By Paul Hodgson, CCO and Senior Research Associate
At a recent open board meeting, the PCAOB proposed a concept release to increase the amount of information provided by a company’s outside auditor.
The alternatives presented in the concept release were:
- Auditor's Discussion and Analysis,
- Required and expanded use of emphasis paragraphs,
- Auditor assurance on other information outside the financial statements, and
- Clarification of language in the standard auditor's report.
The release indicated that these alternatives were not mutually exclusive.
Given the number of risk explosions that have been driven by poor disclosures surrounding non-financial issues, we at GMI are definitely pro-disclosure, pro-transparency, and in full support this initiative.
As Stephen B Harris, PCAOB Board Member, noted in his remarks at the meeting:
First, investors want auditors' reports to include the auditor's assessment of the estimates and judgments used by management to prepare the financial statements. And second, investors want auditors to discuss how they addressed the areas that presented the most significant risks that the financial statements might be materially misstated.
Interested parties can make comments and suggestions here.
While the PCAOB release does not specifically address the inclusion of non-financial issues that might include governance, environmental, and social issues that could increase risk, this is clearly the way forward, especially with the “One Report” movement gaining ground. These ESG & A issues are exactly the kinds of risks that GMI and its predecessor companies have been zeroing in on since their foundation.
Will this increase the need for additional training for auditors so that they can assess such risks? Yes.
Will this increase the fees that companies must pay to auditors? Yes.
But this is a small price to pay to avoid the kinds of massive losses that we have seen over the last few years.