Fact Sheet: Auditor's Reporting Model Reproposal
May 11, 2016
The Public Company Accounting Oversight Board has reproposed for public comment an auditor reporting standard that would enhance the auditor's report to make it more relevant and informative to investors and other financial statement users.
The reproposal revises the Board's initial proposal issued in August 2013. In particular, it modifies the definition of what would be included as "critical audit matters," including limiting the sources of potential critical audit matters and adding a materiality component.
The communication of critical audit matters would inform investors and other financial statement users of matters arising from the audit that required especially challenging, subjective, or complex auditor judgment, and how the auditor responded to those matters.
In addition, the reproposal includes other improvements, primarily intended to clarify the auditor's role and responsibilities in the audit of financial statements and to make the auditor's report easier to read.
The reproposed standard would retain the pass/fail model of the existing auditor's report, which is generally acknowledged to be a useful signal as to whether the audited financial statements are presented fairly. The reproposed standard would not change the auditor's current role of attesting to information prepared by management.
Comments on the reproposed standard and related amendments to other PCAOB standards are due August 15, 2016.
What is Being Reproposed?
The reproposed standard would include the following significant changes to the existing auditor's report:
- Critical audit matters — would require communication in the auditor's report of any critical audit matters arising from the audit of the current period's financial statements.
- Definition of a critical audit matter — 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
- Involved especially challenging, subjective, or complex auditor judgment
- Factors in determining critical audit matters — the auditor would 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.
- Communication in the auditor's report — the auditor would 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.
- Critical audit matters documentation — the auditor would document the basis for its determination of whether each matter that both: (1) was communicated or required to be communicated to the audit committee; and (2) 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 — the auditor would add certain standardized language in the auditor's report, including adding 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 — the auditor would 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 standard would generally apply to audits conducted under PCAOB standards. The communication of critical audit matters would not be required, however, for audits of brokers and dealers reporting under the Securities Exchange Act of 1934 Rule 17a-5; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
How Does the Reproposal Differ from the 2013 Proposal?
After consideration of comments received and additional feedback from outreach activities about the 2013 proposal, the reproposed requirements for critical audit matters have been modified in a number of respects, including by:
- Limiting the source of potential critical audit matters to matters communicated or required to be communicated to the audit committee
- Adding a materiality component to the definition of critical audit matter
- Narrowing the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment
- Narrowing the related documentation requirement consistent with the definition
- Expanding the communication requirement so that the auditor describes how the critical audit matter was addressed in the audit
In addition, the reproposal does not include the provision for a new auditing standard regarding the auditor's responsibilities for other information outside the financial statements.
- In 2008, the U.S. Department of the Treasury's Advisory Committee on the Auditing Profession issued its final report recommending, among other things, that the PCAOB "consider improvements to the auditor's standard reporting model."
- In 2010 and 2011, PCAOB staff conducted outreach to investors, auditors, preparers of financial statements, audit committee members, and other interested parties to seek their views on potential changes to the auditor's report.
- In March 2011, the staff presented its findings to the Board at an open meeting.
- In June 2011, the Board issued a concept release to seek public comment on potential changes to the auditor's reporting model. The Board received 155 comment letters.
- In September 2011, the Board held a public roundtable to obtain insight from a diverse group of investors and other financial statement users, preparers of financial statements, audit committee members, and auditors on the alternatives presented in the concept release.
- In August 2013, the Board proposed for public comment the auditor reporting standard that would have required auditors to include a discussion of critical audit matters specific to the audit. The Board received 248 comment letters.
- In April 2014, the Board held a public roundtable to discuss the proposed standard and comments received and obtain further input on the 2013 proposal.
- Documents associated with the auditor's reporting model standard-setting project can be found on the PCAOB website under Docket 034.