The SEC unanimously approved the PCAOB’s new auditor’s reporting standard Monday, supporting the communication of “critical audit matters” as a way for auditors to provide more information to investors and the public.
As defined in the PCAOB standard and related amendments, critical audit matters are 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.
The standard marks the first major change to the standard form auditor’s report in 70 years, PCAOB Chairman James Doty has said.
SEC Commissioner Kara Stein said in a statement that she expects the new auditor’s report to 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.
“This new information from the auditor will add to the total mix of information available to investors when making voting and capital allocation decisions,” Stein said. “Hearing directly from the auditor on these topics should improve an investor’s experience.”
SEC Chairman Jay Clayton said in a statement that he supports the standard, but he cautioned that some commenters were concerned that divulging critical audit matters would result in an increase in litigation that does not benefit investors, or in boilerplate disclosures. He said he will be disappointed if the new standard results in frivolous litigation costs or defensive, lawyer-driven auditor communications.
Because of this, Clayton said he is pleased that the PCAOB intends to monitor the results of implementation of the standard through its post-implementation review (PIR) process.
“Ultimately, I support a timely and effective PIR for these revised auditing standards,” Clayton said. “And it will be critical that this PIR is completed as soon as practicable. To this end, I have directed the SEC staff to assist as needed in that process.”
Center for Audit Quality (CAQ) Executive Director Cindy Fornelli called the new standard a positive step toward continuous improvement of the audit to better serve investors and capital markets. The CAQ is affiliated with the AICPA.
“The CAQ welcomes the enhanced auditor’s reporting model to provide additional information to investors and other stakeholders in an increasingly complex and global business environment,” Fornelli said in a statement. “We appreciate the PCAOB’s responsiveness to the auditing profession’s concerns and recommendations throughout the proposal process, including observations from the CAQ’s field-testing.”
—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.