SEC approves new audit report format, CAMs and all

In an investor-friendly decision that deputizes auditors with new duties, the Securities and Exchange Commission has given final approval to a new rule that dramatically expands the standard public company audit report.

The SEC approved with no changes a new auditing standard developed and adopted by the Public Company Accounting Oversight Board that requires auditors to list and describe “critical audit matters” arising during each public company audit. In a formal statement accompanying the SEC approval, which is required under Sarbanes-Oxley before PCAOB standards can take effect, SEC Chairman Jay Clayton said he “strongly supports the objective of the rule to provide investors with meaningful insights into the audit from the auditor.”

CAMs are those matters that consumed the bulk of the auditor’s attention because they involved especially challenging, subjective, or complex auditor judgment. To qualify as a CAM under the standard, matters must be communicated or subject to communication with the audit committee and must relate to material accounts or disclosures.

Despite more-than-usual corporate appeal for SEC relief from a PCAOB standard, the SEC addressed and dismissed each of the objections it fielded through its public comment and review process. Clayton said he’s “sensitive” to concerns raised about the new standard — that it could increase litigation, that it will lead to more boilerplate disclosures, and that it could chill dialogue between auditors and audit committees.

“I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships — with Main Street investors ending up in a worse position than they were before,” Clayton said.

Clayton called on all key players involved in implementation — including SEC staff and the PCAOB — to pay close attention to those concerns and stick to the guidance provided in both the SEC’s and PCAOB’s releases adopting the new standard. He also pointed out the role of independent audit committees “as one of the most significant and efficient drivers of value to Main Street investors.”

With each CAM identified by auditors for inclusion in the audit report, auditors must describe the principal considerations that led the auditor to identify it as a CAM, must describe how the CAM was addressed in the audit, and must tie it to the relevant accounts or disclosures in financial statements.

In addition to CAM disclosures, the new standard requires auditors to make affirmative statements about their independence from management and to disclose their tenure as the auditor for each public company engagement. The new audit report will be addressed specifically to shareholders and directors and will contain other changes to standard language, especially a reference to the auditor’s duty with respect to fraud.

The provisions of the standard that do not relate to CAMs take effect for audits of fiscal years ending after Dec. 15, 2017, so they will begin appearing in audit reports in 2018. The CAM provisions take effect for large accelerated filers for fiscal years ending on or after June 30, 2019, and for other companies where they apply for fiscal years ending on or after Dec. 15, 2020.