AccountingHorizonsAmericanAccountingAssociationVol.25,No.4DOI:10.2308/ - PDF document

AccountingHorizonsAmericanAccountingAssociationVol.25,No.4DOI:10.2308/acch-50060pp.659–684PerceptionsandMisperceptionsRegardingtheUnqualiÞedAuditorÕsReportbyFinancialStatementPreparers,Users,andAuditorsGlenL.Gray,JerryL.Turner,PaulJ.Coram,andTheodoreJ.Mock GlenL.GrayisaProfessoratCaliforniaStateUniversity,Northridge,JerryL.TurnerisaProfessoratTexas INTRODUCTIONlthoughstandardauditors’reportsvaryacrosspoliticalboundaries,bothU.S.andinternationalauditingstandardsetterscontinuetoexpressconcernsaboutthecontentandusefulnessofthosereports(AmericanInstituteofCertiedPublicAccountants[AICPA]andInternationalAuditingandAssuranceStandardsBoard[IAASB]2006;PublicCompanyAccountingOversightBoard[PCAOB]2010Theobjectivesofthisstudyaretoidentifytheperceptionsandmisperceptionsregardingthecurrentunqualiedauditor’sreportandtoidentifysuggestionstoimprovetheauditor’sreport.Regulators,governmentagencies,professionalgroups,andotherauditingoverseersalsocontinuetoraiseconcernsabouttheauditor’sreport.Forexample,theU.S.DepartmentoftheTreasury’sAdvisoryCommitteeontheAuditingProfession’s(ACAP)FinalReportoftheAdvisoryCommitteeontheAuditingProfessionfortheU.S.Departmentofthe(hereafter,FinalReport)specicallyurgesthePublicCompanyAccountingOversightBoard(PCAOB)toundertakeastandardsettinginitiativetoconsiderimprovementstotheauditor’sstandardreportingmodelACAP2008,VII:13).Asaresult,thePCAOBhasincludedtheauditreportingmodeltopicontheagendaforitsStandingAdvisoryGroup(SAG)meetings.AtapublicmeetinginMarch2011,thePCAOBOfceoftheChiefAuditorreportedtothePCAOBonitsoutreachtoinvestorsandothersaboutpotentialchangestotheauditor’sreportingmodel.Duringthesameweek,thePCAOBInvestorAdvisoryGrouppresentedrecommendationstotheBoardonchangestotheauditor’sreport,andtheSAGalsodiscussedtheauditor’sreport.MartinF.Baumann,ChiefAuditorandDirectorofProfessionalStandards,said,Theauditor’sreportingmodelisatopstandard-settingpriorityoftheBoard.Tobetterinformtheirinvestmentdecisions,investorssaytheyneedtohearmorefromtheauditorabouttheriskstheauditorsfacedintheauditandaboutthejudgmentsandestimatesmanagementusedinthenancialstatementsPCAOB2011).ThePCAOBplanstoissueaconceptreleaseregardingmodicationstotheauditor’sreportasearlyasmid-2011.Ontheuserside,theCFAInstitutepublishedareport,IndependentAuditor’sReportSurvey,whichsummarizesnancialanalysts’opinionsonseveralquestionsregardingtheauditor’s(CFA2010).Only37percentofrespondentsindicatetheybelievethecurrentauditor’sreporttherightamountofinformation.IntheEuropeanUnion,aGreenPaper,AuditPolicy:LessonsfromtheCrisis,discussesseveralaudit-relatedissues,includinghowauditorscanbettercommunicatetheirwork(EuropeanCommission2010).TheGreenPapernotesthatGiventhatthesestakeholdersmaybeunawareofthelimitationsofanaudit(materiality,samplingtechniques,roleoftheauditorinthedetectionoffraud,andtheresponsibilityofmanagement),thisengendersanexpectationgapEuropeanCommission2010,3–4).InreferencetothisGreenPaper,PaulBoyle,theChiefExecutiveoftheUnitedKingdom’sFinancialReportingCouncil(FRC),said,Thegapbetweenwhatauditdoesandwhatusersexpectfromanauditofthenancialstatementshasbeengrowingforthelast20–30years,despitepreviousattemptstobridgeitHaddrill2011,3).Further,hesaidthatnowisthetimeforfreshthinking.Expressingconcernsabouttheauditor’sreporthasalonghistory,datingbacktotheearly1900s(Churchetal.2008;KingandCase2003;KohandWoo1998;PCAOB2010).AsincludedintheGreenPaperquotationabove,theprofessionreferstotheseconcernsastheexpectationgap Currentversionsoftheauditors’reportsareincludedinStatementonAuditingStandardsNo.58(SASNo.58)AICPA1988),InternationalStandardonAuditing700(ISA700)(IAASB2),andAuditingStandardNo.5(AS5)(PCAOB2007).hehendvalep:/us.ods/Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 suggeststhegaphastwomajorcomponents:Performancegap:Agapbetweenwhatsocietycanreasonablyexpectauditorstoaccomplishandwhattheyareperceivedtoachieve.Reasonablenessgap:Agapbetweenwhatsocietyexpectsauditorstoachieveandwhattheycanbereasonablyexpectedtoaccomplish.Atrstglance,thesetwodenitionslookalmostidenticalwithsomeminorwordswitches,butPorter(1993)capturestwodifferentconcepts.Theperformancegapisbasedonwhatsocietycouldreasonablyexpectthatauditorsshoulddo—notwhatexistingauditingstandardssayauditorsaresupposedtodo.Porter(1993)furthersubdividestheperformancegapintotwomore-detailedgaps:(1)thedecientstandardsgap,whichisthegapbetweenwhatauditorsshoulddoandwhatwoulddoiftheyabsolutelycompliedwiththeauditingstandards,and(2)thedecientperformancegap,whichistheperceivedgapbetweenwhatauditorsactuallydoandtherequirementsofthestandards.Whiletheperformancegapisbasedonanideal,butreasonable,setofachievements,thereasonablenessgapissociety’sunreasonableexpectationsbeyondthosereasonableachievements.Thepastattemptsbytheprofessiontoreducetheexpectationgapprimarilyhavebeentodealwithunreasonableexpectations,asopposedtochangingthestandards.TheAuditingStandardsBoard(ASB)amendedtheauditor’sreporttoeducateusersandtocorrectusers’misperceptionsastotheauditors’responsibilities.However,thefactthattheexpectationgapcontinuestopersistsuggeststhesepastattemptshavebeenunsuccessful.Someresearchershavebeencriticalofthesepastattempts.Humphreyetal.(1992)suggestthatchangesintheauditor’sreportensuretheauditexpectationgapdebateisframedintermsofimprovingtheunderstandingofusersratherthanprovidingmoreinformationonthenatureandqualityofauditperformance.Theyfurtherstate:Thisiswellreectedinthemovetowardslonger-formauditreporting,wherethedominantemphasishasbeenonprovidinginformationongeneralizedauditresponsibilitiesratherthanthedetailingofspecicconsiderationsandndingsaffectingtheenterprisewhichhasbeenaudited.Theintention,therefore,appearstobetogivetoreadersmoreinformationaboutauditing,ratherthanmoreinformationabouttheresultsoftheaudit.(Humphreyetal.1992147;emphasisadded)Morerecently,inanarticleontheroleofauditinthecontextoftheincreasingcomplexitiesofthenancialsystemandrecentnancialcrisis,Humphreyetal.(2009,819)notethattheauditor’sreportisnotparticularlyhelpful,beingfullofgeneral,standardizedstatementsontheroleandlimitationsoftheauditandcontaininglittleaboutthespecicworkundertakenandndingsobtainedbyauditors.Ourresearchcontributesintwowaystounderstandingwhytheexpectationgapcontinuestopersistdespitechangestotheauditor’sreport.First,thestudyincludesvediversestakeholdergroups—nancialstatementpreparers(CFOs),users(bankers,analysts,andnon-professionalinvestors),andexternalauditors.Mostexistingauditor’sreportresearchincludesjustoneofthesestakeholdergroups.Sinceextantresearchmayhavedifferentresearchquestions,hypotheses,andresearchsettingsandtechniques,itisdifculttocompareandsynthesizeresultsandperceptionsacrossstakeholdergroupsfromdifferentresearchstudies.Forourresearch,eachstakeholdergroupusesthesamebasicsetofresearchquestions,allowingustofullysynthesizeandcomparetheperceptionsofthevegroups.Second,weusefocusgroupsasourresearchmethodtoprovidedeeperinsightsintostakeholders’perceptions.Thecontemporaneousinteractionsofthefocusgroupparticipantsandtheopportunitytoasktheparticipantsfollow-upandprobing—andsometimesargumentative—PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 questionsprovidedawidevarietyofndingsregardingtheauditor’sreportandtheexpectationgap.Asanticipated,someofourndingssupportconclusionsreportedinpriorresearch.Also,weprovidenewresults,aswellasadditionalperspectivesonpriorndingsthatwouldbedifculttodiscoverwithotherresearchtechniques.Researchersfrequentlyusefocusgroupstoexplorestakeholderperceptionsandpolicy-relatedissuesinotherdomains.Intheaccountingdomain,theAICPA(Williamson2007),PublicOversightBoard(POB)(2000),IRS(Shoemaker2008),GAO(CrainandBean1998),andothershaveusedfocusgroups.Yet,asearchofacademicdatabasesresultsinlocatingonlyonepaperintheacademicauditresearchdomainthatusedfocusgroups(Boritz2005).Assuch,thedescriptionofourfocusgroupresearchdesignisrelativelydetailedtoprovideguidancetoresearcherswhowanttousethisresearchmethodinthefuture.Mostoftheextantresearchontheauditor’sreportisfromthe1980sand1990s,subsequenttothemostrecentchangetothereportformat.Muchhaschangedintheauditenvironmentsincetheearly2000s,withmajorscandals(e.g.,Enron,WorldCom,etc.)leadingtothedemiseofArthurAndersen,passageoftheSarbanes-OxleyActof2002(SOX),andcreationofthePCAOB.Althoughauditstandardsetters,regulators,andotherprofessionalgroupshavebeenraisingconcernsabouttheauditor’sreport,otherpost-SOXauditor’sreportstudieshaveresearchedmuchmorefocusedtopics,suchasthemarketreactiontotheinclusionoftheinternalcontrolopinioninthePCAOB-basedauditor’sreport.Thisstudyprovidestheonlywide-rangingpost-SOXresearchstudyregardingtheauditor’sreportexpectationsgap.WediscussourdetailedndingsintheResultssection;however,fourgeneralinsightsareseen.First,thecommunicationsoftheauditor’sreportisanelusiveconcepttopreparers,users,andauditors.Thissuggeststhatgaugingtheexactnatureofunintendedcommunicationsand,therefore,theexpectationgapcannotbedeterminedprecisely.Second,usersfrequentlymisinterpretcommontermsintheauditor’sreport,suchasreasonableassurancemateriality,andsamplingEventheparticipatingauditorscouldnotagreeontherelationshipsbetweenlevelofassuranceandmateriality.Third,usersdonottheauditor’sreport.Instead,usersattheauditor’sreporttocheckifithasanunqualiedopinionandtocheckthenameoftheaccountingrmsigningthereport.Non-professionalinvestorsusesecondarysourcesfornancialdataandneverseekouttheauditor’sreport.Regardingaredesignedauditor’sreport,participatingbankersandanalystssuggestedthatnewmaterialaddedtotheauditor’sreportdoesnotmatterifthataddedmaterialisboilerplateinnature—theystillwillnotreadthereport.Usersindicatetheywanttoseeclient-speciccontentsuchastheinformationthatwouldappearinatraditionalmanagementletter.Fourth,themajorityofstakeholdersbelievethatPCAOB-basedauditsaresuperiortoASB-basedaudits.Preparers(CFOs)observedthatPCAOB-basedauditsaremorerigorous,andusersindicatedthatthePCAOB-basedauditor’sreport,alongwithinternalcontrolopinions,providesmoreinformationaboutwheremanagementwillbefocusingfutureresources.Auditorsindicatedthattheinitialnancialstatementnumberspresentedbytheclientnowarehigherquality,becausepreparersknowthatanysubsequentrevisionofthenumbersduringtheauditcouldtriggeranegativeinternalcontrolopinion.Ourndingsclearlyindicatethatauditstandardsetterswillneedtomakesignicantchangestotheauditor’sreportiftheywishtoreducethemisperceptions,theunintendedcommunications,andtheexpectationgapthatexistcurrently.ItalsoprovidesevidencetosupportthedenitionofPorterthatrecognizesthereareseveraldifferentdimensionstotheexpectationgap.Stakeholdersinthisstudysuggestedavarietyofchangestoimprovetheauditreportingmodel.Somechangeswouldberelativelyminor,whilesomecouldbeparadigmshiftsintermsoftherelationshipsbetweenauditors,clientmanagement,thosechargedwithgovernance,andnancialstatementusers.TheparticipantsalsorecognizedthattheirrecommendationshaveassociatedcostsandmayimpactGray,Turner,Coram,andMock AccountingHorizonsDecember2011 theauditor’sriskprole.Balancingbenets,costs,andriskswilladdtotheauditstandardsetters’andregulators’challenges.Wehaveorganizedtheremainderofthispaperintovesections.Thenexttwosectionsprovidethebackgroundforourresearchandanoverviewofliteratureregardingtheauditor’sreport.Thethirdsectionprovidesthedetailsofourfocusgroupresearchdesign.Thefourthsectionpresentsourresultsintheformofasynopsisofthefocusgroups’discussions.Thenalsectionprovidesconcludingcommentsplussuggestionsforfutureresearch.BACKGROUNDThisarticleexpandsonaresearchprojectcommissionedbytheAICPA’sAuditingStandardsBoard(ASB)andtheInternationalAuditingandAssuranceStandardsBoard(IAASB)(AICPA/IAASB2006;Mocketal.2009;Turneretal.2010;Corametal.2011TheASBandIAASBhaveexpressedconcernsaboutmiscommunicationsregardingtheirunqualiedauditors’reports.Specically,theirrequestforresearchproposals(RFP)stated,nancialstatementusersmaynotconsistentlyunderstandtheintendedcommunicationscontainedintheauditor’sreport.Thephraseintendedcommunicationsbecameanimportantaspectofourresearchbecause,asdiscussedinourresearchndings,therewasnogeneralagreementamongparticipantsastotheintendedcommunicationsoftheauditor’sreport.Theapplicableauditstandardsdonotusethatphrase,andeventheauditorsinourstudyhaddifcultyarticulatingandagreeingontheintendedcommunicationsoftheauditor’sreport.TheASBandIAASBRFPstatedthatakeyobjectiveoftherequestedresearchwastoidentifyandprovideinformationandinsightonthenatureofuserperceptionsregardingthenancialstatementauditandtheauditor’sreportamongvariousclassesofnancialstatementandauditreportusers.TheASBandIAASBstatedthattheybelieveidentifyingandaddressinggapsbetweenuserunderstandingandtheintendedmeaningofthereportwillbetterservetheinterestsofallstakeholders.WeexpandedontheASB/IAASBstudysuggestedintheirRFPintwoways:rst,byincludingthePCAOBauditstandardsettingactivitiesandtheongoingreporting-modelactivitiesofthePCAOB’sStandingAdvisoryGroup(PCAOB2010,2011),andsecond,bymorefullyintegratingourndingswithndingsofotherresearchonauditors’reports.Thefactthattheexpectationgapisstillanissuesuggeststhattherehasbeenasignicantgapintheresearch.Theprimaryfocusofdealingwiththeexpectationgapinexistingliteraturehasbeentobetterexplaintheaudittousersbyexpandingdiscussionintheauditor’sreport.ThisapproachhasaddressedonlytheunreasonableexpectationscomponentoftheexpectationgapthatPorter(1993)denes.Asdiscussedinthispaper,researchsubsequenttothelastmajorauditor’sreportchange(SASNo.58)generallyndsthatuserswerebetterinformedintheareaswithrevisedexplanationsKellyandMohrweis1989;Milleretal.1993;Kneeretal.1996).However,researchexaminingkeyexpectationgapissuesndstheexpectationgapstillexistsand,infact,hasbecomewiderinareasnotaddressedintheexpandedauditor’sreport(e.g.,Lowe1994;Pringleetal.1990;Geiger1994).Animportantissuemissingfromtheextantresearchisabetterunderstandingofwhatuserswant,insteadofwhattheprofession(orregulators)believesiswanted.ThestudybyPorter(1993) OpinionsexpressedinthispaperaresolelythoseoftheauthorsanddonotreecttheopinionsoftheAICPAorInadditiontobeingtheco-sponsorforourresearchproject,theIAASBhasataskforceconductingaseparateinternalproject,andisexploringwaystoimprovethecommunicationsoftheauditor’sreport.AsummaryoftheisctHiPerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 highlightsthataproperunderstandingofthedifferencebetweensociety’sexpectationsofauditorsandauditors’perceivedperformanceisthebestwaytostarttoreducetheexpectationgap.Porter,66)saysthatidentifyingwhereexpectationgapdifferencesarethewidestmakesappropriatecorrectiveactionalmostself-evident.Bytheinnovativeuseoffocusgroups,thisstudyisasignicantstepingainingthatunderstandingandencouragingthefreshthinkingneededtohelpbridgetheauditexpectationgap.Weorganizeourresearcharoundthreeoverarchingresearchthemes:Theme1:Overallperceptionsregardingtheauditandtheauditor’sreport;Theme2:Perceptionsregardingkeyconceptsincorporatedorthatcouldbeincorporatedinthecurrentauditor’sreport;andTheme3:Suggestionsandchallengesforimprovingthecommunicationoftheauditor’sLITERATUREREVIEWConcernsregardingtheauditor’sreportdatetotheearly1900s(Churchetal.2008;KingandCase2003;KohandWoo1998;PCAOB2010).From1948through1988,therewasagrowingperceptionthatthenancialstatementusers’interpretationsoftheauditor’sreportweredifferentfromthemessageauditorsintendedtoconvey.TheCohenCommission(1978)identiedseveralareasneedingimprovedcommunication.Inadditiontoconcernsaboutconfusionovermanagementandauditorresponsibilities,theCommissionindicatedconcernthatthestandardizedlanguagemadetheauditor’sreportasymbolthatusersdidnotcarefullyread.Nineyearslater,theNationalCommissiononFraudulentFinancialReporting(NCFFR)(1987)(theTreadwayCommission)suggestedthattheauditor’sreportshouldindicateclearlythattheintentisnottoprovideabsoluteassuranceofnomaterialmisstatementsresultingfromerrororfraudinthenancialstatements,andthatthereportshouldinformtheuseroftheextenttowhichtheauditorsreviewedandevaluatedthesystemofinternalaccountingcontrols(Kneeretal.1996).SASNo.58AuditorÕsReportIn1988,theAICPA’sASBissuedStatementsonAuditingStandards(SAS)Nos.53through61,collectivelyreferredtoastheexpectationgapstandards,toimprovecommunicationsbetweenauditorsandnancialstatementusers(Geiger1988;GuyandSullivan1988;Rousseyetal.1988;McEnroeandMartens2001).SASNo.58,ReportsonAuditedFinancialStatementsAICPAprovidesanewauditor’sreporttobetterpublicunderstandingoftheauditor’sroleRousseyetal.1988).Thenewauditor’sreportrequirestheauditortoaddresstheresponsibilitybeingassumedbytheauditor,thenatureofauditproceduresperformedinconductingtheaudit,andthedegreeofassurancebeingprovided.AfterissuanceofSASNo.58,severalstudies(e.g.,KellyandMohrweis1989;Milleretal.1993;Kneeretal.1996)showthatthenew(SASNo.58)auditor’sreporteffectivelyimprovesusers’abilitytodistinguishbetweenauditorandmanagementresponsibility.However,researchalsondsmisperceptionsbynancialstatementusers.Lowe(1994),forexample,ndsthatjudgeswereuncertainastonancialstatementresponsibility(i.e.,managementversusauditor).Somejudgesalsoperceivetheauditor’sroleasthatofapublicwatchdogorguardian,totheextentofexpectingtheauditortoactivelysearchforthesmallestfraud.Pringleetal.(1990)ndthatthechangedwordingdoesnotaffectusers’abilitytodetermineinvestmentattractiveness,andthatthenewwordingactuallymakesitmoredifcultforuserstodeciphertheintendedmessageoftheGeiger(1994)ndsthatusersstillaredissatisedwiththereportdespitethechanges.Incomparingtheexisting,shorterUnitedKingdomauditor’sreporttothenewU.S.auditor’sreport,Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 Hatherlyetal.(1991)andBrownetal.(1993)ndthattheSASNo.58auditor’sreportnotonlyimpactsuserperceptionsalongdimensionsincludedinthereport,butalsochangesuserperceptionsaboutthingsnotmentionedinthereport,suchasthecompany’slackoffraud.Hatherlyetal.(1991)callthislatterndingaStudiesoutsideoftheU.S.alsoconrmthelackofsuccessinreducingtheexpectationsgap.MonroeandWoodliff(1994),inanexperimentalsurveyofauditors,accountants,creditors,directors,shareholders,andstudents,ndthatthelong-formreportreducestheexpectationgapinsomeareas,butincreasesitinothers.Thegapdecreasesinareasaddressedbythewordingchanges,butactuallyincreasesinareasthatarenottheresponsibilityoftheauditor,suchaspreventingfraudandassessingthefutureprospectsofacompany.AnexperimentbyInnesetal.