Audit Report Proposal Likely Helpful for Investors

Efforts to improve transparency around audit reports would be helpful for investors and likely help highlight major financial reporting issues, according to Fitch Ratings.


The Public Company Accounting Oversight Board (PCAOB) has presented a proposal that would require auditors to compile more detailed and descriptive reports in an effort to better inform investors. Current requirements call for a three-paragraph largely boilerplate audit opinion that accompanies annual reports and, rather than describing key accounting issues, simply states whether companies adhered to generally accepted accounting principles (GAAP).


Fitch has previously highlighted the importance of disclosures that are informative and robust. Yet, the current standard three-paragraph audit opinion could very well be considered boilerplate and of little incremental informational value. Nevertheless, some elements of the PCAOB's proposal (i.e. the explicit statement that "the auditor is independent of the entity and has fulfilled the auditor's other relevant ethical responsibilities, with disclosure of the source[s] of those requirements") might also be met with a similar boilerplate response to the audit report.


"Where auditors have identified weaknesses in the internal control environment, this might constrain ratings. As a result, we believe the proposal to enhance the value of the audit report by including disclosure of 'key audit matters' would likely be helpful, as it could provide additional information about these factors. If this new section is successful in disclosing what is "on the auditor's mind" then that may help assess factors relevant to our ratings," says Fitch.


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