New PCAOB Standard Enhances Relevance and Usefulness of the Auditor's Report
June 5, 2017
The Public Company Accounting Oversight Board adopted a new auditing standard June 1 to enhance the relevance and usefulness of the auditor's report by providing additional and important information to investors.
The new standard and related amendments require auditors to include in the auditor's report a discussion of the critical audit matters (CAMs) which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment.
"The changes adopted today breathe life into the audit report and give investors the information they've been asking for from auditors," said PCAOB Chairman James R. Doty. "The U.S. also now joins many other countries in adopting an expanded audit report."
Under the new standard, the auditor's report will disclose, among other things, the tenure of an auditor, specifically, the year in which the auditor began serving consecutively as the company's auditor. It also will include the phrase, "whether due to error or fraud," in describing the auditor's responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.
The Board approved a phased approach to the effective date for the new requirements. This approach provides investors and other financial statement users with new information as soon as reasonably practicable, while allowing accounting firms, companies, and audit committees time to prepare for implementation of the CAM reporting requirements.
- New auditor's report format, tenure, and other information: audits for fiscal years ending on or after December 15, 2017
- Communication of CAMs for audits of large accelerated filers: audits for fiscal years ending on or after June 30, 2019
- Communication of CAMs for audits of all other companies: audits for fiscal years ending on or after December 15, 2020
The final standard applies to audits conducted under PCAOB standards. Communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
The new auditing standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, retains the pass/fail model of the existing auditor's report.
"The communication of critical audit matters in the auditor's report will mark a new era in the way auditors communicate with investors," said Martin F. Baumann, PCAOB Chief Auditor and Director of Professional Standards. "Investors will have a view inside the audit and will be armed with useful information when making important decisions."
This project began in 2010, with PCAOB staff outreach to investors, auditors, preparers of financial statements, audit committee members, and other interested parties. In June 2011, the Board issued a concept release to seek public comment on potential changes to the auditor's reporting model. The Board also held a public meeting shortly after issuing the concept release.
In August 2013, the Board proposed a new standard on the matter, followed by a two-day public meeting. The Board reproposed the standard in May 2016 for additional public comment.
The auditor's reporting model also was discussed at meetings of the PCAOB Investor Advisory Group and Standing Advisory Group. More on the history of the project, including all of the historical documents, can be found in Rulemaking Docket 034.
The new rules are subject to approval by the Securities and Exchange Commission.
A fact sheet on the new rules also is available.