Written By Guest Blogger Dom Savini. Read his bio here.
Academics, take notice! – There’s a great need regarding the AICPA’s Clarity standards. [1]
A 19th century military strategist once wrote, “Although our intellect always longs for clarity and certainty, our nature often finds uncertainty fascinating.”[2] Needless to say, despite the AICPA’s best efforts at communicating the changes brought about by their Clarity Project, there will undoubtedly be a significant amount of “uncertainty” as the profession attempts to understand how these changes will hit home.
Unfortunately, a large portion of the profession has been quite busy responding to the ramifications brought about by the most recent financial collapse and may not have followed the Clarity Project as closely or in as much detail as they would have liked. After all, if the AICPA meets its goal to make the auditing standards “easier to read, understand, and apply” [3], what do we have to worry about? I say, plenty!
Apart from understanding the cosmetic changes and technical aspect of each redrafted document, there will be significant and profound implementation questions.
Let me highlight two significant changes – (1) the auditor’s report will require separate paragraph headings to clearly distinguish “Management’s Responsibility for the Financial Statements” versus the “Auditor’s Responsibility,” and (2) audits of group financial statements will require the auditor of the group financial statements to be involved with the component auditors.
The first change seems innocuous doesn’t it? Now, assume you are an attorney representing a client who has just filed bankruptcy and is awestruck that her CPA never told her that she was over-invested in slow-moving inventory. All of a sudden the proverbial “light-bulb” shines over the attorney’s head. Did the CPA make clear where his responsibilities began and ended? Was he clear in telling his client what her responsibilities were as opposed to his? Absent evidence to the contrary, the attorney just might want to point to this clarified standard as evidence that “things were so bad in this regard that the AICPA had to fix the problem.” Of course we know this to be an extreme example, but those of us who have experienced litigation first-hand know all too well that extreme cases seem to make for good malpractice cases against CPAs.
The second change requires the auditor of the group financial statements to be involved with the component auditors. This applies even when the component auditor works for a network firm of the group firm or for a different office of the same firm. How are smaller firms who once relied on assist audits going to now implement this clarified – or is it new – requirement? Will component auditors who might otherwise happen to be direct competitors of the group firm be compelled to divulge proprietary firm information? Will scope restrictions change and if so, how?
Now, larger firms have the resources to satisfactorily address implementation issues that will undoubtedly arise, but what about smaller firms or financial statement preparers? The same rubric that a large firm uses in conducting audits cannot be easily adopted by smaller firms. Also, the risk profile of large firms is so different from that of smaller firms it would be inappropriate for example, to do a “copy/paste” of a large firm’s audit program. When it comes to standards-setting, preparers often feel like an afterthought as one can well imagine. What additional burden can the preparer expect to carry in order to fully satisfy an auditor complying with the clarified standards? Are audit fees going to be substantially affected?
Moreover, who will help explain to investors how requiring two new sections in the audit report may reduce information risk while increasing financial statement reliability? Additionally, who will analyze the work done by regulators in light of the new clarified standards to make sure that redundancies and conflicting requirements are avoided?
Students, financial statement preparers, practitioners, investors, and regulators are all going to need insight and greater understanding to effectively and efficiently comprehend the redrafted standards.
To help answer and shall I dare say clarify the Clarity Project, I can think of no better place to communicate, assess, and address the impact than academia. I hope some of you will agree and consider this as you prepare your curriculums and research projects.
[1] The AICPA’s Auditing Standards Board is nearly complete with an ~8 year project to improve compliance with its GAAS requirements and to converge U.S. GAAS with international auditing standards. The goal is to improve compliance via standards that are easier to read, understand, and apply.
[2] Karl von ClausewitzKarl von Clausewitz
[3]www.aicpa.org/interestareas/frc/pages/frc.aspx dated July 2012
