Auditors have some new guidance from their regulators about how to begin revising their audit reports to reflect new requirements that take effect this year-end.
The Public Company Accounting Oversight Board adopted and the Securities and Exchange Commission approved changes to the standard audit report that begin taking effect for fiscal years beginning on or after Dec. 15, 2017. The new audit report will feature new language intended to give investors more insight into what auditors do on their behalf and what they find during the course of the audit.
The most significant addition to the standard report is the requirement for auditors to list and describe “critical audit matters” that surfaced during the audit. CAMs are those issues that were or should have been communicated to the audit committee involving accounts or disclosures material to financial statements that involved especially complex or difficult auditor judgment.
CAM disclosures will not begin at the end of 2017, however, unless auditors elect to do so voluntarily as permitted in the rule. The PCAOB gave auditors and audit committees until June 30, 2019, to work through how those disclosures will develop before they will be required in audit reports.
For this year-end, companies will begin to see other changes to the content of the standard audit report, such as the auditor’s tenure on the engagement, a brief new phrase regarding the auditor’s duty with respect to fraud, and an assertion by the auditor that it is required to be independent from management. The PCAOB’s recent 8-page guidance to auditors explains those more straightforward changes to the audit report. The guidance includes a sample audit report containing the new language as an example.
Speaking at a national accounting conference, PCAOB Chairman James Doty said the changes to the audit report, long demanded by investors, will make audit reports more relevant and more credible than the traditional boilerplate pass-fail report.
“In today's complex economy, and particularly in light of lessons learned after the financial crisis, investors in our public capital markets want a better understanding of the judgments that go into an auditor's opinion – not a recitation of the standard procedures that apply to any audit, but the specific judgments that were most critical to the auditor in arriving at the opinion,” said Doty. “In a matter of weeks, audit reports will be better organized, provide investors the tenure information they have asked for, and include an express statement about auditor independence beyond just what is implied by the title of the report.”
SEC Chairman Jay Clayton, speaking at the same accounting conference, said he’s hoping the new standard results in quality information for investors. “If it results in boilerplate, I’ll be really bummed out,” he said.