Auditors have just been handed extensive new disclosure requirements to be included in audit reports that are largely expected to make public company audits take more time and cost more money.

The Public Company Accounting Oversight Board has adopted a long-awaited new standard that overhauls the standard audit report to require auditors to make new narrative disclosures regarding what troubled them most during any given audit. The standard requires auditors to identify and describe “critical audit matters,” or those issues that led to the most heartburn in arriving at a final audit opinion.

Officially, a CAM is described as any matter that was communicated to the audit committee, or was required to be communicated, relating to material accounts or disclosures that involved especially challenging, subjective, or complex auditor judgment. That opens up the black box inside which auditors have traditionally operated, giving investors new insight into what auditors did and found during the audit.

To help them identify what qualifies as a CAM, auditors are told to take into account certain factors, including the auditor’s assessment of the risk of material misstatement. Each CAM identified by the auditor must be named in the audit report with a description of the principal considerations that led the auditor to conclude it was a CAM. Auditors are required to explain how the CAM was addressed in the audit, and they’re required to tie it back to specific accounts or disclosures in the financial statements.

The PCAOB points out that thew new standard does not impose new performance requirements on the auditor other than the determination, communication, and documentation of critical audit matters, which will be based on work the auditor has already performed and on matters already communicated to the audit committee. "Additionally, our research has shown that similar auditor reporting introduced in the United Kingdom has not significantly increased audit fees and has not resulted in increased time to issue the auditor’s report,” said PCAOB Chief Auditor Marty Baumann

In addition to CAM disclosures, auditors also are required to include some additional new information in audit reports. They must disclose the year in which the auditor began serving as the company’s auditor, giving investors an easy way to identify the auditor’s tenure. Auditors must explain their already-existing requirements to be independent of the company and management in performing their work.

Auditors must add new standard language to assure investors understand the auditor’s duty to provide reasonable assurance that financial statements are free of material misstatements, whether due to error or fraud. Auditors also must open the audit report by addressing it specifically to the company’s shareholders and directors, who are the intended beneficiaries of the audit but who are unnamed in audit reports.

PCAOB Chairman James Doty described the requirements as the first significant change made to the standard auditor’s report in more than 70 years, responding to evolutionary changes in financial reporting that have made it more complex and more steeped in judgment and estimates. “It will make the auditor's report more relevant, useful and informative to investors and other financial statement users in light of the progress of history,” he said. “The new standard will breathe new life into a formulaic reporting model.”

Assuming the Securities and Exchange Commission approves the standard, which is required for PCAOB rules to take effect, the standard will take effect for audits of fiscal years beginning after Dec. 15, 2017, except the CAM disclosures. The PCAOB is giving auditors more time to develop and implement those disclosure processes.

CAM disclosures will take effect for large accelerated filers with fiscal years ending after June 30, 2019, and for other companies for fiscal years ending after Dec. 15, 2020. CAM disclosures will not be required for audits of investment companies other than business development companies, for broker-dealers, or for many employee stock purchase or savings plans.

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