Abstract
AS5[v.Dec:2017] issued by the Public Company Accounting Oversight Board [PCAOB] requires the use of Analytical Procedures [AP] at the Planning and Substantive Phases of Assurance Audits for firms traded on active exchanges. We argue that one aspect of AP, relative to risk-setting, should be vetting the information that is produced/published by the audit client pertaining to Regulation G [v.SEC:2003] called: Non-GAAP information. In our research, we intend to leverage the longstanding Reg[G] requirements to extend the Non-GAAP information to firm performance profiles reported for the Environment, Social, and Governance[ESG]Platform on BloombergÒ. There are two research foci: (1) Offer an AP-Model that uses GAAP & ESG variables to contribute audit evidence useful in making the decision to launch an AP-Extended Procedures examination of the firm’s Enterprise Resource Planning & Control [ERP&C] protocols, and (2) Profile a random accrual-set of firms indexed on Bloomberg so as to offer population parameter estimates for refining the AP-Model. The AP-Model is based upon correlational associations for the ESG- & GAAP-variables from the: Income, Balance Sheet & Cash Flow Statements. If there seems to be a disconnect between the nature of these associations for the ESG-variables and those of the GAAP-variables, the auditor may use this as audit evidence in making the decision to conduct an Extended Procedures Examination of the firm’s [ERP&C] protocols. As for the other focus, we found that for the accrual of firms tested there is no inferential evidence that the ERP&C-protocols are consistent drivers for both the ESG- and the GAAP variable sets.
Highlights
The Public Company Accounting Oversight Board [PCAOB] requires the use of Analytical Procedures [AP] in the Planning and the Substantive[Completion] phases of certification audits
The reason for this is that assuming a functioning ERP&C model there seems to be an H%-associational disconnect between the nature of the Generally Accepted Accounting Principles (GAAP)-information and the supposedly related ESG information. This disconnect, if inferentially significant, would warrant consideration of an EP-investigation. We offer that this test protocol is inferentially conservative re: the False Positive Error [FPE] in the Bayes-sense given that the PCAOB[¶[47A1p.22.]] offers: “Generally, a conclusion that a control is not operating effectively can be supported by less evidence than is necessary to support a conclusion that a control is operating effectively.”
The critical inferential issue for this study, as motivated by the results reported by HWR re: the Non-GAAP impact on the audit, is the following Study Focus Question reiteration: To what extent are firms reported on the Bloomberg Terminals characterized as having an associational disconnect between their ESG: Non-Financial profile and their GAAP-profile? Investigation Rationale Recall circa 2002 both the PCAOB and the SEC were reacting to the unfortunate and not infrequent use of Non-GAAP information in the 1990s to obfuscate the operational reality as reported by auditors of firms traded on exchanges
Summary
The Public Company Accounting Oversight Board [PCAOB] requires the use of Analytical Procedures [AP] in the Planning and the Substantive[Completion] phases of certification audits. It is worth remarking that while AP are discussed in the PCAOB documents and by AEBH there is no “recommended” set of actual statistical, mathematical or data analytics to effect an AP-analysis This is logical; recall that AP are: evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data. The overview of our research is using the PPMC, as the AP-data-analytic model of choice, we will offer an AP-model to assess the possible nature of the client’s reporting of Non-Financial information vis-à-vis the nature of the Client’s GAAP data as an indication of the need for an Extended Procedures AP-investigation relative to further testing the Client’s (i) ERP&C Model and/or (ii) the adequacy of the Client’s Internal Control over Financial Reporting [ICoFR]. Offer a Conclusion and Suggestions for the further investigative extensions
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