Wednesday, April 24, 2019

CII offers support for PCAOB’s auditing estimate and specialist use proposals

By Amy Leisinger, J.D.

The Council of Institutional Investors has submitted comments to the SEC in support of the Public Company Accounting Oversight Board’s proposed rules on auditing accounting estimates and amendments to auditing standards for auditor’s use of the work of specialists. CII noted that auditors and other financial “gatekeepers” play a vital role in ensuring the integrity and stability of the markets and investor well-being and that the quality and reliability of information provided by audited financial statements depends directly on the quality of the standards used by auditors to ensure proper disclosures.

Proposals. In December 2018, the PCAOB unanimously approved standards on auditing accounting estimates and the auditor’s use of the work of specialists. The new standard on the auditing of accounting estimates, including fair value measurements, emphasizes the need to apply professional skepticism when auditing accounting estimates. The new standard and related amendments include an appendix that provides specific direction to address auditing the fair value of instruments, particularly when the information is provided from third parties such as pricing services and brokers and dealers.

The new standard on the auditor’s use of the work of specialists strengthens and clarifies requirements in two areas: (1) the use of the work of a company’s specialists; and (2) the use of the work of an auditor’s specialist. Regarding company specialists, the new standard is aligned with the new accounting estimates standard by incorporating risk assessment. It also sets forth factors for determining the necessary evidence to support the auditor’s conclusion regarding an assertion when using the work of the company’s specialist. The standard also adds requirements that the specialist be informed of the work to be performed and amends requirements for assessing the knowledge, skill, and ability of the auditor’s specialist.

Estimates. In support of the estimates proposal, CII explained that fair value accounting with robust disclosures provides investors with more useful information than what would be reported under amortized cost or other alternative accounting approaches. Investors value the auditor’s evaluation of estimates, and the proposal would increase auditor responsibility for auditing accounting estimates and fair value measurements and provide uniform, consistent requirements to increase the quality of information provided in financial statements, according to CII. The estimates standard “will strengthen auditor responsibilities, improve audit quality, and further investor protection,” CII opined.

In addition, CII noted, the new requirements “can reduce the non-diversifiable risk to investors and generally should result in investment decisions by investors that more accurately reflect the financial position and operating results of each company.”

Specialists. According to CII, the specialist proposal would effectively address the more frequent use of specialists seen in connection with increased investor demand for fair value accounting. Increased amounts of work completed by specialists may lead to additional risk that auditors may fail to detect potential material misstatements, CII explained, and the proposal will increase auditors’ attention to the work of a company’s specialists, thereby enhancing investor protection. The application of the proposed requirements should result in consistently rigorous practices among auditors when using the work of and supervising specialists, the organization stated. The standard’s requirements also should result in auditors developing a better understanding of respective accounting estimates in significant financial statement accounts and disclosures, CII concluded.