PCAOB Adopts New Auditor Reporting Standard for U.S. Public Companies – June 20, 2017 by Peggy McCaffrey

As part of its ongoing mission to “protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports” (Sarbanes-Oxley  Act of 2002), the Public Company Accounting Oversight Board (PCAOB) has adopted a new auditor reporting standard affecting the content of “unqualified opinions.” Once approved by the United States Securities and Exchange Commission (SEC), the new standard would require additional disclosures in audit reports, including communication of “critical audit matters.” This should not only merit attention from auditors but from trustees, audit committees, financial management, legal counsel and investors in public companies.

Noteworthy Changes to Existing Reporting Standards

While the final standard retains the pass/fail opinion of the existing auditor’s report, it will disclose, among other things, a statement that the auditor is required to be independent, the tenure of the auditor and the year the auditor began consecutively serving as the company’s auditor. It also will include the phrase, “whether due to error or fraud” when describing the auditor’s responsibility to obtain reasonable assurance about whether the financial statements are free from material misstatements.
 
The new standard will require the auditor to identify and disclose critical audit matters (CAMs), which are defined as matters that were communicated or were required to be communicated to the audit committees. These typically relate to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective or complex auditor judgment.
 
The PCAOB has emphasized that auditors should consider the following factors when evaluating whether a matter involves “especially challenging, subjective or complex auditor judgment”: 

  • The auditor's assessment of the risks of material misstatement, including significant risks;
  • The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty;
  • The nature and timing of significant, unusual transactions and the extent of audit effort and judgment related to these transactions;
  • The degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures;
  • The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter; and
  • The nature of audit evidence obtained regarding the matter. 

Communication of each CAM includes identifying the CAM, describing the principal considerations that led the auditor to conclude the matter was critical, describing how the matter was addressed in the audit, and reference to the specific accounts and disclosures. 

Effective Dates

Below are important effective dates to be aware of:

  • 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 new auditor reporting 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.
 
However, this new standard would require additional audit report disclosures and additional awareness for many involved in financial reporting for public companies. We will be watching this development closely for the SEC’s approval. 
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.