.

During the PCAOB’s open meeting to issue the concept release, one Board member

noted the importance to the Board of receiving robust comments on the concept

release. The Board would like to hear from a broad range of investors of all sizes andtypes, as well as from investor representatives, audit committee members, financial

statement preparers, analysts, and others.

Next Steps

The PCAOB announced plans for a public roundtable to be held in the third quarter of

2011. Once the PCAOB receives the feedback from the concept release and

roundtable, it will determine what changes should be made to the current auditor’s

reporting model.

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