(1997)comparesauditorsandusersprovidedwiththeshortauditreportwithusersprovidedwiththeexpandedauditreport.Theexpandedauditreportclosesthegapinareasassociatedwiththeauditprocessandauditenvironment,whichwerethemainissuesaddressedbytheexpansionoftheauditreport.However,vedimensionsnotaddressedbytheexpandedauditreportmoveusers’perceptionsfurtherawayfromthatoftheauditors.Inparticular,theperceptionthatfraudwasnotpresentwasstatisticallysignicant,suggestingfurtherevidenceofthehaloeffectnotedinanearlierpaper(Hatherlyetal.1991).Gayetal.(1998)performanexperimentacrossauditors,companysecretaries,andshareholderscomparingthereviewreporttotheexpandedauditreport.Signicantdifferencesbetweenauditorsandtheusergroupsfortheexpandedauditreportpersistacrossallimportantaspectsoftheaudit,includingresponsibilities,reliability,anddecisionusefulness.Insummary,extantresearchsuggeststhatusersattendtochangesmadebytheSASNo.58auditors’reports.However,thenewformofreportleavesunchanged(andactuallymakesworse)manyoftheothermisperceptionsofusersinrelationtotheauditexpectationgap.PCAOBAuditingStandardNo.5AuditorÕsReportAsaresultoftheSarbanes-OxleyActof2002(SOX),auditsoflistedcompanies(issuers)mustcomplywithauditstandardspromulgatedbythePCAOB.Initially,thePCAOBadoptedtheexistingsetofASBauditstandards,butsoondevelopeditsownstandardauditor’sreport,includingelementsrelatedtotheeffectivenessofinternalaccountingcontrolovernancialreporting.Still,thePCAOBformofreportdoesnotappeartobeacompletesolution.InitsFinalReport,forexample,theACAPrecommendsthatthePCAOBundertakeastandardsettinginitiativetoconsiderimprovementstotheauditor’sstandardreportingmodelACAP2008,VII:13).IAASBInternationalStandardonAuditing700AuditorÕsReportThefactthatanotherformofauditreportwasproposedbytheIAASBin2003andadoptedinternationallyin2006providesfurtherevidencethattheexpectationgapstillexists.IntheexposuredraftissuedbytheIAASBfortheproposedauditor’sreport,thestatedobjectiveistoenhanceunderstandingoftheauditor’sroleandauditor’sreportIAASB2003).Theintroducedchangesincludethefollowing:agreaterdiscussionontheauditor’sresponsibilities;anotethattheauditorhascompliedwithethicalrequirements;anotethattheauditevidenceobtainedissufcientandappropriatetoprovideabasisfortheauditopinion;andanexplanationastowhytheauditorevaluatesinternalcontrol.ChongandPugrath(2008)examinewhetherthesemostrecentchangesreducetheexpectationgapbetweenshareholdersandauditorsand,notsurprisingly,ndthatitdoesnot,consistentwiththeextantresearchonpriorchangestothewordingofstandardauditors’reports.TheirndingsalsoPerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 showmoreperceptiondifferencesbetweenthesegroupsassociatedwiththelonger-formauditor’sreport,whichalsoisconsistentwithexpectationgapstudiesonthepriorauditreport(MonroeandWoodliff1994;Innesetal.1997).MovingAwayfromBoilerplateAreviewofliteratureontheauditor’sreportingmodelbyChurchetal.(2008)suggeststhatadditionalinformationmightenhancetheauditor’sreport,butthevalueofanyadditionsmaydiminishifthewordingofthestandardauditor’sreportremainsboilerplate.AreportbytheAuditQualityForum(AQF2007),fromasurveyofshareholders,comestoasimilarconclusion.Shareholdersbelievethecurrentauditreportistooboilerplateandoverlystandardized.Further,AQF(2007)outlinedthefollowingaspotentiallybeinghelpfultosomeshareholders:Moreinformationaboutemphasizedmattersandreferencestouncertaintyandfuturerisk;Discussionofanymaterialissuesencounteredduringtheauditandtheirresolution;Tailoredcompanyreports,ratherthanstandardizedreports;Alternativeaccountingtreatmentsconsideredandthereasonsforadoptingthetreatmentchosen,wherematerial;andMoreinformationonmaterialareasofjudgment,anddifcultorsensitiveissues.Churchetal.(2008)suggestthatresearchiswarrantedtoimprovethecontentoftheauditor’sreportsousersseesomethingbeyondsimplyapassorfailsignal.Theyalsonotethatsomestudiesevaluatethevalueofadditionaldisclosuresaboutmaterialitylevels,aswellasadditionalinformationabouttheauditor’sndings(e.g.,MansonandZamon2001).Churchetal.(2008)callforfurtherstudiesexaminingtheeffectofdifferentdisclosuresintheauditor’sreport.RESEARCHDESIGNToelicitstakeholders’perceptionsregardingtheauditor’sreport,weconductedfocusgroupswithvedifferentstakeholdergroups,includingpreparersofnancialstatements(CFOs),usersofnancialstatements(bankers,nancialanalysts,andnon-professionalinvestors),andexternalauditors.Thefocusgroupsareanestablishedmethodologyforexploratoryresearchintheaccountingprofession.Forexample,theAICPAusedfocusgroupstotestitsFeedthePigpublicserviceannouncementstoimprovenancialliteracy(Williamson2007).Myers(2002)explainshowCPAscouldconductfocusgroupstohelpaligntheirserviceswiththeneedsoftheirclients.ThePublicOversightBoard(POB)madeextensiveuseoffocusgroupstogatherinsightsfortheirmajorreport,ThePanelonAuditEffectivenessReportandRecommendations,commonlyreferredastheO’MalleyPanel(POB2000).TheInternalRevenueService(Shoemaker2008),theGeneralAccountancyOfceCrainandBean1998),andtheInstituteofInternalAuditors(Gray2008)allusefocusgroups.DuringconversationswithrepresentativesattheIAASBandPCAOB,wefoundthatgroupmeetingsforinformationgatheringhavebeenconductedhavingthecharacteristicsoffocusgroups,butwerenotexplicitlycalledfocusgroups.Incontrast,anextensiveliteraturesearchndsthatacademicresearchintheaccountingandauditingdomainrarelyusesfocusgroups(e.g.,Boritz2005).Focusgroupmethodshaveevolvedover60yearsoutofresearchdesignedbyPaulLazarsfeld,RobertMerton,andtheircolleaguestogaugeaudienceresponsestopropagandaduringWorldWarII(KiddandParshall2000).Themethodologyispopularinthesocialandhealthsciencesandinevaluationresearch.Theintentoffocusgroupsistoconveytopolicymakerstheimpactofchangedpoliciesperceivedbyindividuals,groups,andorganizations(FitzpatrickandBoulton1994).Thekeycharacteristicoffocusgroupsistheinteractionandgroupdynamicsoftheparticipants.Focusgroupparticipantscommentonandsometimeschallengeeachothers’comments.BristolandGray,Turner,Coram,andMock AccountingHorizonsDecember2011 Fern(1996)ndthatfocusgroupparticipantsperceivedthefocusgroupsasmoreexcitingandthanparticipantsineithersurveysorstructuredinterviews.AccordingtoFitzpatrickandBoulton(1994),focusgroupsareparticularlyusefulwhereresearcherswanttoidentifyarangeofperspectivesonissuesamongdifferentstakeholders—forexample,bridgingagulfinunderstandingbetweenprovidersofaserviceandtheintendedusers.Thedynamicsofafocusgrouparesuchthatindividuals’commentscansparkoffparticipantstorevealbroaderinsightsthanarepossiblefromindividualinterviews.Amajorobjectiveoffocusgroupsistoidentifyareasofagreementandcontroversytobetterunderstandhowperspectivesariseandaremodiedinagroup(CareyandSmith1994;KiddandParshall2000;ReedandPayton1997;Sim1998Basedontheiruseinotherdomains,focusgroupsseemtobeaveryappropriatewaytoexploretheperceptionsoftheauditor’sreportbykeystakeholderstoassistinreducingtheexpectationgap.Thefollowingparagraphsdescribepreparationsforthefocusgroups,facilitationofthegroups,andthemethodusedtosynthesizefocusgroupdiscussions.PreparingfortheFocusGroupsWeconductedthersttwostepsofourresearchinparallel;namely,arrangingthefocusgroupsandpreparingafocusgroupscript.Inkeepingwiththerecommendationinfocusgroupliteratureregardinghomogenousgroups,weplannedforeachcategoryofstakeholdertomeetseparately.Inaddition,wescheduledtheauditorfocusgroupsaftertheotherfocusgroupstosolicittheauditors’reactionstothecommentsandsuggestionsoftheotherstakeholders.WeusedalistofgeneralquestionsintheASB/IAASBRFPasastartingpointforthescript,whichthenwasexpandedtoincludequestionsbasedonourreviewofpriorexpectationgapliteratureandtoincludePCAOB-relatedquestions.Wethenorganizedthenalsetofquestionsaroundtheresearchthemespresentedearlier:overallperceptionsregardingtheauditandtheauditor’sreport,perceptionsregardingkeyconceptsincorporatedorpotentiallyincorporatedintheauditor’sreport,andsuggestionsandchallengesforimprovingtheauditor’sreport.Ascriptensurescoverageofallquestionsineachfocusgroup,butthescriptmustnotbeover-structuredwithtoomanyquestions.Thepurposeofthequestionsistostartdiscussionsandthenallowtheinteractionsanddiscussionstoruntheircourse,andforthefacilitatortoaskunanticipatedfollow-upandprobingquestions.AsTable1indicates,atotalof53individualsparticipatedinthefocusgroups.Theoriginalworkplanwastoconductonefocusgroupwitheachstakeholdergroup.However,weconductedtwofocusgroupswithCFOsandwithauditors.TherstCFOfocusgroupwasthepilottestforthescript,andweconductedasecondCFOfocusgrouplaterinNewYorkCity.Wealsoconductedtwofocusgroupswithauditors.Wefounditinterestingthattheauditorsintherstfocusgrouphadsomedifcultyarticulatingtheintendedcommunicationsoftheauditor’sreport,anddebatedamongthemselvesabouttherelationshipoflevelofassuranceandmateriality.Assuch,weconductedasecondfocusgroupwithauditorsfromanothermajorinternationalaccountingrmtoexpandonthosediscussions.FacilitatingtheFocusGroupDiscussionsAseachparticipantarrived,thefacilitatornotedthatperson’spositiononaseatingchart.seatingchartallowedthefacilitatortousetheperson’snameduringthefocusgroup,whichwould Havinganunequalnumberofparticipantsineachstakeholdergroupisnotanissue,sincewearenotconductingstatisticalanalysisofthequalitativeresults.Thefacilitatorwasoneoftheco-authorsandhasnearly20yearsofexperienceinconductingfocusgroupsforprofessionalorganizations.PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 