Reports prepared by public company auditors will contain more information for investors and other financial statement users as a result of new rules approved by the PCAOB during an open meeting in Washington.
Under the new PCAOB standard and related amendments, the auditor's report will retain the pass/fail opinion of the existing auditor's report but also will include a new description of "critical audit matters," providing financial statement users with information about the most challenging, subjective, or complex aspects of the audit.
The standard will create the first significant change to the standard form auditor's report in 70 years.
Critical audit matters are defined as any matter arising from the current period's audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
- Relates to accounts or disclosures that are material to the financial statements, and
- Involved especially challenging, subjective, or complex auditor judgment.
If no critical audit matters arose from the audit, the auditor's report must state that there were no critical audit matters.
Additional changes to the auditor's report that were approved recently include items that are intended to clarify the auditor's role and responsibilities, provide additional information about the auditor, and make the auditor's report easier to read.
The standard will apply to audits conducted under PCAOB standards, but communication of critical audit matters will not be required for audits of:
- Brokers and dealers.
- Investment companies other than business development companies.
- Employee stock purchase, savings, and similar plans.
- Emerging growth companies.
The standard is subject to approval by the SEC. If approved, all provisions other than those related to critical audit matters will take effect for audits for fiscal years ending on or after Dec. 15, 2017. Provisions related to critical audit matters will take effect for audits for fiscal years ending on or after June 30, 2019, for large accelerated filers, and for fiscal years ending on or after Dec. 15, 2020, for all other companies to which the requirements apply.
Pending SEC approval of the final standard, auditors may elect to comply before the effective date.