June 22nd, 2011

Finance chiefs aren’t likely to favor the accounting oversight board’s proposal to require an Auditor’s Discussion and Analysis report.

Public Company Accounting Oversight Board members Jay Hanson and Daniel Goelzer are warning constituents about the possible negative consequences of a PCAOB proposal that would require auditors to spin a “narrative” about their clients in addition to giving their usual pass/fail opinions on company financial reports.

CFOs are not likely to warm to the proposed changes, which would require that an Auditor’s Discussion and Analysis (AD&A) be included with an auditor’s report. The AD&A “could include a discussion of the auditor’s views regarding the company’s financial statements, such as management’s judgments and estimates, accounting policies and practices, and difficult or contentious issues, including ‘close calls,'” according to a PCAOB fact sheet.

Strongly favored by investors, the AD&A plan drew heat from companies and accountants during PCAOB staff outreach sessions. “Most preparers, auditors, and audit committee members indicated that management or the audit committee, rather than the auditor, should provide additional information about the company,” the oversight board reported.

In a statement issued Tuesday, Hanson, a former auditor with McGladrey & Pullen for nearly 32 years, cautioned that “auditors are not analysts or investment advisers. They are not trained to evaluate and communicate the overall business and strategic risks of the companies they audit.”

Hanson also warned that the plan could delay the delivery of audit reports. “With filing dates as early as 60 days after year-end, increasing complexity and judgments in almost all accounting areas, the concentration of calendar year-end companies and no excess capacity in the audit profession, how will it all get done?”

For his part, Goelzer questioned “whether auditors should move beyond their traditional role of attesting to information that management prepares. Under some of the ideas floated in the [PCAOB] concept release, auditors would be required to provide commentary on such matters as management’s judgments and estimates and its selection of accounting policies and practices.”

The PCAOB plan would also require the use of “emphasis paragraphs,” involving such issues as significant management estimates and areas of measurement uncertainty. Under current PCAOB standards, such paragraphs aren’t required but may be added at the auditor’s discretion.

The proposal would also require auditor assurances on information outside a company’s financials, such as management’s discussion and analysis, non-GAAP information, and earnings releases. Currently, there’s no requirement that auditors provide assurance on such information.

Clarifying “the language about what an audit represents and the related auditor responsibilities” would be another requirement under the plan. Issues clarified in the auditor’s report could include auditor’s responsibilities for fraud, financial statement disclosures, management’s responsibility for the preparation of the financials, information outside of the financial statements, and auditor independence.