On October 23, the Securities and Exchange Commission approved new audit reporting standard, AS 3101, proposed by the Public Company Accounting Oversight Board (PCAOB), which requires auditors to provide new information in public company audit reports, with the goal of making such reports more informative for investors and other financial statement users. The adoption of the PCAOB rule represents the first significant change to the auditor’s report in several decades and will fundamentally change the auditors’ report from a writing that consists entirely of boilerplate (in the vast majority of cases at least), into a document that contains disclosure specific to the particular filer, as discussed in more detail below. In a public statement on October 23, SEC Commissioner Kara Stein said she expects the PCAOB rule to result in auditor’s reports that “provide investors with more meaningful information about the audit, including significant estimates and judgments, significant unusual transactions and other areas of risk at a company,” which will “add to the total mix of information available to investors when making voting and capital allocation decisions.”

Under the PCAOB rule, an auditor will be required to disclose in its audit report any critical audit matters (CAMs) arising from the current audit or affirmatively state that the auditor determined that there were no CAMs. A CAM is defined as any matter arising from the audit of financial statements that was (or was required to be) communicated to the audit committee that both (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective or complex auditor judgment (with specific factors to be considered when making that determination included in the PCAOB rule). With respect to each CAM, an auditor is required to include in the relevant audit report, among other things, the principal considerations that led the auditor to determine that the matter is a CAM and a description of how the CAM was addressed in the audit. The CAM-related provisions of the PCAOB rule will apply to audits of (1) financial statements of large accelerated filers for fiscal years ending on or after June 30, 2019; and (2) financial statements of any other company to which the PCAOB rule applies (which expressly excludes emerging growth companies, among others) for fiscal years ending on or after December 15, 2020.

Additionally, under the PCAOB rule, the auditor’s report will be required to:

• include a statement disclosing the year in which the auditor began to consecutively serve as the company’s auditor, as well as a statement regarding the requirement for the auditor to be independent;
• be addressed to the company’s shareholders and board of directors (or equivalents);
• contain certain standardized language, including in the description of the auditor’s responsibility under PCAOB standards with respect to obtaining reasonable assurance that the financial statements do not contain any material misstatement; and
• follow a standardized form, meaning that (1) the auditor’s opinion will be required to appear in the first section of the auditor’s report; and (2) the auditor’s report must contain standardized section titles that help guide the reader.

These requirements will apply to audits of financial statements for fiscal years ending on or after December 15.

Some commenters expressed concern that the PCAOB rule’s requirements could, among other things, result in frivolous litigation and antagonistic auditor-audit committee relationships. Although the SEC found, as required by the Sarbanes-Oxley Act of 2002, the PCAOB rule to be consistent with the requirements of the Sarbanes-Oxley Act and necessary or appropriate in the public interest or for the protection of investors, SEC Chairman Jay Clayton reiterated in a public statement on October 23 that he was pleased the PCAOB intends to monitor the results of implementing the PCAOB rule, including consideration of any unintended consequences.

The full text of the adopting release is available here. The full text of the SEC Chairman’s public statement is available here, and the full text of SEC Commissioner Stein’s public statement is available here.