Highlights from the PCAOB’s Public Meeting on the Auditor’s Reporting Model – Investment Companies– May 01, 2014

During the PCAOB’s Public Meeting on the Auditor’s Reporting Model held April 2-3, 2014, the following comments were highlighted during one of the panels with respect to the application of the proposed standard to Investment Companies:

Overall, there were differences in opinion on whether the application of the proposed PCAOB standard should be applied uniformly across all issuers, or whether investment companies and broker dealers should be scoped out of the proposal. Proponents for uniform application suggested difficulties in determining where and when you can scope out exempt issuers, as well as defining and distinguishing the characteristics and circumstances which would warrant exemption; therefore, supporting uniform application across all issuers. Proponents for scoping out sections of the proposed standard most specifically critical audit matters, or CAMs) for certain issuers such as investment companies and broker dealers, suggested that the additional information would be redundant, confusing to investors, and would greatly vary based on the auditing firm and auditor judgment—creating significant confusion to investors where audit reports vary among funds within the same peer group, when there are no true differences in the fund structures.>Aspects of the Proposal which certain panelists were generally in support of included the following:

  • Overall Board efforts to enhance the relevance and usefulness of the auditor’s report
  • Disclosure that the auditor is registered with the PCAOB and is required to be independent
  • Enhanced disclosure of the auditor’s responsibility with respect to fraud and the notes to the financial statements

Concerns expressed by panelists surrounding the introduction of CAMs included the following:

  • “Red Flag” Concept - Investors may incorrectly interpret a CAM as a negative indicator, and make misinformed investment decisions
  • Expectation within proposed standard is that only in rare circumstances will CAM not be included in the auditor’s report, which creates pressure on the auditor to highlight matters when there really aren’t any issues warranting its inclusion in the auditor’s report
  • Comparability of CAMs across the industry and differences in auditor judgment, as well as CAM language among audit firms and even within the same audit firm. This matter was illustrated through an example where more than one audit firm may be used for a large fund complex, and two similar funds within this complex are each audited by a different auditor. Differences in auditor judgment among the firms on what warrants a CAM, as well as the language within the auditor’s report, creates inconsistencies between the funds where in actuality there are none – ultimately, this puts one fund ahead of the other purely based on the investor’s interpretation of the CAM and the language used by each auditor. This circumstance would even be further magnified when you are looking at all auditor reports from the peer group or universe of funds.

Finally, all panelists seemed to agree that additional deliberation, outreach and evaluation is required in order to adequately modify certain areas of the proposal to be applicable and useful to investment companies.

The public Meeting Statements made by the various panelists may be found on the PCAOB website:http://pcaobus.org/Rules/Rulemaking/Pages/Docket034Statements.aspx

The complete agenda, panelist statements, and webcast from the Board’s Public Meeting on the Auditor’s Reporting Model (April 2-3) are posted on the PCAOB website:


Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.