PCAOB: Tag the Audit Report

Proposed changes in the audit report should include the creation of tagged data (XBRL) within the audit report itself. This tagged data would represent the information conveyed in the audit report, which is being expanded under the proposed rules. Tagging would allow audit firms to use standard tags, and improve the usability of the audit report in computer searches and other analysis.

It is appropriate that the auditor’s report contain information about the auditor and their activities, not the company. Reporting about significant management estimates is valuable, but is not appropriate for the audit report.

As the audit report is expanded to contain more information, it should also be aligned with current and future technologies for regulatory reporting. The SEC has adopted XBRL tagging for the financial statements of the 10-K and 10-Q. It is also appropriate for the audit report to be tagged.

Tagging the audit report will allow all audit firms to use a standard taxonomy to represent standard language. This will improve the ability of investors to search computer databases of filings, based on information in the audit report.

Reporting on “critical audit matters” will also be improved by tagging this information. These improvements include using a standard vocabulary (implemented as a taxonomy of terms) where appropriate and linking to the tagged version the financial statements created by the company.

In reporting on the “other information” used by the auditor, if the auditor has used the tagged data created by the company, and checked it for material inconsistency, this is worth noting in the audit report. If material inconsistencies were found, the specific tagged data created by the company can be linked directly in the tagged data of the audit report.

It is fundamental reality of the capital markets that financial statements are analyzed through computer programs and databases to filter and select information before the statements are read by an investor or regulator. Therefore it is critical to provide the best level of tagging to improve the use of the audit report by the capital market. The proposed rules of the PCAOB to expand the audit report are a positive step in my view, and one that can be made even better by moving to tagging the audit report with XBRL.

 

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