The New Auditor’s Report – A Done Deal with an Impact This Year!

By: George M. Wilson & Carol A. Stacey

 

On October 23, 2017, the SEC formally approved the PCAOB’s new Auditor’s Reporting Standard, now AS 3101. The final PCAOB standard was submitted to the SEC for approval on July 19 and published in the Federal Register on July 28.

 

The new standard takes effect in two phases:

 

The first phase adds information to and modifies the format of the auditor’s report and is effective for audits of periods ending after December 15, 2017, this calendar year end. This change applies to all reporting companies.

 

The second phase, which adds information about critical audit matters (CAMs) to the auditor’s report, does not apply to EGC’s, and is effective:

For audits of large accelerated filer for fiscal years ending on or after June 30, 2019

For audits of all other companies to which the requirements apply for fiscal years ending on or after December 15, 2020.

 

The new Auditor’s Report requirements that will be effective this year, for periods ending after December 15, 2017, include these modifications:

 

  • Auditor tenure – a statement disclosing the year in which the auditor began serving consecutively as the company’s auditor;
  • Independence – a statement regarding the requirement for the auditor to be independent;
  • Addressee – the auditor’s report will be addressed to the company’s shareholders and board of directors or equivalents (additional addressees are also permitted);
  • Amendments 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 misstatement; and
  • Standardized form of the auditor’s report – the opinion will appear in the first section of the auditor’s report, and section titles have been added to guide the reader.

 

The second phase, with the later effective date, requires the auditor’s report to discuss critical audit matters, which are defined as:

 

“A matter 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.”

 

Chair Clayton, in a statement about the new standard, said:

 

I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with Main Street investors ending up in a worse position than they were before.

 

I therefore urge all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release

 

As a thought question, it will be interesting to see how a company’s disclosures of Critical Accounting Estimates will relate to the auditor’s discussion of Critical Audit Matters. More about this in our next post!

 

As always, your thoughts and comments are welcome!

 

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