PCAOB member Jay Hanson talked about advances in technology and the aftermath of the financial crisis in remarks at a May 23, 2011 Compliance Week conference. He said that changes in technology and business models have made it very difficult to understand today’s transactions and products. Valuing those products is hard for both issuers and auditors. Hanson said that accounting and auditing often lag behind business innovations.

Hanson advised that the Board’s inspections of accounting firms have revealed information that should be of concern to compliance officers, companies and investors. The inspections identify trouble spots such as the fair value of a complex financial instrument. Given the challenges these instruments pose to management and auditors, Hanson said it is even more difficult for investors to understand, so they rely heavily on management to get the accounting right and on auditors for the assurance that management got it right.

Investors are angry about the financial losses they suffered in the recent crisis. Based on a recent meeting with the PCAOB’s Investor Advisory Group, Hanson said the consistent theme is that investors do not believe they are getting adequate information on which to base their investment decisions. Investors want more disclosure from auditors and from managers. The Board is preparing a concept release to seek comments on potential changes to the auditor’s reporting model in an attempt to increase its transparency and relevance, according to Hanson.

In addition to improvements to the auditor’s report, Hanson said some have called for companies to provide more or different information. The debate about possible changes could have broad repercussions on the financial reporting process that go beyond the audit requirements, so Hanson urged interested parties to get involved.

Hanson reviewed the Board’s inspection reports which summarize any deficiencies that are found in the review of issuer audits. He recommended that people review these reports, along with the Rule 4010 reports which the Board issues periodically to address specific audit issues. These reports provide valuable information about the issues with which auditors may be struggling, he explained, and how an issuer’s audit may be affected by certain difficult areas.

Hanson said the Board has found a very direct correlation between the quality of a company’s processes, controls, documentation and people, on the one hand, and the quality of the audit on the other.

As auditors try to apply fair value measurements to complex financial instruments, Hanson said they have to do more than what management is required to do in keeping the books and records. For example, if a company uses a pricing service to value an asset, auditors must test the pricing service or do their own test so that they understand the numbers. That is one of the high-risk areas on which the inspection teams have focused, he advised.

If the inspection staff concludes that an auditor has not done sufficient testing, the auditors may be required to do some additional work. Hanson pointed out the problems this could create for a company after its filings have been made. The better job that management does in determining and providing evidentiary support for its valuations, the better job the auditor can do, he said.

Hanson also reviewed the nonpublic criticisms of firms’ quality controls. If the deficiencies are corrected or remediated, the criticisms remain nonpublic. Hanson said the problem is that some auditors are not doing a very good job of remediating the quality control problems identified by the inspection team, so the Board is considering ways to make clear to auditors what is expected of them.

The fact that the Board does not name the company whose audit was reviewed should not prevent a company or its audit committee from asking whether an audit was subject to a PCAOB inspection, according to Hanson, or how the auditor fared in its latest inspection by the Board. If an inspection revealed accounting problems, Hanson said a company should be particularly concerned since it may trigger a review by the SEC and possibly even a restatement.

Hanson believes that more transparency may have prevented some of the problems that arose during the financial crisis. The Board is working on a number of projects that will improve transparency, including the consideration of requiring auditors to disclose the location of other firms that participate in an audit. Hanson said it is a critical piece of information, given that some audit reports may be based in large part on the work of affiliated firms that are separate legal entities based in other countries.

The Board is particularly concerned about the number of countries that prohibit inspections of accounting firms located in their jurisdictions. Until the Board can reach agreements with the regulators in those countries, Hanson said more transparency is needed to provide issuers and investors with better information about the degree of PCAOB oversight of the firms.

The Board is also seeking more transparency in connection with its enforcement actions and has asked Congress to change the nonpublic nature of its disciplinary proceedings. Hanson said it is a long road, and controversial, but the Board believes that investors deserve to know about its proceedings against an auditor long before the current rules allow that disclosure.

Hanson concluded with a couple of his personal goals as a Board member. Rather than focusing only on what auditors are doing wrong during inspections, Hanson said he would like to highlight characteristics of what successful auditors are doing right so that others can learn by example. He also hopes to engage the auditing profession in discussions about ways to ensure that the needs of investors guide auditors’ actions, including those of more junior auditors who may not have the benefit of interactions with investors.