beimportantlaterforidentifyingeachspeakerwhenthefacilitatorlistenedtotherecordingofeachfocusgroup.Atthebeginningofeachsession,thefacilitatordiscussedtheobjectivesofthestudyandexplainedthatparticipantcommentswouldremainanonymous.Afocusgrouprequiresamixofstructureandspontaneity.Duringthefocusgroups,thefacilitatorusedvarioustechniquestoencourageeachparticipant’sinvolvementandtoensurethattherewasnodominationofthediscussionsbyonlyafewparticipants.Thefacilitatorconductedtherstroundofresponsesforeachresearchquestioninround-robinfashion—alternatingbetweenproceedinginaclockwiseandcounter-clockwisedirectionforeachquestion.However,sinceacriticalaspectofthefocusgroupisobtainingreactionsfromotherparticipants,aseachparticipantprovidedhisorherinitialcommentstoaquestion,beforemovingtothenextpersoninthesequence,thefacilitatoraskedthegroupiftheyhadanyresponsestothosecomments.facilitatorwouldalsoaskfollow-uporprobingquestionsbeforemovingtothenextquestion.Generally,thefacilitatorletthediscussionsandinteractionsruntheircourse.However,ifanyparticipantseemedtobetakingtoolongwithhisorhercomments,thefacilitatorwouldtactfullyinterruptthatpersonbyaskingthegroupiftheyhadanyreactionstothespeaker’scomments.Thefocusgroupwiththenon-professionalinvestorsstartedwiththesamescript,butweadjustedtheprocessslightly.Theseparticipantsweremembersofaninvestmentclubthathasbeeninexistenceforapproximately12years,andrepresentedawiderangeofbackgrounds.Forexample,oneparticipantwasaCPAwhoworkedforalargenancialinstitution.AnotherparticipanthadaPh.D.inpsychologyandwasamarriagecounselor.ThemembersunderstoodbasicinvestmentterminologysuchasEPS,beta,cashow,andvariousnancialratios.Sinceourresearchfocusedontheterminologyintheauditor’sreport,withthisgroup,werstconcentratedonthewordsandphrasesinauditors’reports,suchaslevelofassuranceandmateriality,toexplorehowthesenon-professionalinvestorsinterpretedthosewordsandphrases.WethenexploredtheirreactionstothelistofspecicresearchquestionsintheASB/IAASBRFP.Wesynthesizedtheircommentswiththeotherfocusgroups’comments. TABLE1NumberandSourcesofFocusGroupParticipantsNumberofParticipantsSourceFinancialstatementpreparers(CFOs)15LosAngelesandNewYorkCityFinancialExecutivesInternationalchaptersBankers(lendingofcers)9LargeanonymousinternationalbankAnalysts8NewYorkCityCFAInstituteChapterNon-professionalinvestors7ALosAngelesinvestmentclubExternalauditors(partnersandmanagers)14Twolarge,anonymousinternationalaccountingrmsTotal53 Foracomprehensivediscussionofallaspectsofconductingfocusgroups,agoodsourceistheTheFocusGroupMorganandKrueger(1997).Thefacilitatorwouldneverinterruptaparticipant’sinitialcommenttoaquestion.Insomegroups,however,theresometimesmaybeaparticipantwhowantstoponticateoneveryone’scomments,andthatmustbemanagedtactfully.Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 DebrieÞngsandFocusGroupFollow-UpsNeartheendofeachfocusgroup,thefacilitatorthankedtheparticipantsandencouragedthemtocontacthimwithadditionalcomments.Follow-upemailstotheparticipantsagainthankedthemfortheirparticipationandencouragedthemtosendanyadditionalcomments.Inaddition,wecontactedsomeparticipantsdirectlytoclarifysomepointtheymadeduringthefocusgroups.SynthesizingtheFocusGroupDiscussionsSynthesisoffocusgrouprecordingsisaniterativeprocesstranscribingeachrecording.Aftertranscribingallrecordings,theactualsynthesisprocessbeginstocreateonecomprehensivefocusgroupdocument.Thedraftsynthesizeddocumentinvolvedseveralroundsofreviewswiththeresearchersconcerningeditingandclarifyingthediscussions.RESULTSThefollowingisasynthesisofthediscussionsfromthesevenfocusgroups.Weorganizethediscussionaroundthethreeresearchthemes.Theme1:OverallPerceptionsRegardingtheAuditandtheAuditorÕsReportThepurposeofthediscussionquestionsrelatedtoTheme1wastoobtainperceptionsregardingthenancialstatementauditandtheauditor’sreporttakenasawhole.ThekeypointsthatcameoutofTheme1discussionswereasfollows:Stakeholdersvaluetheaudit,buttheycannotassignameasurablevaluetotheaudit.Usersconsidertheauditor’sreporttobeboilerplateandtypicallydonotreadtheauditor’sreport,andauditorsdonotexpectthattheydo.Therewasaconsensusthat,conceptually,areplacementforthecurrentunqualiedauditor’sreportcouldbeastampthatsaidO.K.,alongwiththestandardsusedbytheauditorandthenameofthermthatconductedtheaudit.UserslooktoseeifthereportincludesanunqualiedopinionandwhetheraBig4rmconductedtheaudit.Ifyesonbothcounts,thatisthelasttimetheylookatthereport.IfaBig4rmdidnotconducttheaudit,theuserdosomeresearchtodeterminethereputationofthermsigningtheauditor’sreport.Anunqualiedauditor’sreportdoesnotimplyanythingaboutthequalityofmanagementorwhetherthecompanyisagoodinvestment(unlesstheauditor’sreportincludesagoing-concernopinion).Oneparticipantstatedthatonereasonitisdifculttoplaceavalueontheauditisthatthenancialstatementswiththeauditor’sreportisonepackage,anditisthepackagethathasvalue—notthetwoseparatepartsinisolation.Asonebankersaid,[Unaudited]nancialstatementswouldjustbejunk.Participantsinthedifferentgroupsalsofrequentlystressedthepointthatanauditisacomplianceissuethathastobedonewhetherithasvalueornot.Oneauditorsaidtheauditor’sreportgivesthereaderofthenancialstatementscomfortwiththesubstanceofthenumbers.Anotherauditorsaidthereportindicatesthenancialstatementsarepresentedfairlyaccordingtogenerallyacceptedaccountingprinciples.Athirdauditorsuggestedthereportisalegalliability-releasingdocumentfortheauditor,butitisnotaseffectiveinreleasing GrayandRatzinger(2010)foranin-depthdiscussionofstakeholders’perceptionsregardingnancialstatementauditsconductedbyBig4accountingrms.PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 liabilityasacontractualagreementwouldbe.Hesaidtheauditor’sreportisaconcludingdocumentthattellstheclienttheauditorhasfullledhis/herresponsibilitiesanddescribestheauditor’sconclusion.Hesaid,Atitsheart,theauditor’sreportissomethingwrittenbyattorneystolimitorreleaseliability.Thenon-professionalinvestorsindicatedthattheauditisimportant,buttheyassumetheauditorperformedtheauditproperlyandthecompaniestheywouldconsiderfortheirportfoliotheaudit.Inadditiontonotreadingtheauditor’sreport,theinvestorssaidtheyneverusethenancialstatementsinannualreports,10-Ks,or10-Qspublishedbythecompanies.Instead,theyreliedonsecondarysources,suchasTheValueLineInvestmentSurveyortheMotleyFoolandsimilarwebsites.Thisrelianceonsecondarysourceswasnotana¨vedecisionontheirpart.TheybelongtotheNationalAssociationofInvestmentClubs(NAIC),andtheNAICguidelinesrecommendusingavarietyofnancialratiosquicklyextractedfromsecondarysources.Inaddition,thesesecondarysourcesprovidebuy/sell/holdrecommendationsregardingthecompanies,whichareimportantinputstotheirinvestmentdecisions.Focusgroupparticipants’observationsregardingthestandardizednobody-reads-itaspectoftheauditor’sreportsupportndingsofpriorresearch,suchastheChurchetal.(2008)commentsregardingtheauditor’sreportbeingacerticate.Eventheauditorsagreed,conceptually,thatanstampcouldreplacethecurrentauditor’sreport.AdisconcertingaspectoftheTheme1discussionsisthatnoapparentprogresshasbeenmadesincetheCohenCommissionexpresseditsconcernsthatstandardizedlanguagemadetheauditor’sreportasymbolnotcarefullyread(CohenCommission1978).Inotherwords,itappearsthatSASNo.58,PCAOBAuditStandard5,andISA700simplyhavereplacedonesetofboilerplatecontentinpriorunqualiedauditors’reportswithanothersetofboilerplate-basedauditors’reports.Theme2:PerceptionsRegardingKeyConceptsIncorporatedorThatCouldBeIncorporatedintheCurrentAuditorÕsReportAfterdiscussingtheoverallperceptionsoftheauditandtheauditor’sreportunderTheme1,thefocusgroupdiscussionsshiftedtothespecicconceptsincluded(orpotentiallyimplied)intheauditor’sreport,includinglevelofassurance,materiality,sampling,internalcontrols,fraud,andgoing-concern.ThekeypointsthatcameoutofTheme2discussionsfollow:Intheabstract,usersknowauditorsdonotprovideabsoluteassurance.Buttheconceptsoflevelofassurancereasonableassurance,andhighlevelofassurancearefuzzytoallthestakeholders,includingtheauditors.Tovaryingdegrees,userslinktheconceptoflevelofassurancewiththatofmateriality.Somestakeholders,includinganumberofauditors,believethetwoconceptsarestronglylinked(theyareUsershaveabasicunderstandingofmaterialityandsampling,buttheirassumptionsastomaterialitylevelsandsamplesizedifferconsiderably.Iftheauditor’sreportissilentonfraudandgoing-concern,usersbelieveauditorstestedthesetwoissuesthoroughlyandtherewerenoproblems.UsersdonotbelievethatinconductinganASB-basedaudit,auditorsareforminganopinionontheinternalaccountingcontrols.Mostpreparers,users,andauditorsinthefocusgroupsbelieveaPCAOB-basedaudit,withitsexplicitrequirementforaninternalcontrolopinion,issuperiortoanASB-basedaudit.PreparersandusersbelievethePCAOBauditsaremorethorough.Auditorsbelievethenumberstheclientgivesthemarebetter,becausetheclientworriesthatnumberswillleadtoanegativeopinionontheinternalcontrols.Below,wefurtherelaborateonsomeofthespecicdiscussionsfromfocusgroupparticipants.Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 LevelofAssuranceandMaterialityThefocusgroupscripthadseparatequestionsregardinglevelofassuranceandmateriality;however,thediscussionsofthesetwoconceptsquicklyblendedtogether.OneofthemainconcernsleadingtoissuanceofSASNo.58in1988wasthatusersexhibitedapparentmisperceptionsregardingtheintendedlevelofassurance.AstudycommissionedbytheIAASBfoundagreatdealofvariabilityinperceivedlevelsofassurance,evenamongtheassuranceprovidersthemselvesHasanetal.2005).Morethan20yearsafterissuanceofSASNo.58,theASBandIAASBstillhaveconcernsthatsomeusersbelievetheauditprovidesabsoluteassurance(AICPA/IAASB).ThePCAOBhassimilarconcerns(PCAOB2010ThesecondsentenceofthesecondparagraphintheSASNo.58auditor’sreportcoversboththelevelofassuranceandmateriality.Thisparagraphsays,inpart,weplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthenancialstatementsarefreeofmaterialmisstatement(emphasisadded).Focusgroupparticipantsseemtohaveabasicunderstandingofreasonableassuranceinthatnoneoftheparticipants,includingthenon-professionalinvestors,believesanauditprovidesabsoluteassurance.However,theparticipantsdidfrequentlyexpressaconcernthattherearenancialstatementusers—otherthanthemselves—wholikelydobelievethatauditsprovideabsoluteassurance.Eventhoughtheparticipantsdidnotbelievethatauditorsprovidedabsoluteassurance,levelofassuranceisstillafuzzyconcepttotheparticipants—eventotheauditors.Thisfuzzinessisunderstandable,sincetheauditstandardsdonotoperationalizeorquantifyreasonableassurance.SASNo.1(AICPA1972),Paragraph.02,introducesreasonableassurance:Theauditorhasaresponsibilitytoplanandperformtheaudittoobtainreasonableassurance.SASNo.104,AmendmenttoStatementonAuditingStandardsNo.1,CodicationofAuditingStandardsandProcedures,hasfourparagraphs(AICPA2006,paras..10–.13)thatdiscussreasonableassuranceinmoredetail.Paragraph.10indicatesthatreasonableassuranceishighassurance.However,similartothemeaningofreasonableinSASNo.1,SASNo.104doesnotdene,quantify,oroperationalizehighassurance.Acrossallthefocusgroups,participantsthoughtlevelofassuranceandmaterialityarecloselyrelated,butthereweredebatesastoexactlyhowtheyarerelated.Manyauditorsexpressedabeliefthatthelevelofassuranceandmaterialityareessentiallythesamething,butotherauditorsstronglydisagreed.However,auditorswhodisagreedhadadifculttimetryingtoexplainhowthetwoconceptsdiffer.Someparticipantsviewmaterialityasasurrogateorindicatorforlevelofassurance.Forexample,allelsebeingequal,userswouldfeeltheyarereceivingahigherlevelofassurancewherematerialitywas1percentofassetsversusanauditwherematerialitywas2percentofassets.The1percentmaterialitylevelwouldrequiremoreauditwork,increasingthelikelihoodofndingerrorsandfraud.Therefore,userswouldhavemorecondence—ahigherlevelofassurance—inthosenancialstatements.Althoughmaterialitymaybemorequantiablethanlevelofassurance,nancialstatementusergroupshadverydiverseperceptionsregardingtheconceptofmateriality.Someusers,particularlythenon-professionalinvestors,wereverysurprisedthatmaterialitylevelscanbemillionsofdollarsforlargecompanies.CFOsseemedtohavethebestunderstandingofmaterialitybecausemosthadpriorexperienceworkingasBigNauditors.SamplingAllparticipantsunderstoodthatauditorsusesamplingaspartoftheaudit.However,aswithmateriality,auditorsdonotdisclosesamplesizes,andusers’perceptionsregardingsamplingvariedwidely.Non-professionalinvestorsthoughtsamplesizesaremuchlargerthanthosetypicallyusedPerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 byauditors—oneinvestorthoughtsamplesizesare20percentto30percentofanaccountbalanceormore.Someparticipantsthoughtsamplingismorescienticthanthejudgmentalmethodsauditorsfrequentlyuse.Onebankersaidtheauditorsuseactuarialtableswhenselectingsamplesizes,andhewasverydisappointedwhenthefacilitatorsaidthatauditorsusenon-statisticalsamplingfarmorefrequentlythanstatisticalsampling.InternalControlsandInternalControlAuditsOnesignicantdifferencebetweenASBandPCAOBauditstandardsisthatPCAOBstandardsrequiretheauditortoexpressaseparateopinionontheclient’sinternalcontrolovernancialreporting(ICFR).ParticipantsgenerallyindicatedtheydonotassumeanSASNo.58auditor’sreportimpliesanythingaboutthequalityoftheinternalcontrols.Infact,thebankersindicatedtheysometimesconducttheirowninternalcontrolreviewofthosepartsofacompanyseekingaloan,suchascontrolsoverpledgedaccountsreceivables.Ingeneral,theCFOsbelievethatPCAOB-basedauditsaresuperiortoASB-basedaudits,andoneCFOindicatedthatanunqualiedopiniononICFRincreaseshiscondenceinthenancialstatements.HesaidSOXSection404activitieshaveincreasedsignicantlytheamountoftimeauditorsareathiscompany,andtheauditrequiresmoredocumentation,moretesting,morerigorousauditprocedures,andtheparticipationofmorepeople.Analysts,ingeneral,thoughttheICFRopinionprovidesadditionalinformation,includinginsightsintocorporategovernance.OneauditormentionedthathebelievedtheinitialnancialstatementnumberspresentedtotheauditorsbytheirclientsarenowmoreaccurateunderPCAOB-basedaudits,becausetheclientknowsthatanyadjustmentmayresultinadverseopinionsregardingICFR.However,anotherauditorexpressedaconcernthatprivatecompaniestypicallyhaveweakerinternalcontrols,particularlywithsegregationofduties.Insuchcases,internalcontrolauditsforprivatecompanieswouldalwayshavesomenegativeaspectstothem,andthevalueofthesenegativereportstonancialstatementuserswasunclear.FraudAnunqualiedauditor’sreportdoesnotexplicitlysayanythingaboutfraud.Theparticipants,however,assumeauditorslookedforfraudandfoundnone.Inaddition,someauditorsvoicedconcernthatanumberofusersbelievethelevelofassuranceormaterialitylevelappliedtotheoverallauditalsoappliestofraudtesting.Accordingtotheparticipatingauditors,fraudtestingisnotsubjecttothesamelevelofassuranceormaterialitylevelasareotheraspectsofanaudit.Going-ConcernTherewasageneralconsensusamongparticipantsthatagoing-concernopinionprovidesimportantinformationtonancialstatementusers.Usergroupsassumedthatiftheauditor’sreportdoesnotincludeagoing-concerncomment,theauditorsperformedanadequategoing-concernanalysisandconcludedgoing-concernwasnotanissue.However,thereweredifferencesinperceptionbetweentheauditorgroupsandtheusergroupsastothedegreeofanalysisperformedbytheauditors.Auditorsstressedtheirgoing-concernanalysesconsistprimarilyofforecastingcashowsandotherkeynancialdataforoneyeartodetermineifthecompanyhassufcientliquiditytooperatethroughthenextyear.Theauditorsdonotevaluatemanagement,thecompany’sbusinessmodel,orthequalityorcompetitivenessofcompanyproductsaspartoftheirgoing-concern AccordingtoHalletal.(2002),auditorsintheirsurveyusednon-statisticalsampleselectionmethodsfor85percentofallaudits.Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 analysis.Inotherwords,unliketheusers’perceptions,auditorsdonotperformananalysisthataWallStreetnancialanalystmightperformtodetermineifacompanyisagoodinvestment.Theme3:SuggestionsandChallengesforImprovingtheCommunicationoftheAuditorÕsAskingparticipantstosuggestwaystoimprovetheauditor’sreportcreatedthemostpolarizingpartofthefocusgroups.AsreectedintheTheme1summary,therewasstrongconsensusthatastampsimplysayingcouldreplacethecurrentunqualiedauditor’sreport.However,theTheme2discussionsofthedetailedlanguageoftheauditor’sreportshowedthatsignicantdifferencesinperceptionsexist,andevenauditorshaddifcultydeningandagreeingonthecommunicationsoftheauditor’sreport.Whenitcametodiscussingrecommendationstopotentiallyimprovetheauditor’sreport,thereweremorespiriteddiscussionsoftheprosandconsofeachrecommendation.Table2summarizesthoserecommendations,rationalesfortherecommendations,andtheconcernsassociatedwiththerecommendations.ThefollowingparagraphsdetailthekeypointscapturedinTable2.IncludetheAuditor’sSignatureIAASBauditstandardsallowtheengagementauditorpartnertosigntheauditor’sreportwithhisorhernameinadditiontotherm’sname,andsomejurisdictionsactuallyrequirethepartnertosigntheauditor’sreportinthatmanner.Respondingtothatidea,oneCFOsaid,SinceI’mpayingalotofmoneytotherm,Iwouldrathersee[just]therm’snameontheauditor’sreport.AnotherCFOdidnotliketheideaforthreereasons.First,theauditistheaccumulatedworkofmanypeople,andusersarerelyingonthereputationoftherm.Second,whatistheimpactifthespecicauditpartnerwaswellrecognizedintheprofession,butretires,andajuniorpartnertakesovertheaudit?Willthathaveanegativeimpactinthenancialmarkets?Third,ifapartnersignstheauditor’sreport,thentheauditorwillwanttodomoreauditworkbecausehis/herpersonalreputationisontheline.AnotherCFOpointedoutthatifitaddedprestigetotheaudittohavetherm’sindustryexpertsigntheauditor’sreport,theexpert’ssignaturewouldendupappearingoneveryauditor’sreportforthatparticularindustry,sothentherewouldbeaconcernastohowmuchtimethatpartnerwasactuallydedicatingtoeachaudit.Becauseofthedemandforthesepartners,thehourlyrateofthesepartnersprobablywouldincreasesignicantly.Thebankersalsohadamixedreactiontothisidea.SomebankersalreadyhaveacloseworkingrelationshipwiththeclientandtheCPArmconductingtheaudit,sotheyfrequentlyknowwhotheauditorpartnerisforaspecicborrower.Otherbankersthoughtitwouldbeusefulinformationasacontactpointiftheyhadfollow-upquestions.Anotherbankerthoughthavingtheauditor’snameonthereportwouldimprovetheperceptionofauditquality.Oneanalystsaidhiscolleaguesdiscussedtheideaoftheauditpartnersigningtheauditor’sreport,andgenerallyagreedtheywouldhavemorecomfortwiththeauditifthepartnersignedthereport.However,anotheranalystarguedthatifthepartnersignedthereport,thereportwouldbecomeevenmoreboilerplatebecausetheauditorwouldwanttomakesuretherewasabsolutelynothingcontroversialorexceptionalinthereport.Intermsofthevalueofawell-knownpartnersigningthereport,theanalystsdidnotappeartohaveastrongopinion,eitherpositiveornegative.LiketheCFO’sconcern,theanalystsraisedtheconcernthatifthestarpartnerwassigning Adiscussionregardingtheengagementpartner’ssignatureappearedintheU.S.Treasury’sAdvisoryCommitteeontheAuditingProfession(ACAP)FinalReportACAP2008).Specically,Recommendation6(ACAP2008,VII:19)states:UrgethePCAOBtoundertakeastandard-settinginitiativetoconsidermandatingtheengagementpartner’ssignatureontheauditor’sreport.PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 TABLE2 ChangestotheAuditorÕsReportSuggestedbyParticipants RecommendationRationaleConcerns Includeengagementpartner’s signatureontheauditor’s reportinadditiontothe rm’ssignature. Wouldimprovequalityofaudit becausetheengagementpartner wouldtakeexplicit responsibilityforthereport. Itistheauditrm’sresources, practices,andstandardsapplied totheaudit,soonlyitsname shouldappear. Alreadypracticedandrequiredin somecountries(e.g.,Germany, Sweden,andFinland). Itdoesnotchangetheengagement partner’sresponsibilitybecause he/shesignsoffontheaudit internally. Saysomethingexplicitabout fraudandinternalcontrol testing. Manageusers’perceptions concerningfraudandinternal controltesting. Moredisclosureswillmeanhigher auditfees. Attachmanagementletter.Alreadyrequiredbysomethird parties. Auditorsmaywanttodo additionalauditingofanything disclosedintheletter. Italreadyexists;therefore,itisa  freegood.  