SEC Approves New PCAOB Standard for Auditor's Report
On October 23, 2017, the U.S. Securities and Exchange Commission ("SEC") approved the Public Company Accounting Oversight Board's ("PCAOB") new auditing standard which requires the auditor's report to provide new information for the benefit of investors and other financial statement users.
In addition to continuing to give a pass or fail opinion in the auditor's report, the report must include a discussion of critical audit matters ("CAMs"). CAMs are matters arising from the audit of the financial statements that (i) have been (or are required to be) communicated to the audit committee, (ii) relate to accounts or disclosures that are material to the financial statements, and (iii) involve especially challenging, subjective, or complex auditor judgment. Although not expected, if no CAMs were to be identified in an audit, the auditor's report is required to include a negative affirmation to that effect.
Among other things, the new standard also requires the auditor's report to include statements regarding the auditor's tenure and the requirement that the auditor be independent, as well as changes the organization and format of the auditor's report.
The new requirements will become effective in three phases:
New auditor's report format, tenure of the auditor, and other information must be included in audits for fiscal years ending on or after December 15, 2017.
Communication of CAMs for audits of large accelerated filers must be included in audits for fiscal years ending on or after June 30, 2019.*
Communication of CAMs for audits of all other public companies must be included in audits for fiscal years ending on or after December 15, 2020.*
The disclosure of CAMs may have a significant impact on discussions between auditors and audit committees, but the phase-in period before implementation of the communication of CAMs requirement provides companies with the opportunity to plan how to address these disclosures and create a process with their auditors. For calendar year end companies, the other changes will need to be reflected in the auditor’s report filed with their 2017 Form 10-Ks (or Form 20-Fs) in early 2018.
*Audits of emerging growth companies, brokers and dealers, investment companies other than business development companies, and employee stock purchase, savings, and similar plans do not have to include communication of CAMs. No similar exemption exists for smaller reporting companies or foreign private issuers.