PCAOB Now Pilot Testing Its Impending Requirements for Disclosure of Critical Audit Matters

By:
Ruth Singleton
Published Date:
Dec 5, 2018

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Last year, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard that will significantly expand the auditor’s report, requiring auditors to disclose any “critical audit matters” (CAMs) that they encounter during their audits. With the implementation dates of this new standard fast approaching, the PCAOB has been working with companies conducting “dry runs” of the standard, according to Accounting Today.

The standard, the Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, defines a CAM as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee; that relates to both accounts or disclosures that are material to the financial statements; and that 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, describe how it was addressed in the audit, and refer to the relevant financial statement accounts or disclosures. The PCAOB adopted the standard on June 1, 2017, and the Securities and Exchange Commission formally approved it on Oct 23, 2017.

The CAMs requirements will be phased in, beginning with audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for all other companies for fiscal years ending on or after Dec. 15, 2020. During an audit conference on Dec. 4, 2018, at Baruch College, PCAOB deputy chief auditor Jennifer Rand said that guidance for the new standard should be available early next year.

“I know from our Investor Advisory Group meeting a few weeks ago investors are very excited to see this,” Rand said. “They are hopeful that auditors will provide audit-specific information. They are interested in learning what the significant issues are for the auditors, so we’re very hopeful we will be successful in our implementation of this. We know that many auditors are already working on doing pilot testing and dry runs of critical audit matters, working with audit committees and management. We’ve been hearing some very positive feedback about that. We’re very encouraged that’s happening so that once it does go into effect, it’s not catching anyone off guard. We know it’s a very big change for auditors and, if you’re involved connected with the pilot testing and dry runs, we’re very much appreciative of your effort in connection with that. If there are any questions that come up with that or any challenges, we want to hear what those are.”

SEC deputy chief accountant Marc Panucci, who also spoke at the  Baruch conference, said that the SEC is interested in monitoring the implementation of the new auditor’s report and the new CAMs, as well as the feedback. “Our understanding is there’s a lot of effort going on around the dry runs,” he said. “The firms are trying to touch as many, if not all, large accelerated filers since they’re the ones that are going to have to do it in ’19. Our understanding of audit committees of those companies, if they’re not seeing it, they’re raising their hand and asking for it because they see the benefits of the dry runs.”

On Sept. 25, 2017, the NYSSCPA presented “The Expanded Auditor's Report: A Dialogue,” a panel discussion about the new requirements. Trusted Professional Staff Writer Chris Gaetano served as the moderator, and the participants were Jeanette M. Franzel, at the time a PCAOB member; NYSSCPA President Jan C. Herringer, who was at the time president-elect; Charles V. Abraham, a member of the NYSSCPA’s SEC Committee and now an NYSSCPA vice president; Jeff Mahoney, general counsel with  the Council of Institutional Investors,  and Thomas J. Ray, the PCAOB’s former chief auditor. A video of that discussion is available here.

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