Itprovidesusefulinternalcontrol information. Themanagementlettermaybe cleansedthroughnegotiations betweentheclientandthe auditorbeforedistribution. Itwilldisclosethepartsof nancialreportingonwhich managementisfocusing.Negativecommentsaboutthe client’sinternalcontrolsmay negativelyaffecttheclient,but havelittletodowiththequality oftheauditednancial statements. Disclosematerialitylevelsand samplinginformation. Bydenition,userscanbe expectedtomisinterpretwhat theauditor’sreportis communicatingiffundamental auditparametersarenot explicitlydisclosed. Iftheseparametersaredisclosed, clientswilltrytogamethe systemandmayshopfor auditorswhousehigher materialitylevelsandsmaller samplesizes. Tocontrolauditorrisk,the auditorswillaudittoeven tighterparameterssotheyhave fullcondencethatthedisclosed parametersareachieved. Materialityismorethanjusta number;ithasaqualitative aspecttoit. Addgranularitytotheauditby providing  grades  toan unqualiedopinion,orby givingseparateopinionson keyelementsofthenancial reports. Providesuserswithmore informationabouttheclient.For example,didtheypasstheaudit withyingcolors(receivedan A),ordidtheyjustbarely achieveanunqualiedopinion (receivedaC). Mayrequiremoreauditing. Howwouldusersinterpret differentgradesfromaBig4 versusanon-Big4auditrm? Howwouldusersinterpret differentgradesfromoneyear tothenext? (continuedonnextpage) 674 Gray,Turner,Coram,andMock AccountingHorizons December2011 numerousauditreports,thenhowmuchtimeisthepartnerspendingoneachclient’saudit.However,somedidseesomevalueinhavingasenior-levelpersonassociatedwithaparticularAlthoughoneauditorthoughttheideawouldincreasehisreputation,themajorityoftheauditorsdidnotsupportthisidea.Signingtheauditor’sreportdoesnotchangetheirresponsibilityorliabilitybecausetheyalreadysignoffinternallyontheaudit.Oneauditorexpressedconcernsabouttheprivacyissueassociatedwiththepartner’snameonthereport.Anotherauditorsaidateamfollowingrmproceduresandstandardsperformstheaudit,soitisappropriatethatthereportincludejusttherm’sname.Theauditorsdidnotbelievethathavingtherm’sindustryspecialistsignatureontheauditor’sreportwouldsignicantlyimprovetheaudit,buttheywereconcernedusersmightbelievethatauditwassomehowsuperior.Theauditorsalsowereconcernedthatitwouldspreadaauditortoothinlytoassignhimorhertoallauditsrequestedbyclients.Inaddition,starauditorsprobablycoulddemandahigherhourlyrate.Themethodofassigningnewer,lessfamouspartnerstoauditsalsowasaconcernoftheauditors.SayMoreaboutInternalControlsinASB-BasedAuditor’sReportSomeparticipantssuggestedtheASB-basedauditor’sreportshouldincludetheauditteam’sconclusionabouttheirabilitytorelyontheclient’sinternalcontrols,theircontrolriskassessment,andhowtheydesignedtheirauditproceduresbasedonthatassessment.Theparticipantswantedtoknowthecontextbywhichtheauditteamestablisheditsauditproceduresandtestwork.Forpubliccompanies,thePCAOBrequiresextensivecommunicationswiththeauditcommittee,includingidenticationofcriticalauditareas,thedegreeofrelianceoninternalcontrol,andissuesthatsurfacedduringtheaudit.Fornon-publiccompanies,focusgroupparticipantssuggestedtheAICPAadoptsimilarreportingstandards.SaySomethingExplicitaboutFraudAsmentionedearlier,ifthereisnomentionoffraudintheauditor’sreport,allnonauditorparticipantsassumetheauditorslookedforfraudandnonewasidentied.Topreventmisinterpretationsregardingfraud,somenonauditorparticipantssuggestedtheauditor’sreport TABLE2(continued)RecommendationRationaleConcernsAddinformationthatdescribesauditplanningandsubsequentdiscussionswithmanagement.Wouldimproveusers’understandingofhowtheauditorsarrivedattheiropinion.Woulddriveupauditcosts.MuchofthisisnowexplicitlyrequiredinSASNo.114. Althoughtheauditor’sreportinSASNo.58issilentoninternalcontrol,alaterinterpretation,AU9508ReportsonAuditedFinancialStatements:AuditingInterpretationsofSection508AICPA2008b),indicatesanauditormayaddlanguagetotheauditor’sreportregardingtheirlimitedinternalcontrolprocedures.Thesuggestedsentencetoincludeintherstparagraphis,Anauditincludesconsiderationofinternalcontrolovernancialreportingasabasisfordesigningauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheCompany’sinternalcontrolovernancialreporting.Accordingly,weexpressnosuchopinion.PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 shouldincludeaspecicstatementregardingfraud.Anauditoralsosuggestedtheauditor’sreportshouldsaysomethingaboutfraudbecausethepublicbelievestheauditor’sjobistodetectfraud.Anotherauditoraddedthatthereneedstobestrongerlanguageregardingthelimitsoftheauditandthesubjectivenatureofthenancialstatements.However,anotherauditorhadacontraryviewandsaidthateveniftheauditor’sreportwas20pageslongwithstrongerlanguage,iftheclientfails,theauditorsaregoingtobesuedforthatfailure.Oneauditorsuggestedtheradicalideathatreviewingthelastthreeyearsofclientemailsshouldbearequiredpartofeachaudit.ThiswouldbebetteratferretingoutfraudthanSOX-relatedactivities.Hebasedthissuggestiononthecommentshereceivedfromthefraudandforensicspecialistswithinhisrmwhosaytheskeletonsarealwaysintheemails.AttachtheManagementLettertotheAuditor’sReportAlthoughtheexactrequirementsandsuggestedwordingvary,SASNo.115(AICPA2008aAS5(PCAOB2007),andISA700(IAASB2010)eachrequiretheauditortocommunicateinwriting,tomanagementandindividualschargedwithgovernance,anysignicantinternalcontroldecienciesormaterialweaknessesidentiedduringtheaudit.Atleastoneparticipantineachfocusgroupraisedtheideaofincludingthiswrittencommunication(referredtohereinasthemanagementletter)withtheauditor’sreport.Thissuggestioninitiallyseemedtobeasincetheauditrmalreadyprovidesthismaterialtoitsclientswhenappropriate.SomeCFOssaidthatvariousthirdpartiesalreadyrequireauditorstosubmitthemanagementletteralongwiththeauditor’sreport.Thebankersconrmedtheydosometimesrequestthemanagementletterifinternalcontrolisimportanttotheunderlyingloan(e.g.,accountsreceivableispledgedascollateralfortheloan).Thedistributionofmanagementletterstorecipientsotherthantheauditclientraisedthequestionofwhethertheletterswouldgothroughacleaningprocess,wheremanagementaskstheauditortoremove,change,ortonedownsomecomments.Nevertheless,asoneanalystsaid,evenifthenalcontentsofthemanagementletterwerenegotiated,itstillwouldbebetterthannomanagementletterbecauseitwouldindicateareasmanagementiscurrentlyworkingtoimprove.Onthedownside,anauditorsaidthatmanagementletterscouldbeparticularlysensitiveissuesforprivatecompaniesbecauseamanagementlettermayincludecommentsthatmaybeembarrassingtotheclient,buthavenothingtodowiththeauditopiniononthenancialstatements.Theauditorgaveanexample:Whatiftheaccountingdepartmentisunderstaffed?Theauditorcancompensateforthisintheirauditprocedures,buthowwillusersofthenancialstatementsinterpretacommentinthemanagementlettersuggestingtheaccountingdepartmentcoulduseataxexpertoradditionalhigher-levelaccountingtypes?DiscloseMaterialityIfstandardsetterswantnancialstatementuserstointerpretcorrectlythelevelsofassuranceprovidedbytheauditor’sreport,itisclearfromtheTheme2discussionsthatsomechangestotheauditor’sreportareneeded.Sinceparticipantsexpressedaconnectionbetweenlevelofassurance TheexpandedISA700reportdoesstate,Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementofthenancialstatements,whetherduetofraudorerrorIAASB2010).Werecognizethatmanagementletterspredatetheaforementionedauditstandardsandcanincludemorethancommunicationsregardingtheinternalcontrols,buttheparticipantscommonlyusethetermmanagementletterbeall-encompassing,andintheirdiscussionsdidnotdistinguishbetweenthecommunicationsoninternalcontrolsandtraditionalmanagementletters.Asseeninthediscussion,whenparticipantstalkedaboutmanagementletters,theywereaddressingtheinternalcontrolreportingaspectsofthecommunication.Gray,Turner,Coram,andMock AccountingHorizonsDecember2011 andmateriality,disclosingmaterialitymaybeasignicantsteptowardclosingtheexpectationgap regardinglevelofassurance. Preparerandusercommentsaboutdisclosingmateriality. AminorityofCFOsthoughtitwasa goodideaforauditorstodisclosematerialityinformation,arguingmoreinformationisbetterthan lessinformation.MostCFOs,however,expressedconcernsabouthowdisclosureofmateriality wouldchangetheauditor’sriskproleandincreaseauditfees.AsoneCFOindicated,theauditor’s reporthasevolvedtoitscurrentstateofbeingsubjecttoreviewsbythecourtsformanyyears,and anychangestothereportmaychangetheauditor’slitigationrisk. SomeCFOsstateditisgoingtobeimpossibletoagreeonacommondenitionofmateriality becauseeachaccountingrmhasadifferentdenitionofmateriality,andmaterialityalsoincludesa qualitativeaspectthatgoesbeyondreportingmaterialitynumbers(e.g.,1percentofrevenue).One CFOsaid,  Itisaslipperyslope—you’regoingtoendupwitha16-pageauditor’sreport.  