It's Official: SEC Approves Expanded Audit Report

By:
Chris Gaetano
Published Date:
Oct 24, 2017
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The Securities and Exchange Commission has formally approved the new expanded auditor's report adopted by the Public Company Accounting Oversight Board on June 1, creating a number of new disclosure requirements, chiefly the mandatory discussion of critical audit matters, according to the Wall Street Journal

The standard, the Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, defines critical audit matters as an issue that was communicated to required to be communicated to the audit committee and relates to both accounts or disclosures that are material to the financial statements and involved especially challenging, subjective or complex auditor judgment. When auditors disclose a CAM in their reports, they must identify the CAM, describe the principle considerations that led the auditor to determine that the matter was a CAM, a description of how it was addressed in the audit, and its relevance to financial statement accounts or disclosures. 

Beyond the CAM provision, the new standard also requires that the audit report include a statement disclosing the number of years the auditor has consecutively served as the company's auditor and a statement that the auditor is required to be independent. The new standard also updates certain standard language in the auditor's report, such as including 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. It also requires that the report be explicitly addressed to the company's shareholders and board of directors, at minimum. The audit report will retain the standard pass/fail model, with the opinion to appear in the first section. 

The PCAOB formally approved the standard in June and the matter then went to the SEC for final approval, as all PCAOB measures do. Some companies and business groups, which had previously expressed their reservations to the PCAOB, continued to do so to the SEC as it considered the measure. Opponents, such as the U.S. Chamber of Commerce, said that the rule should be rejected because it would create confusion and impose unreasonable burdens. SEC Chair Jay Clayton acknowledged these concerns, and promised to pay close attention to the issue going forward. However he also said that the changes will mean significant enhancements to audit reports. 

The new PCAOB standard was the focus of "The Expanded Auditor's Report: A Dialogue," a panel discussion hosted by the NYSSCPA on Sept. 25. A video of the discussion is available here.

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