Alan Beller’s Testimony at the Public Company Accounting Oversight Board’s (PCAOB) Public Hearing

Alan Beller recently testified at the Public Company Accounting Oversight Board’s (PCAOB) public hearing in Washington, D.C. on the closely watched proposal to enhance the auditor’s reporting model.

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.

Alan, former Director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission and Senior Counselor to the Commission, advises clients on complex disclosure matters, especially financial disclosure, and the legal aspects of accounting and auditing issues. Alan 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. 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.

Speaking as a member of the panel providing “ Perspectives on the Auditor’s Reporting Model,” Alan 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.

Alan 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 Alan’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.

Alan 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.

For the complete text of Alan’s testimony, please click here.