Financial statement disclosures have become a key component of
public company financial reporting. Over the years, the FASB has
expanded the nature and scope of the disclosures that are required
in financial statements, and disclosures have become more
qualitative. The notes to a public company's financial statements
frequently run many pages in length and cover topics ranging from
the selection of accounting principles to the assumptions underlying
fair value determinations. The transformation of financial
statements from simply a series of line items into a more
comprehensive presentation that includes extensive narrative is the
result of the increasing complexity of business transactions, of the
increased use of fair value and other accounting estimates, and of
demands from financial statement users for more relevant
information.
Financial statement disclosures are still evolving. In
particular, some recent and proposed accounting standards contain
disclosure requirements that are objectives-based and explicitly
depend on preparer judgment. For example, the proposed Financial
Instruments ASU requires the reporting entity to "determine, in
light of facts and circumstances, how much detail it is required to
provide * * * and how it disaggregates information into classes for
assets with different risk characteristics." The proposed ASU also
states that an entity "should strike a balance between obscuring
important information as a result of too much aggregation and
overburdening financial statements with excessive detail that may
not assist financial statement users in understanding the entity's
financial instruments and allowance for credit losses." How that
balance should be struck is left to the preparer. Complying with
this sort of requirement will require the exercise of considerable
judgment.
The financial statement audit encompasses the disclosures, and
therefore, as the scope and complexity of disclosure increases, so
should the scope and sophistication of the auditor's work. Under
existing PCAOB standards, auditors are required to plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework. This
includes performing procedures to test the disclosures and to
evaluate whether the financial statements contain all of the
disclosures required by the reporting framework and all of the
information essential for a fair presentation.
The Board's interim standards took financial statement
disclosures into account, and the recently adopted risk assessment
standards call for auditors to devote still more attention to
disclosures. For example, Auditing Standard No. 12 requires the
auditor to develop expectations about the disclosures that are
necessary for the company's financial statements to be presented
fairly in conformity with the applicable reporting framework. PCAOB
standards also require auditors to perform procedures to assess the
risk of omitted, incomplete, or inaccurate disclosures and to
identify and test significant disclosures. In an integrated audit,
Auditing Standard No. 5 requires the auditor to test controls over
significant disclosures.
During the discussion today, the Board is interested in learning
about the challenges that the financial statement disclosure
requirements — and the trends toward more qualitative disclosure and
more preparer judgment concerning the content of disclosures — pose
for auditors. We would also like to understand how auditors are
addressing those challenges and how preparers and investors see the
auditor's role in this area. The Board is particularly interested in
the SAG's views concerning whether there are further changes to the
auditing standards that the Board should consider and whether there
are other forms of guidance that the Board should consider issuing
in order to ensure that auditors devote proper attention to
disclosures.
To lead that discussion, I will now turn the floor over to Deputy
Chief Auditor Keith Wilson.