The New Auditor's Report

CPAs use the auditor's report to communicate their opinions of an entity's financial statements and related disclosures. Concerned parties, in turn, use the report to assess the integrity of the financial statements and the accuracy of the disclosures. In 1988, the American Institute of CPAs auditing standards board established new wording for the standard unqualified audit report. It also revised the reporting requirements and types of audit reports allowed (for example, the subject-to report for uncertainties and except-for report for consistency departures were eliminated). The new wording appears in Statement on Auditing Standards no. 58, Reports on Audited Financial Statements. (The sidebar on page 61 describes the evolution of the audit report until SAS no. 58's issuance.) With these audit reporting changes and modifications comes the need for CPAs to assess how financial statement users perceive the new reports and what impact the wording has had. One question is how users who continually encounter different types of reports are affected. Have these changes been acknowledged by those outside the CPA profession? If so, have they been beneficial? This article reports on a study of bank loan officers conducted to determine how this group of users perceived some of the new audit reports compared with former reports. The loan officers generally viewed the new standard report similarly to the old one. However, they liked the new modified unqualified consistency report better than both the former except-for consistency report and the standard unqualified report used alone in the event of an accounting change. GAUGING USER PERCEPTIONS One hundred seventy-eight bankers participated in the survey to assess the impact of the new standard unqualified report and the new modified unqualified consistency report on their perceptions of an audit, the auditor and the audit report. It was conducted in the fourth quarter of 1989 to determine users' initial reactions to the new reports (SAS no. 58 is effective for all reports issued or reissued after January 1, 1989). Bank loan officers were chosen for the survey because of their constant exposure to various audit report types and their familiarity with the meaning intended to be communicated through such reports--new or old. Participants reviewed a loan application for a medium-sized regional retail grocery company (with $51 million in sales) operating at or slightly below industry averages. A marginal applicant was used to allow the audit report wording a greater opportunity to affect the bankers' perceptions. The loan request was for $2.2 million, repayable in equal quarterly installments over 10 years. The proceeds were to be used to add inventory to existing stores and to open several new stores. Financial statements and related footnotes, a description of the company, biographies of its key executives and a set of calculated financial statement ratios and cash flow data were provided to each participant. Five slightly different scenarios were used (each loan officer received one set of application materials and evaluated only one scenario). Two loan applications presented the company with no change in accounting principle. The applications were identical except for the wording of the auditor's report; group 1 received the old standard report, while group 2 was given the new standard report. The three remaining loan applications were similar to the first two, except they showed the company had changed its depreciation method, which resulted in an 8% ($26,000) aftertax increase in net income. The effect of this change, in accordance with Accounting Principles Board Opinion no. 20, Accounting Changes, was properly noted as a separate item on the income statement. Referred to as change cases, these last three loan applications were identical to each other except for the type of audit report included. The first group (group 3) received the new modified unqualified consistency report with the required additional paragraph. …