Tuesday, June 20, 2017

Beefing Up Public Company Audit Reports

New Standards for Public Company Audit Disclosure

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) voted to adopt new standards for public company audit reports. The new auditing standard, AS 3101, is the result of nearly eight years of work by the PCAOB with members of the public accounting profession, regulators, academics, and investor groups. If approved by the Securities and Exchange Commission, this new standard will change the scope of the current auditor’s report. AS 3101 retains the unqualified versus qualified (pass versus fail) opinion of the existing auditor's report, but makes significant changes to the auditor's report by adding a new section highlighting what the PCAOB calls “critical audit matters” (CAM). Adding CAM to audit opinions is intended to better highlight key areas of risk information to reduce the information asymmetry between users of a company’s financial statement and the company's management.

 

Critical Audit Matters

 

The new standard defines a critical audit matter (CAM) as a financial issue that was communicated or required to be communicated to the audit committee and that:

 

1. relates to accounts or disclosures that are material to the financial statements, and,

 

2. involved especially challenging, subjective, or complex auditor judgment.

 

CAMs are not necessarily audit deficiencies, but rather highlight the specific judgments that were most critical to the auditor in arriving at the opinion. The new standard would require communication of each CAM in the auditor's report in the following manner:

 

1. identification of the CAM;

 

2. description of the principal considerations that led the auditor to determine that the matter was a CAM;

 

3. description of how the CAM was addressed in the audit; and,

 

4. reference to the relevant financial statement accounts or disclosures.

 

Other Changes to the Auditor's Report

 

The final version of AS 3101 adds several other items of information to the auditors’ report intended to "clarify the auditor's role and responsibilities related to the audit, provide additional information about the auditor, and make the auditor's report easier to read.” These additions include: 

 

Auditor tenure — The auditor's report will include a statement disclosing the year in which the auditor began serving consecutively as the company's auditor;

Independence — The  auditor's report also will include a statement that the auditor is required to be independent;

Enhancements to basic elements — Certain standardized language in the auditor's report has been changed, 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 of material misstatements;

Standardized form of the auditor's report — The opinion will appear in the first section of the auditor's report. Section titles have been added to guide the reader; and,

Addressees — The auditor's report will be addressed to the company's shareholders and board of directors or equivalents (additional addressees also are permitted).

 

Effectiveness and Implementation

 

Subject to approval by the Securities and Exchange Commission, the final standard and amendments will be phased in over a three-year period. However, auditors may elect to comply before the effective date, at any point after SEC approval.

 

  • All provisions other than those related to critical audit matters will take effect for audits for fiscal years ending on or after December 15, 2017; and,
  • Provisions related to critical audit matters 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.

 

 

The full text of PCAOB Release No. 2017-001 is available via: https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf

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