Last month, the PCAOB, which is setting an aggressive tone under new chairman James Doty, set forth some proposed changes to the form of audited financial statements. Comments aren't due until the end of September, but people are already voicing some opinions. The idea is to ask auditors to provide more color and commentary about the results. This has long been sought by shareholders advocates, though the ideas floated make issuers somewhat nervous. The four proposals include the following:

• Requiring a new "Auditor's Discussion and Analysis" section, which would amount to a narrative about the results.
• Requiring auditors to highlight significant areas of focus during an audit via emphasis paragraphs, which are little used now.
• Expanding assurance on information outside the financial statements, such as a company's MD&A disclosures, non-GAAP financial measures and earnings releases.
• Clarifying the meaning of key terms used in the audit report and explaining significant audit concepts.

The first proposal has generated the most controversy so far. Indeed, two PCAOB members--Jay Hanson and Daniel Goelzer--have already warned constituents about the possible negative consequences of a "narrative" requirement. The thrust of the argument is that auditors are not analysts or consultants, and "are not trained to evaluate and communicate the overall business and strategic risks of the companies they audit." Any additional information should come from executives or the board, they say.

The requirement might also result in various delays to audited results. But proponents of the narrative requirement argue that they just want information about the processes used by auditors and various judgment calls. This is a refreshing conversation in that the current form of the financial statement dates back to the 1940s. Some change may be in order. It's just a matter of what.

For more:
- here's an article from lawyers at Fried Frank

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