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E-MailAlan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on Mr. Beller’s testimony at the Public Company Accounting Oversight Board’s (PCAOB) public hearing in Washington, D.C. on proposed enhancements to the auditor’s reporting model; the complete text is available here. The views expressed in his testimony are based on his knowledge and experience as both a government official and a legal advisor to private clients.
The proposed enhancements to the auditor’s reporting model would be the first change to the standards in more than 70 years. Furthermore, they could significantly impact the content and format of auditors’ reports; the treatment of that information by investors and other users of financial statements; and the relationship and structure of interactions among management, audit committees and auditors as they have developed since the enactment of the Sarbanes-Oxley Act of 2002.
Mr. Beller served as the Director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission and as Senior Counselor to the Commission from January 2002 until February 2006. Mr. Beller was also counsel to the Co-Chairs of and a member of the Treasury Department’s Advisory Committee (ACAP) on the Auditing Profession that issued its final report in October 2008 that among other things recommended a PCAOB initiative addressing the auditor’s reporting model.
Speaking as a member of the panel providing “Perspectives on the Auditor’s Reporting Model,” Mr. Beller supported the PCAOB’s initiative, but offered an alternative approach to changing the report, consistent with proposals in Cleary Gottlieb’s earlier comment letters to the PCAOB on the subject. That approach would directly provide more useful information in the report and thus enhance investors’ understanding. The alternative includes:
- Enhancing disclosure by issuers of the impact of accounting estimates and judgments on their financial statements and reporting.
- Modifying the auditor’s report to require focused attention by the auditor on an issuer’s critical account policies and estimates disclosure and a required statement in the report on those policies and estimates.
Mr. Beller stated that he believes the PCAOB’s current proposed standard relating to disclosure of critical audit matters (CAMs) will not improve financial reporting or investors’ understanding for several reasons, including the following:
- As the standard is proposed, and as CAMs are currently defined in the proposal, the disclosure will in many cases focus on immaterial information and thus be less likely than Mr. Beller’s proposed alternative to convey meaningful information regarding financial reporting or its quality;
- The current proposal will necessarily either require preparers to include information in their disclosure regarding CAMs that is immaterial and that the preparers would otherwise not be required to disclose or lead to audit reports that contain original information regarding issuers being published by the auditors; and
- The proposed standard raises significant risks of adversely impacting the relationship between audit committees and external auditors.
Mr. Beller also expressed concerns with the proposed “other information standard,” including the following:
- There is no persuasive indication that the proposed standard will lead to better financial reporting than, or advantage investors, other users or markets over, the current standard.
- The information to which the proposed standard will apply is overly broad in that it will require auditors to “evaluate” information and make judgments as to inconsistency, inaccuracy and materiality that are outside their expertise; and
- The work that the proposed standard requires from auditors not only extends beyond the auditor’s expertise but also is ambiguous and not capable of evaluation by investors.
The complete text of Mr. Beller’s testimony is available here.