Another CFOsaid,asapracticalmatter,peoplemaynotunderstandwhythenumbersaredifferentfor differentcompanies.AnotherCFOaddedthatdisclosureofmaterialitylevelsintheauditor’sreport wouldrequiresomestandardizationtoreduceanyconfusionresultingfromcompaniesusing differentpercentages(1percent,2percent,etc.)and/ordifferentbases(revenue,netincome,assets, etc.)tocalculatemateriality. Oneconcernvoicedbyabankerwasthatadditionalinformationwould  justgetintheway.  Healsofeltthatbankers—insteadofauditors—wouldstartsettingmaterialitylevels.Another bankersaiduserseitherfeelcomfortablewiththenancialstatementsascurrentlypresentedorthey donot,andthedisclosedmaterialitylevelwillhavelittleornothingtodowiththatcomfortlevel. SimilartotheCFOcommentabove,abankerpointedoutthatsomeone(i.e.,standardsetters)would havetoincludebenchmarkinformationsouserswouldknowiftheauditorwasvaryingfrom typicalpractices.Thebankersbelievedauditorswouldviewtheseadditionaldisclosuresas increasingtheirriskand,therefore,wouldwanttoconductadditionalauditwork,resultinginan increaseintheauditfees. Ananalystsaidhercolleaguesfrequentlyhaveaskedwhyauditorsdonotdisclosethe materialitylevelsotheanalystscoulddecidewhetherthatlevelisadequatefortheiranalysis.Some analystsinthefocusgroupthoughtthisdisclosurewasagoodidea.Oneanalyst,however, expressedaconcernthatcompanieswouldtryto  gamethesystem  and,forexample,keepany fraudulentactivitiesbelowthedisclosedmaterialitylevel.Anotheranalystsaidhavingmore information,includingmaterialitylevels,mightbegood,butitisnotasubstitutefortheanalysts askingmorequestionsofmanagement.Inotherwords,auditednancialstatementsarethestarting pointoftheiranalysisthat,subsequently,willgeneratefollow-upquestionsforthecompany’s management. AuditorsÕcommentsaboutdisclosingmateriality. Similartoananalyst’scommentsabove,a concernexpressedbysomeauditorswasthatsomeclientswouldtryto  gamethesystem.  Another concernwasthatcompanieswouldgravitatetowardauditorswhousethehighestmaterialitylevels. AnotherauditoraddedthatdisclosingmaterialitylevelswouldworkonlyiftheAICPAandthe PCAOBsetmaterialitystandardsandrequiredafootnotesuchas  thematerialitylevelwas2 percentofassets,inaccordancewithAICPAorPCAOBstandards.  Anotherauditoraddedthat therecouldnotbejustonematerialitystandardbecauseforsomeclients,assetsmakethebetter base,butrevenuewouldbeabetterbaseforotherclients.Anotherauditorsaiditisgoingtoconfuse theusersiftheytrytocompareonecompanywhosematerialitywasbasedonassetsandanother companywhosematerialitywasbasedonrevenue.Anotherauditorcommentedthatiftheauditor includesonematerialitylevelintheauditor’sreport,theuserisgoingtoassumeeverylineitemon eachnancialstatementwastestedtothesamematerialitylevel,whichisnottrue. Oneauditorsaidatthebeginningoftheauditthatthereisadefaultvalueformateriality,butas theauditprogresses,therearequalitativeandsubjectiveaspectsthatalsoareassociatedwith PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReport 677 AccountingHorizons December2011 materiality.Theauditorsaidsignicantprofessionaljudgmentisassociatedwithmateriality numbers.Assuch,disclosingmaterialitynumbersalonedoesnotcapturethefullconceptof materiality.Accompanyingmaterialitydisclosureswouldbeanexplanationastowhatthe materialitylevelwas,andwhytherewereanyadjustmentsforthingssuchasdebtcovenantsor fraudmatters. Oneauditorsaidhelikedtheideaofdisclosingmateriality,andsuggestedtheauditorcouldadd anotherparagraphtotheauditor’sreportthatprovidedmaterialityinformation.However,heasked thatifthedisclosuresaid,  inouropinion,theaccompanyingincomestatementcouldbeoffby$20 million,whichwewouldnotconsidermaterial,  howwouldthatinformationchangetheviewsof theusersofthenancialstatements? Anotherauditorsaidthatauditstandardswouldhavetoprovideguidanceastowhatthe materialitynumbersshouldbe,andthatthetrendprobablywouldbetodecreasethemateriality levelsbelowthatguidancejusttobesafeorconservative.Athirdauditoragreedthatthereported materialitylevelsprobablywoulddecrease,andtheauditorlikelywoulduseastill-lowerinternal materialitylevelfortheirauditwork,whichwouldincreaseauditworkandfees. Echoingthesepoints,afourthauditorexpressedaconcernthatusersofnancialstatements wouldnotreallyknowwhattodowithmaterialitydisclosures.Otherauditorsagreedthatitwould benecessarytoprovidesomeformofeducationsouserswouldknowwhatmaterialitynumbers mean. Managingexpectations. Regardingthedisclosureofmateriality,oneauditorprovidedan interestinganalogy.Publiccompaniesnowprovideguidanceonkeyitems,suchasearningsper share,astowhattheyexpectfutureresultstobe.Oneauditoraskedanauditclientwhytheclient companydisclosesthosenumbers,sincethereisriskassociatedwithmakingsuchprojections.The clientsaiditwasfordefensivepurposes,becauseifthecompanydidnotdisclosethenumbers, analystswouldpublishtheirownprojections.Bypublishingitsownprojections,thecompanyis managingthemarketplace’sexpectations.Participantsmadethepointseveraltimesduringthe focusgroupsthatnancialstatementusershaveunrealisticexpectationsintermsofauditingtothe penny,verytightmaterialitylevels,andverylargesamplesizes.Assuch,iftheauditorsdisclosed thisinformation,theauditorsthenwouldbehelpingmanagethenancialstatementusers’ expectationsregardingtheauditand,thus,likelyloweringtheexpectationgap. AddGranularitytotheAuditor’sReport OneCFOsuggestedprovidingagradingscheme(e.g.,A,B,andC)totheunqualiedauditor’s reportinsteadofmerelypass/fail.MostoftheCFOsseemedopposedtothisideaandraisedseveral concerns.Whatdothosegradesmeanandhowwilltheychangetheauditor’sriskprole?What wouldtheauditor’sliabilitybeiftheclientreceivedanAoneyearandaCthenextyear,andthe client’sstockpriceorbondratingdroppedduetothisgradechange?Howdoesthenancial statementusercompareaBfromaBig4accountingrmtoanAfromathird-tieraccountingrm? AnotherCFOsuggestedadifferentformofgranularity—dividetheauditintovetoten differentelementsandhavetheauditorprovidearatingoropiniononeachofthoseelementsaspart oftheoverallauditopinion.Someelementscouldbemanagement,revenue,andcoststructure. However,anotherCFOarguedsuchgranularitymaybegoingtoofarbeyondthepurposeofthe audit,whichhesuggestedistohaveanopinionontheaccuracyofthenancialstatements. ACFOpointedoutthatmuchofthatgranularinformationisinthefootnotesalreadyandin otherpartsofthe10-Kandannualreport,andtheauditor’sreportalreadyindicatesallthatmaterial isaccurate.However,anotherCFOarguedthatitisnotobviouswherethatinformationcanbe found,anditwouldbeusefulifasummaryofparametersparticularlyapplicabletoanindustrywas inonelocation.Then,10-Kuserswouldknowtheassumptionsmadebythecompanyregarding 678 Gray,Turner,Coram,andMock AccountingHorizons December2011 estimatesandvaluations.AnotherCFOsaiditalsowouldbeusefultohaveasummaryofthetopverisksinoneplace.AddFootnotesoraSynopsistotheAuditor’sReportAnumberofparticipantssaidtheywouldlikemoreinformationonhowauditorsreachedtheiropinions,orasynopsisofdiscussionsbetweentheauditors,clientmanagement,andtheauditcommittee,andtheoutcomeofthosediscussions.Thesesuggestionswouldappeartobeaparadigmshiftintermsoftherelationshipsbetweentheauditors,thosechargedwithgovernance,currentinvestors,andthepublicatlarge.Currently,someauditinformationisproprietaryandonlysharedamongtheauditors,andsomeinformationissharedwithonlytopmanagementandtheauditcommittee.Theonlyinformationauditorssharewithcurrentinvestorsandthepublicisthecarefullywordedauditor’sreport.Thesuggestionsbelowfromthefocusgroupparticipantswouldmakepubliclyavailablesomeproprietaryinformationandinformationprovidedtothosechargedwithgovernance.Asthediscussionillustrates,besideschangingtheriskprolefortheauditors,suchdisclosureswouldchangesignicantlytheroleoftheauditor’sreportinthenancialstatementanalysisprocess.Theunqualiedauditor’sreportwouldbemuchmorethanjustacerticateofcompletioneasilyreplacedwithasimpleOnebankersuggestedthatauditorsdisclosehighlightsofanythingthoughttobeasignicantchangeforthecompany,whethertheclientdisclosedthatchangeornot.Thechangecouldbeapresentationchangeorachangeinthenumbers.Eveniftheclientdisclosedthechangesinthenancialstatementnotes,iftheauditorthoughtitwassignicant,theauditorshouldmentionitinhisorherdisclosures.Anotherbankersaid,Moretransparencyisbetter.However,anotherbankerarguedthatiftheclient’sfootnotesaccompanyingthenancialstatementsareadequate,theauditorwouldnotneedaseparatedisclosure—theonusisontheauditortoensuretheclient’sdisclosuresareadequate.Oneanalystsaidhewouldpreferthatthecompanyjustputallitsfootnotesaboutaccountswithestimatesinoneplaceandexplaintheimpactorsensitivityofthosejudgments.Anotheranalystsaidanalystsalsowouldlikeasimilardiscussionregardingclientestimatesfromtheauditor.Forexample,whatdidtheauditorproposetotheclientasadjustments,whydidtheauditorproposethoseadjustments,andiftheywererejectedbytheclient,whyweretheyrejected?Anotherbankerarguedagainstanyadditionalauditorhighlights.Currently,hemakesaquickcheckoftheauditor’sreport,andifitwasanunqualiedreport,hemovesontothenancialstatementfootnotes.Hedoesnotwanttohavetostudyalotofadditionaldetailsintheauditor’sreportandthenstudythenancialstatementfootnotes.AnanalystmentionedthataCharteredFinancialAnalyst(CFA)surveyindicates84percentofanalystswouldlikethisriskinformationincludedwiththeauditor’sreport.Oneanalystexpressedaconcernthatanyiteminanauditorsynopsisprobablywouldrequire30minutesofdiscussionontheanalystconferencecalland,insuchanevent,thecompanywouldwanttomanagetheauditorsynopsiscarefully.Theanalyst’sconcernledtoadiscussionastowhetherthereshouldbeastandardizedsynopsisdiscussingthesamerisksforeverycompany.Someanalystsbelievedastandardizedsynopsiswouldhelpthemmakeyear-to-yearandcompany-to-companycomparisons.However,otheranalystssaidtheywouldprefertogetacompany-specicsynopsistohelpthemfocustheiranalysisofthatcompany.Ananalystsaidacustomizedreportwouldbeparticularlyusefulfordiversiedcompaniesbyindicatingwhererisksmayhaveshiftedbetweensubsidiaries.Oneanalystarguingforasynopsisusedananalogy:Whatwouldyouprefer—knowingthatabondratinganalystratedacompany’sbondA3,orwhythebondratinganalystratedthebondA3?Arguingtheotherside,oneanalystwasconcernedtheclientswouldtrytogamethesystem ts_march_2008.pdfPerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 conductingfraudulentactivitiesoutsidetheriskareasmentionedintheauditor’ssynopsis.Shealso expressedconcernthatnewdisclosureseventuallywouldalsobecomeboilerplate,and  youreyes wouldglazeoverreadingallthatmaterial.  Anotheranalystcomparedthisadditionalinformation tothecomfortlettersomeunderwritersrequest.Sheaddedshewasnotsureofthevalueofseeinga 20-pageexplanationofallthestepstheauditortooktoconducttheaudit.Athirdanalystsaidwhat theywanttoseearetheexceptions—changestotheauditapproach,adjustmentsthattheclient madeordidnotmake,andexceptionstostandards. Oneauditoropinedthattheauditorfootnotesorsynopsiswouldbeliketheauditorhavinghisor herownauditordiscussionandanalysisoftheaudit,similartothemanagementdiscussionand analysisthatmayaccompanythenancialstatements.Anotherauditorsaidasynopsiswouldbe somewhatliketheduediligencereportstheyprepareforspecic,nonauditengagementssummarizing therm’sproceduresandconclusions.Anauditorsuggestedthatauditcostswouldincrease substantiallybecausehundredsofhourswouldgointodraftingandevaluatingtheseadditional reports.Itprobablywouldtriggermore-thoroughauditproceduresofanythinginthereport,andthere wouldbededicatedstaffjusttoreviewthosereports.Thegeneralcounselprobablywouldreview everyreport.Anotherauditornotedthat,currently,allnancialstatementsaretheresponsibilityof companymanagement,andonlytheopinioncomesfromtheauditor.Packaginganauditorsummary reportwiththenancialstatementswouldchangetheauditor’sriskprolesignicantly.Afew participantsnotedthatsomeoftheseadditionalauditordisclosuresalreadyareincludedinthematerial presentedtothosechargedwithgovernancebytheauditors,sotherealquestionmaybe:What informationpresentedtothosechargedwithgovernanceshouldalsobedisclosedtothepublic? Anotherauditorsaidshedidnotknowhowthissummary,whichwouldbeso  cleanedup,  wouldgivetheuseranyadditionalusefulinformationfortheiranalysis.Anotherauditoradded,  lessismore.  Thatis,becausethecurrentauditor’sreportisshort,anyadditionalinformation, suchasagoing-concernopinion,emphasisofamatter,etc.,includedintheauditor’sreport,is goingtobeevidenttotheuser.Ontheotherhand,iftheauditor’sreportincludedsignicant additionalmaterials,thentheseissueswouldbelostinthedetails. CONCLUSIONS ThecurrentSASNo.58standardunqualiedauditor’sreporthasbeeninplaceforover20 years.Bothpriorresearchandourresultsindicatetheexpectationgapisstillsignicant.Thefocus groupapproachprovidessomenewperspectivesontheexpectationgap,aswellassomesupportfor ndingsfromotherresearchmethods. Onecriticalndingofourresearchisthelackofconsensusastowhatisthe intended communicationoftheauditor’sreport.Eventheparticipatingauditorshavedifcultydescribing andagreeingontheintendedcommunicationoftheauditor’sreport.Thestakeholdersprovidedrich discussionsontheirperceptionsregardingtheauditor’sreportconcepts,theirexperiencesonusing thereports,andtheirsuggestionsaboutpossibleimprovementstothereports.Thestakeholdersalso providedconcernsassociatedwiththosesuggestions. Currently,auditorsdonotdisclosematerialitylevelsandsamplesizespublicly,donotquantify thelevelofassurance,andtheauditor’sreportissilentonsomeaspectsoftheaudit,suchasfraud. Thus,astheTheme2discussionillustrated,users’perceptionsofwhattheauditor’sreportis communicatingareverylikelytobeawed—andsometimes,likethecommentsfromthe non-professionalinvestors,theperceptionsarefarfromreality. DirectionsforFutureResearch Theresearchpresentedinthispaperraisesmanyinterestingandprovocativeideas,concerns, andsuggestions.Thenextlogicalstepsinfutureresearchfallintotwobroadcategories,therstof 680 Gray,Turner,Coram,andMock AccountingHorizons December2011 whichisbehavioral.Eachofthesuggestionstochangetheauditor’sreporthasassociatedrisks;therefore,astheparticipantsstressed,noneofthesesuggestionsarefreegoodswithoutpotentialconsequences.Assuch,rigorousresearchmustdetermineiforhowimplementationofeachsuggestionmightchangebehaviorswithineachstakeholdergroup.Ifbehaviorsdidchange,wouldthechangesbepositiveornegative?Forexample,wouldtheprecisionofthenumbersprovidedbythepreparerschangeinrelationtothedisclosedmaterialitylevels?Preparersmayusematerialitylevelsastheirownprecisiontargets,astheymaybelievethereisnoreasontobemoreprecisethantheauditors.Willauditors,astheparticipantauditorsspeculated,settheiractualmaterialitylevelslowerthantheirlevels,anddomoreauditprocedurestoincreasetheircondencethattheyachievedthedisclosedmaterialitylevels?Importantly,woulddisclosureimpactusers’analysisofnancialstatements?Iftheanswertothislastquestionisno,thenitdoesnotwarrantaddingtheefforts,regulatoryactions,andrisksassociatedwithmaterialitydisclosures.Asecondcategoryoffutureresearchwouldfocusonthecost-benetaspectsofeachsuggestion.Itisnotenoughthatstakeholderbehaviorschange—researchersshouldexaminetheeconomicconsequencesofthesuggestions.Ingeneral,asuggestionshouldhavepositivesocietalresults.However,sharingofbenetsandcostsbyvariousstakeholdersoffersamoreproblematic,andpossiblymoreinteresting,researchquestion.Forexample,whatiftheanalysisindicatesasuggestionwillprovideanetbenettousers,butanetcosttopreparersandauditors?Isthechangejustiedifitisaburdentooneormorestakeholders?Should,orhowshould,costsbeshiftedbetweenstakeholderstomaketheeconomicimpactmoreequitableAnotherperspectiveforresearchingtheauditreportingmodelwouldbetoapplyinstitutionaltheory(fromorganizationalbehaviorliterature)thatcanprovideamorecomprehensiveviewoftheinteractionsbetweendifferentparties(i.e.,variousstakeholders)thanthetraditionalagencyliteratureusedinauditingandaccountingresearch.Forexample,Cohenetal.(2008)andBeasleyetal.(2009)haverecentlyexploredtheapplicationofinstitutionaltheorytotheauditdomain.Asourresearchandpriorauditreportingliteraturehaveshown,theauditor’sreporthasbecomemoreformthansubstance—itisboilerplate.Institutionaltheorydesignatesthismovementtowardboilerplateascoerciveisomorphism.Thebankersandanalysts,inparticular,inourstudyhaveclearlyindicatedthatnomatterhowmuchadditionalcontentisaddedtotheauditor’sreport,theywillstillnotreadthereportiftheadditionalcontentisjustmoreboilerplate.Theapplicationofinstitutionaltheorycouldoffernewinsightsintotheauditreportmodelandhelpdevelopfutureimprovementstotheauditor’sreport.Examinationofpotentialmodicationstotheauditreportingprocessisnotonlyrichinpossibilities,buttheresultsofrigorousacademicresearchcanprovideinsightsdirectlyimpactingtheauditprofession.Suchresearchcanresultinastrongerbondbetweenacademiaandpracticingauditorsandproveinvaluabletobothgroups.Beyondauditreportingmodel,futureresearchalsoshouldconsideradditionalapplicationsofthefocusgroupmethod.Explorationofpolicy-relatedissuesisastrengthofthefocusgroupapproach,andbothaccountingandauditingdomainsfacemanypendingpolicyissues.Academicscouldusefocusgroupstohelpidentifypolicyissuesandthescopeandstrengthsofopinionsamongvariousstakeholdergroupsregardingthoseissues.Focusgroupsprovidedeeperinsightsintostakeholders’perceptions.Thecontemporaneousinteractionsofthefocusgroupparticipantsandtheopportunitytoasktheparticipantsfollow-upandprobing—andsometimeargumentative— Corametal.(2011),whichreportsonthesecondpartofourfundedresearchproject,usedverbalprotocolanalysis(VPA)toexplorenancialanalysts’behaviorsregardingtheauditor’sreport.Whiletheanalystsattendedtotheauditor’sreport,theydidnotchangetheirinitialpublicoffering(IPO)priceforacompany,whetherthecompany’snancialstatementswereaccompaniedbytheauditor’sreportornot.PerceptionsandMisperceptionsRegardingtheUnqualiedAuditor’sReportAccountingHorizonsDecember2011 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