On June 1, 2017 the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard to provide additional information to investors. The new standard received approval from the Securities and Exchange Commission on October 23, 2017. This post summarizes several of the major changes coming to audit reports in the near future.
Key changes from the new auditing standard include:
- Communication of critical audit matters (“CAMs”) — CAMs are matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.
- Disclosure of auditor tenure — The report must disclose the year in which the auditor began serving consecutively as the company’s auditor.
- Other improvements to the auditor’s report — A number of other improvements to the auditor’s report are intended to clarify the auditor’s role and responsibilities, and make the audit report easier to read. One change contains the standardized ordering and inclusion of section headers.
The new standard will be gradually phased in, with the new report format, tenure, and other information included in audits for fiscal years ending on or after December 15, 2017. Communication of CAMs for audits of large accelerated filers will be included in audits for fiscal years ending on or after June 30, 2019. Communication of CAMs for all other companies will be included in audits for fiscal years ending on or after December 15, 2020.
In August 2017, the CFA Institute released a letter expressing strong support for the new PCAOB standard. The CFA Institute applauds the changes because they should enable investors to better understand auditor reports. In addition, the organization says the new reporting standards are an “overdue replacement” of an antiquated reporting model.
Not all parties are satisfied with the changes; the U.S. Chamber of Commerce and a group of 27 other major corporations and business trade associations have voiced concerns. The primary concerns expressed by the group included the disclosure of immaterial information and the replacement of management as the source of original information. The groups fear that requirements of CAMs will have a “chilling effect” on the audit committee – auditor relationship, create liability for businesses and auditors, and result in additional expenses for firms. Despite these concerns, the SEC unanimously approved the new standard, which Accounting Today has called “the biggest change to the format of the audit report in more than 70 years.”
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