Changes May be on the Way for Public Company Audit Reports
Public company audit reports received a major update. On June 1, the Public Company Accounting Oversight Board (PCAOB) adopted a new audit report designed to provide public company shareholders with more information about public company audits. The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion will include information about the auditor and material risks uncovered by the audit, as well as the auditor's opinion. The pass/fail model of the auditor's report remains, but auditors will be asked to provide additional data points, including areas of reporting that required significant auditor judgment. Emerging growth companies, non-issuer brokers and dealers, investment companies (other than Business Development Companies (BDCs)) and employee benefit plans are not required to include the critical audit matters in the new audit report.
A Brief History of PCAOB Audit Report Changes
Discussion of changing the PCAOB auditor reporting model has been a topic of several committees. The U.S. Department of the Treasury Advisory Committee on the Auditing Profession (ACAP) issued its final report in 2008 recommending that the public company auditor reporting model be updated. In response to the report, the PCAOB conducted outreach with auditors, financial statement preparers and public company investors and, based on the feedback, issued a concept release for PCAOB audit report changes in June 2011. Public comments on the concept release, as well as several public meetings, were taken into consideration for the final proposed standard.
Critical Audit Matters
One of the biggest changes to public company auditor reports comes from the addition of critical audit matters. In making the change, the PCAOB seeks to provide more information about the audit process itself to help investors with investment decisions, such as providing insights relevant in analyzing and pricing risks in capital valuation and allocation.
Some audits involve especially challenging, subjective or complex auditor judgment, but the audit report previously did not identify where significant auditor judgment was used. Critical audit matters address this concern by requiring auditors to include the areas of reporting that required especially challenging, subjective or complex auditor judgment that are related to key accounts and disclosures that are material to the financial statements and were required to be communicated to the audit committee. Examples of critical audit matters include areas of high financial statement and audit risk, significant unusual transactions and other significant changes within the financial statements.
Auditors will communicate about critical audit matters by identifying the issue and describing how the auditor determined it was a critical audit matter. A description of how the audit addressed the critical audit matter and a reference to the relevant financial statement account or disclosure should also be provided.
The revised audit standard also includes specifics about the auditor's tenure, such as the year in which the auditor started serving as the company's auditor. Additionally, the report will include a statement that the auditor is required to be independent. To clarify the role and responsibility of the auditor in the audit process, additional language has been added to the description of the auditor's responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatements. The phrase "whether due to fraud or error" is now part of the description, which mirrors changes that the European Union made to its audit reports.
The effective date of the new audit report is subject to approval by the U.S. Securities and Exchange Commission. The changes will be implemented in phases. The first phase, which requires the auditor to include information about its tenure and independence, is scheduled to take effect for fiscal years ending on or after December 15, 2017. The format of the report will also change with the opinion being included in the first section of the report rather than at the end, as it is under current standards. The second phase will include the inclusion of critical audit matter provisions and are first required for large accelerated filers for audits ending on or after June 30, 2019. For all other filers, the critical audit matter requirement takes effect for audits of fiscal years ending on or after December 15, 2020.
For More Information
For specific comments, questions or concerns about the PCAOB audit report changes, please contact Rich Howard of MHM's Professional Standards Group. Rich can be reached at firstname.lastname@example.org or 949.450.4402. Published on June 12, 2017