The New Audit Report

Securities and Exchange Commission and Public Company Accounting Oversight Board

On October 23, 2017, the Securities and Exchange Commission (“SEC”) approved the new auditor reporting standard, as proposed by the Public Company Accounting Oversight Board (“PCAOB”). The final standard maintains the pass/fail opinion of the existing auditor’s report, but makes a number of significant changes including the introduction of critical audit matters (“CAM”).

Auditors will now be required to communicate in the auditor’s report any CAM arising from its audit or state that there were no CAMs. The determination of a CAM is principles based, and is defined as a matter that was communicated or required to be communicated to the audit committee and that:

Relates to accounts or disclosures that are material to the financial statements and;
Involves especially challenging, subjective, or complex auditor judgment

Beyond the introduction of the CAM, the new auditor’s report makes several other changes including required statements concerning auditor tenure, independence, the nature of the audit, and others.

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In adopting the standard, the PCAOB’s goal is to make the auditor’s report more relevant to investors by requiring the inclusion of additional and specific details about the audit.

With no significant changes to the standard form of the audit report in over 70 years, it is not a surprise that its form and content was evaluated to see how it could be enhanced. Today, auditor’s reports are generally boilerplate, and follow strict standards over form and content. In developing the new standard, the PCAOB solicited feedback on various drafts, receiving over 400 comments from industry, accounting firms, investors, analysts, and professional organizations. Although the feedback was mixed, there were some potentially significant concerns raised by commenters, including disclosure of previously unreleased information, increased time and expense, and impacts to auditor and issuer liability.

While the new auditor’s report is intended to increase relevancy and transparency for investors, commenters have raised concerns the new requirements may result in a number of unintended consequences.