PCAOB Reproposes Standard to Enhance the Auditor’s Report for Investors with Refined Requirements for Critical Audit Matters

The Public Company Accounting Oversight Board today reproposed for public comment the auditor reporting standard to enhance the auditor's report to make it more informative for investors by requiring auditors to provide information on critical audit matters.

“In today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors want a better understanding of the judgments that go into an audit opinion,” said PCAOB Chairman James R. Doty.  “This proposal delivers on the intention of Congress to further the public interest in the preparation of more informative audit reports for public investors.” 

The Board is reproposing the auditor reporting standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments to certain other PCAOB standards.

The revised proposal would retain the pass/fail model in the existing auditor's report, but would provide additional information in the report, such as the communication of critical audit matters arising from the audit and new elements related to auditor independence and auditor tenure.

The Board received extensive public comment in response to its August 2013 proposal on the auditor's reporting model. After analyzing the comments and conducting additional outreach, the concept of critical audit matters has been carried forward from the 2013 proposal although the reproposed requirements have been refined 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 a critical audit matter

• Narrowing the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment

• Revising the related documentation requirement

• Expanding the communication requirement to require the auditor to describe how the critical audit matter was addressed in the audit

The revised proposal would generally apply to audits conducted under PCAOB standards. Unlike the 2013 proposal, however, the requirements regarding critical audit matters would not apply to 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.

"The refinements to the 2013 proposal presented today address feedback we received, including many of the concerns we heard, while still providing important additional information to investors," said Martin F. Baumann, PCAOB Chief Auditor and Director of Professional Standards.

The project to enhance the auditor's reporting model began in 2010 with PCAOB staff outreach to different stakeholders, including investors, financial statement preparers, and auditors. In June 2011, the Board issued a Concept Release to seek public comment on potential changes to the auditor's reporting model. The Board also held a public roundtable shortly after issuing the concept release.

In August 2013, the Board proposed the auditor reporting standard along with another new auditing standard regarding the auditor's responsibilities for other information outside the financial statements. The Board received nearly 250 comment letters on the initial proposal and at a two-day public meeting in April 2014 as well as at PCAOB Investor Advisory Group and Standing Advisory Group meetings. More on the history of the project, including all documents, can be found in Rulemaking Docket 034. The Board is not reproposing the other information auditing standard at this time.

Comments on the proposed standards and related amendments are due by August 15, 2016. A fact sheet on the proposal is also available.