PCAOB Expands Disclosures in Auditor's Report

Doug Morally contributed to this article.

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditor reporting standard that will significantly expand the standard audit report.  This long-awaited standard is the most significant change to the standard auditor’s report in over 70 years, according to PCAOB Chairman James Doty.  The adoption of the new standard and related amendments now require auditors to identify and describe critical audit matters (CAMs).

CAMs are defined as matters that have been communicated to the audit committee and are related to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective or complex auditor judgement.  Each CAM identified by the auditor must be named in the audit report with a description of the principal considerations that led the auditor to determine that the matter was a CAM, a description of how the CAM was addressed in the audit and a reference to the relevant financial statement account or disclosure.

The new standard also includes a number of additional changes intended to clarify the auditor’s role and responsibilities.  The auditor’s report will include the following:  a statement disclosing the year that the auditor began serving consecutively as the company’s auditor; a statement that the auditor is required to be independent; certain standardized language, including adding the phrase, “whether due to error or fraud,” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free from material misstatements; the opinion will now appear in the first section of the auditor’s report; and the auditor’s report will be addressed to the company’s shareholders and board of directors.

The final standard applies to audits conducted under PCAOB standards; however, the communication of CAMs is not required for audits of brokers and dealers, investment companies other than business development companies, employee stock purchase, savings and similar plans, and emerging growth companies.

Ultimately these changes aim to provide the user of the financial statements with information that is overall more relevant to the financial statements and underlying disclosures.  Companies subject to the new standards should prepare for these changes through proactive dialogue with external auditors, Audit Committees, and Boards of Directors.

The final standard is still subject to approval by the Securities and Exchange Commission (SEC).  Subject to SEC approval, all provisions other than those related to CAMs will take effect for audits for fiscal years ending on or after December 31, 2017.  Provisions related to CAMs will take effect for audits for fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal years ending on or after December 15, 2020, for all other companies to which the requirements apply.

For more information on the new auditor reporting standard, contact us.