Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments
Jennifer L. Todling, Professional Accounting Fellow, Office of the Chief Accountant
Dec. 5, 2016
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, individual Commissioners, or of the author’s colleagues upon the staff of the Commission.
It is my pleasure to be with you today to share some thoughts about the future based on my reflections on my work in the Professional Practice Group and other work experiences. Specifically, others within the Office of the Chief Accountant have spoken today about the importance of high quality implementation and ongoing monitoring of new accounting standards. Effective implementation and ongoing monitoring are certainly not limited to accounting standards; they are also relevant and important when considering the application of new auditing standards.
The PCAOB has an active standard setting agenda and continues to consider ways to enhance auditor reporting as well as improve and modernize its audit performance standards in a number of important areas. I believe many stakeholders have a role to play throughout this process, including after a new auditing standard is adopted. I’d like to focus my time today discussing the importance of having an implementation and monitoring strategy for new auditing standards and how stakeholders can contribute to these efforts.
Importance of having an implementation and monitoring strategy
In my view, engagement among stakeholders should not stop after a final auditing standard is adopted. In fact in many ways, this is only the beginning. After a standard is adopted, the implementation and monitoring process begins and it’s during this time that stakeholders seek to understand how the standard is applied in practice, something that may be difficult to determine during the rulemaking process.
Implementation of new auditing standards naturally starts with thoughtful attention by auditors who will have direct responsibility in the implementation effort. Ongoing monitoring by regulators also plays a critical role in evaluating compliance with new standards. However, other stakeholders, including audit committees, management, investors and academics should consider how they can contribute to help maximize the intended benefits and minimize potential unintended consequences of new auditing standards.
The type of implementation and monitoring strategy may differ depending on the nature of the auditing standard adopted. For example, in an evolving area, the standard setter may determine that staggered effective dates are appropriate based on the nature of the requirement, or entity characteristics (e.g., size or type of issuer) such as, by allowing smaller companies and auditors more time to implement so that they can benefit from the experience of larger companies and auditors. Having phased effective dates can also help others, including regulators, monitor implementation efforts and react in a timely manner if mid-course adjustments are appropriate.
In addition, standards that require new disclosures by the auditor or where academic and other research were limited at the time of rulemaking may be strong candidates for more robust implementation strategies, feedback loops, or ongoing study, such as through a post-implementation review. For instance, earlier this year the SEC approved a new PCAOB rule which will require identification of the engagement partner name and information about other audit firms that participated in the audit on a new Form AP beginning in 2017. While auditors are required to provide some of this additional information in other jurisdictions, or may be providing some of the information voluntarily in other cases, this will be the first time that identification of these parties will be consistently and readily available in the US public company environment. As a result, as part of its early implementation efforts the PCAOB developed a staff implementation guide, held webcasts for auditors to understand the information technology elements necessary for compliance, and provided an opportunity for audit firms to perform pilot testing prior to the effective date of the new rule. I understand that audit firms have also started their implementation efforts. While this is only the beginning, things seem to be off to a good start in the implementation efforts for this new rule.
In addition, standards that require additional communication from the auditor may be more directly visible to all stakeholders; therefore, a wider range of constituents, including investors and academics, may be more readily able to provide input and feedback based on their experience and perspective. In this regard, many investors have expressed interest in receiving additional information about the audit, beyond the pass/fail nature of the opinion. In response to this request, the PCAOB has proposed changes to the auditor’s report, which has remained largely unchanged since the 1940s. While expanded audit reports have been contemplated or adopted in some other jurisdictions in recent years, it is still a very new approach to enhancing auditors’ communications with investors. The PCAOB has sought extensive feedback throughout the rulemaking process, including from investors, to inform its standard setting efforts.
How stakeholders can contribute to effective implementation and monitoring efforts
So, how can stakeholders contribute to these efforts?
Investors: I would expect that investor engagement and outreach will be especially significant in the post-adoption period for standards requiring additional communication from the auditor. In addition to providing ongoing feedback to standard setters and regulators, investors can engage directly with the auditing profession to share their insights into best practices and how they are using the additional information. This may include commenting on whether they find the new disclosures informative and whether the disclosures are sufficient as proposed.
