PCAOB refines auditor’s reporting model proposal

The PCAOB proposed a revised standard to make auditors’ reports more informative to investors.

Information provided in audit reports has been largely unchanged since the 1940s; the PCAOB has sought for years to find a way to communicate more information from the audit to the public.

Under the new proposal, auditors’ reports would retain the current pass/fail model but would provide additional information. This would include the communication of critical audit matters arising from the audit and new elements related to auditor independence and auditor tenure.

The new proposal, which accounts for public comments on the PCAOB’s earlier 2013 proposal, seeks to:

• Limit the source of potential critical audit matters to matters communicated or required to be communicated to the audit committee.
• Add a materiality component to the definition of a critical audit matter.
• Narrow the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment.
• Revise the related documentation requirement.
• Require the auditor to describe how the critical audit matter was addressed during the audit.
• Change the format of the auditor’s report, moving the opinion on the financial statements to the front and requiring section titles in an effort to make it easier for readers to follow.

The revised proposal would generally apply to audits conducted under PCAOB standards. But unlike the 2013 proposal, the new proposal would not apply to audits of:

• Brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a-5.
• Investment companies other than business development companies.
• Employee stock purchase, savings, and similar plans.

Comments on the proposal will be accepted through Aug. 15 and can be made at the board’s website, pcaobus.org.