Thursday, August 31, 2017

CII applauds PCAOB proposals on auditing estimates and use of specialists

By Amy Leisinger, J.D.

The Council of Institutional Investors has submitted comments to the Public Company Accounting Oversight Board in support of the board’s June 2017 proposals relating to auditing accounting estimates and fair value measurements and standards for auditors’ use of the work specialists. According to CII, the proposals will ensure more useful and consistent information for investors and increased understanding for auditors overseeing the work of specialists.

PCAOB proposals. The PCAOB’s proposal for auditing accounting estimates, including fair value measurements, emphasizes the importance of applying professional skepticism and paying more attention to potential management bias. If adopted, the proposal will replace three existing standards with a single standard and is intended to focus auditors on the estimates that pose the greatest risk of material misstatement.

The proposal relating to auditors’ use of the work of specialists aligns with the board’s risk assessment standards. It strengthens the requirements for evaluating the work of a company’s specialist and applies a risk-based approach to supervising and evaluating the work of both auditor-employed and auditor-engaged specialists.

CII support. In its letter, CII noted the importance of accurate and reliable financial statements to institutional investors and the overall well-being of capital markets. The quality of information provided in audited financial statements depends directly on the quality of the standards used by auditors to ensure that proper disclosures, according to CII, and the PCAOB’s proposed standards would enhance both accuracy and consistency throughout the industry.

In support of the estimates proposal, CII explained that fair value accounting provides investors with more useful information than other alternative accounting approaches. The proposal will increase auditor responsibility for auditing accounting estimates and fair value measurements and provide consistent requirements to increase the quality of information provided in financial statements, according to CII. In addition, CII noted, the proposal aligns requirements for auditing accounting estimates with PCAOB risk assessment standards to increase overall audit quality by ensuring that auditors focus on the most substantial risks for material misstatements and plan accordingly.

The specialist proposal serves to effectively address the more frequent use of specialists seen in connection with increased investor demand for fair value accounting, according to CII. More work done by specialists means more risk that auditors who fail to properly oversee the specialists will fail to detect potential material misstatements, CII explained. The proposal will lead auditors to devote more time and attention to specialists’ activities and increase coordination between them, CII concluded.