With respect to the recent experience in the UK on enhanced auditor reporting, we have heard from investors that information has been most meaningful when it is tailored to the individual audit instead of being boilerplate. In the UK, there seems to be ongoing engagement with investors, including opportunities for investors to provide feedback in order to make sure the information provided by auditors is useful in the long-term. Audit firms should also consider being pro-active by performing outreach to investors early as part of their efforts. I believe this ongoing dialogue with investors is important.
Auditors: Audit firms play a vital role in the implementation and monitoring of auditing standards, including by establishing policies and shaping the approach of their engagement teams on the implementation of new auditing standards. For instance, studies on the UK auditor reporting have suggested that the usefulness of additional information provided by the auditor may increase when auditors view enhanced reporting as a communication to the financial statement user instead of merely a compliance exercise. The analysis of UK auditor reporting also suggests that it may be helpful for audit firms to consider whether their audit methodology enables audit partners to tailor their auditor’s report based on the audit performed (as opposed to relying on standard audit report templates), so that the report may be more likely to result in meaningful information for investors.
Audit committees and management: As part of their auditor oversight role, audit committees should consider engaging in early and frequent dialogue with auditors to promote successful implementation of auditing standards. Audit committees, including through their discussions with management, can also monitor for best practices or potential unintended consequences and share their observations with auditors and regulators.
For example, this can be facilitated by considering whether management, the audit committee and the auditor understand and support the objective of the auditing standard; whether there has been ongoing dialogue among these parties throughout the audit process; and whether the audit committee is able to review any potential changes resulting from the auditing standard as early as possible.
Regulators: As regulators, we also have an important role to play. Regulators should consider whether they have provided adequate guidance to facilitate successful implementation. We should also stay engaged with stakeholders to ensure we are appropriately responsive in the post-adoption period.
For example, the PCAOB performs ongoing monitoring of its standards through its issuance of implementation guidance, outreach with advisory groups, and PCAOB inspections. Further outreach may be appropriate in some cases, including with investors.
Standards resulting in enhanced auditor communication may result in the inclusion of new information in SEC filings. This may have implications to regulatory oversight, including through review by the Division of Corporation Finance. These reviews could identify compliance issues, such as whether additional information provided by the auditor includes language that could be viewed as disclaiming or providing a piecemeal opinion. As a result, continued collaboration between the SEC and PCAOB in the post-adoption period is important. In this regard, the coordinated approach to implementing reporting pertaining to internal control over financial reporting provides some valuable experience to both organizations.
Academics: Academics can also help monitor the impact of auditing standards. This may include evaluating how investors use additional information provided by the auditor, including by studying whether there is a market reaction to the information and whether the information is used differently depending on the type of investor or company. They also could evaluate the impact of enhanced auditor reporting and transparency on auditor ratification decisions by shareholders or disclosures by the audit committee. Overall, academics can also evaluate the impact of changes to auditing standards on auditor behavior and performance, including considerations related to the impact on audit quality, among others. Continued outreach with the academic community can help inform the efforts of other stakeholders.
These are just a few of the items to consider focusing on in developing implementation and monitoring strategies.
In closing, while I don’t have all the answers, I hope that these ideas will help spur the dialogue in the days ahead as we all consider our roles in these ongoing efforts. Thank you for your time and the opportunity to be here today.
 For instance, PCAOB Release No. 2015-008 Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards included phased effective dates.
 See PCAOB Release No. 2015-008.
 For instance, the International Auditing and Assurance Standards Board (“IAASB”) and the Financial Reporting Council in the United Kingdom (“FRC”) require the name of the engagement partner to be included in the auditor’s report.
 For instance, several other regulators and standard setters, including the IAASB, the European Union and the FRC have adopted expanded auditor reporting requirements that extend beyond the binary pass / fail opinion.
 See e.g., the FRC's Extended Auditor’s Reports, A Further Review of Experience (January 2016) and October 27, 2016 discussion of the PCAOB Investor Advisory Group available at https://pcaobus.org/News/Events/Pages/2016-IAG-meeting.aspx.
 See Kecia Williams Smith, Tell Me More: A Content Analysis of Expanded Auditor Reporting in the United Kingdom (August 2016) at 12.
 Id at 14.
 See e.g., the IAASB’s More Informative Auditor’s Reports — What Audit Committees and Finance Executives Need to Know (March 2016) at 3.