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PCAOB Reproposes Changes to Auditor Reporting Model
Practical Law Legal Update w-002-2515 (Approx. 4 pages)
PCAOB Reproposes Changes to Auditor Reporting Model
by Practical Law Corporate & Securities
| Published on 12 May 2016 • USA (National/Federal) |
The Public Company Accounting Oversight Board (PCAOB) reproposed a new auditing standard and related amendments that would change the standard auditor's report to make it more relevant and informative to investors and other financial statement users.
On May 11, 2016, the Public Company Accounting Oversight Board (PCAOB) reproposed a new auditing standard and related amendments that would change the standard auditor's report to make it more relevant and informative to investors and other financial statement users. The reproposal retains the "pass/fail" model currently used in auditor's reports, but would require auditors to provide additional information about the audit and the auditor. The reproposed standard would not change the auditor's current role of attesting to information prepared by management. The reproposal revises the PCAOB's initial proposal issued in August 2013 (for more on the original proposal, see Legal Update, PCAOB Proposes Changes to Auditor Reporting Model).
Currently, an auditor's report identifies the financial statements that were audited, describes the nature of an audit, and expresses the auditor's opinion on the financial statements using standardized language. This format is described as a pass/fail model because the auditor opines on whether the financial statements are fairly presented (pass) or not (fail). However, as a result of performing the audit, the auditor often has additional information about the financial statements that is not included in the report, but which could be useful to investors and other users of the financial statements.
In order to make the auditor's report more informative and increase its relevance and usefulness, the proposed new format would:
- Pass/fail model. Retain the pass/fail model, including the basic elements of the current auditor's report.
- Critical audit matters. Require the auditor to communicate "critical audit matters" that would be specific to each audit. This would include any matter 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 judgments by the auditor.
The auditor would be required to:- take into account a list of factors in determining whether a matter involved especially challenging, subjective, or complex auditor judgment, such as the auditor's assessment of the risks of material misstatement, including significant risks;
- identify the critical audit matter, describe the principal considerations that led the auditor to determine that the matter is a critical audit matter, describe how it was addressed in the audit, and refer to the relevant financial statement accounts and disclosures. If there are no critical audit matters, the auditor would state that in the auditor's report; and
- document the basis for its determination of whether each matter 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, involved especially challenging, subjective, or complex auditor judgment.
- Clarifications of existing auditor responsibilities. Require the auditor to add certain standardized language in the auditor's report, including:
- a statement about the requirement for the auditor to be independent; and
- the phrase "whether due to error or fraud," when describing the auditor's responsibilities under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements.
- Tenure. Require the auditor to add a statement in the auditor's report about how long it has been the auditor for the company.
- Standardized form of the auditor's report. Require the opinion be the first section of the auditor's report, and require section titles to guide the reader.
The reproposed auditing standard would generally apply to audits conducted under PCAOB standards. However, the communication of critical audit matters would not be required for:
- Audits of brokers and dealers reporting under Rule 17a-5 under the Exchange Act.
- Investment companies other than business development companies.
- Employee stock purchase, savings, and similar plans.
The PCAOB is accepting public comments on the reproposal until August 15, 2016.
For more information on the reproposal, see the PCAOB's press release and fact sheet. For general information on auditing, see Practice Note, Auditing: An Overview.