JUNE 2008 -
Over the past few years, auditors have been criticized for a variety
of meltdowns in the financial sector. They have been blamed for
failing to detect fraud, allowing inadequate disclosure in the financial
statements, and compromising their independence in dealing with
management. Recently, a CPA Journal reader
asked why, in the interest of full disclosure, the audit opinion
doesn’t clearly state that the management of the audited company
paid for the cost of the audit. One of my colleagues argued that
everyone knows who pays for the audit. But do they? Certainly, all
CPAs know who pays for the audit; but many users, including creditors,
vendors, or others seeking to make economic decisions based on the
information provided in the financial statements, may not be aware
of this simple fact. Perhaps it’s time for the profession
to revisit the audit opinion—not only for what it says, but
also for what’s left unsaid.
Choosing Our Words Carefully
opinion is generally addressed to the board of directors and the
shareholders, and for years the standard template has used CYA
(cover your ass-ets) terminology in place of real communication.
The first paragraph explains the scope of the audit and the auditor’s
responsibility in the audit process; the second paragraph refers
to the procedures performed “in accordance with GAAS”
used to provide a “reasonable basis” for the opinion;
and the final paragraph expresses the auditor’s opinion
of whether the financial statements “present fairly, in
all material respects” and are in conformity with GAAP.
argue, “If it ain’t broke, don’t fix it.”
After all, the wording used in the standard opinion has passed
the test of time and has been vetted by legal gurus to make it
bulletproof, right? But does it still work in today’s environment
and for today’s users?
on the Side of Disclosure
has been discussed about full disclosure in the financial statements,
the topic as it relates to the audit opinion has received little
attention. In addition to the technical changes that reflect the
ever-changing professional landscape, such as complying with PCAOB’s
AS1 by reference to “the standards of the Public Company
Accounting Oversight Board (United States),” the profession
has been remiss in addressing two important issues.
need to carefully consider the impact of the words used to describe
the services the profession provides (i.e., “assurance”).
Accounting standards refer to planning and performing the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. This caveat frames what can
be achieved through the audit and can limit the auditor’s
liability. However, when it comes to what CPA firms say in their
marketing-related materials, the qualifying term “reasonable”
is conspicuously omitted. The potential consequence is to (mis)lead
nonaccountants to expect a greater level of confidence regarding
the financial statements than is justified. Ongoing revelations
of corporate scandals and restatements provide evidence that audits
cannot assure the correctness of the financial statements.
What a difference one little word can make in the resulting communication.
should think about the potential implications and materiality
of the information that is omitted from the auditor’s report
(e.g., “Company XYZ has paid us to conduct this audit and
express our opinion.”). Might it make a difference to those
reading the audit opinion? We can argue whether receiving payment
directly from the audit client constitutes a conflict of interest—a
situation in which financial or other personal considerations
have the potential to compromise or bias professional judgment
and objectivity. What are the odds that a source of revenue for
a CPA firm could potentially influence the auditor’s professional
judgment and objectivity?
Code of Professional Conduct warns against impairment of independence
in fact and appearance. If there is any doubt as to whether a
source of funds or other benefits might constitute a conflict
of interest—or might be perceived as such—we should
err on the side of disclosure. Once they have the facts, let the
public decide how much confidence they will place in the audit
I welcome your comments.
Kranacher, MBA, CPA, CFE
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