Statement on Adoption of an Auditing Standard on the Auditor’s Report

I support today's vote on the adoption of a new auditing standard that makes the standard auditor's report more informative and useful by requiring auditors to communicate additional information about the audit of the financial statements and by making other improvements to the auditor's report.

Investors and other users of public company financial statements are the beneficiaries of the audit, and the auditor's report is the primary means by which the auditor communicates with them. But for decades communication between auditors and investors has suffered a multifaceted "expectations gap" – a gap between what investors and other financial statement users expect of independent auditors and what auditors deliver.[1]

Investors and other users of audited financial statements have called for auditors to convey more information in their audit reports about the auditor's responsibilities, the nature of the work performed, the level of assurance provided by the audit, and additional information about significant matters in the financial statements or the audit.

The Board's project on the auditor's reporting model originated as a step toward addressing some elements of this expectations gap.[2]

The standard and amendments presented to the Board today should result in investors receiving more information about certain unique aspects of each financial statement audit and should help clarify certain of the auditor's responsibilities. In doing so, this new approach to auditor reporting should spur subtle changes in the mode and nature of communications between and among public companies, their audit committees, auditors, and investors.

Critical Audit Matters

The new standard will retain the benefits of the pass/fail audit opinion as a signal of reasonable assurance about the financial statements and disclosures. It will also require a new type of disclosure to provide additional information about the audit. That is, auditors will be required to inform investors and other financial statement users of critical audit matters that arise during the audit.

The Board has refined the concept of a critical audit matter in successive proposals to include any matter arising from the audit of the financial statements 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 auditor judgment.

Similar in concept to enhanced auditor reporting recently adopted by international standard-setters and other non-U.S. regulators, critical audit matters have as their focus the issues faced by the auditor in each audit, grounded in the auditor's expertise and judgment.[3]

Under the Board's new auditing standard, auditors will be required to identify the critical audit matter(s), describe the auditor's principal considerations for determining that a matter was critical, describe how the critical audit matter was addressed in the audit, and refer to the relevant financial statement accounts and disclosures. And if the auditor determines that there are no critical audit matters, the auditor must state so in the auditor's report. Auditors will also be required to document the basis for determining critical audit matters.

These requirements took into account a number of complicating operational factors and competing policy views that the Board has considered since it issued its first proposal in 2013.[4] In fact, following issuance of a concept release in 2011, the Board sought public input on two variations of the proposal to refine its approach.

I share the views stated in the adopting release[5] that information provided through critical audit matters can benefit investors and other users of the financial statements. Auditor reporting on especially challenging, subjective, or complex auditor judgments should provide some insights about the company's financial statements and the audit that can benefit investors and users of the financial statements. Critical audit matters also call attention to certain matters reported by management. Such information, and therefore, such insights should be specific to the facts and circumstances of each audit and each set of financial statements.

Evaluating the overall effect of new standards is an important part of economic analysis of regulatory decision-making. I encourage academic research on the impact of expanded auditor reporting in the U.S. environment as the standard is implemented, as well as in the international environment as similar requirements are being implemented in other countries.

Other Changes to the Standard Auditor's Report

Other changes to the standard auditor's report include clarifications to statements in the auditor's report about the requirements for the auditor: to be independent of the client; to detect material misstatements whether due to error or fraud; and to perform procedures related to the notes to the financial statements.

They also include clarifications to the auditor's description of the nature of an audit (i.e., performing risk-based procedures and evaluations of certain matters) and to the addressees of the audit report. The new standard would also reorganize the format of the standard auditor's report to help guide the reader through it.

There is one new requirement, however, with which I have expressed skepticism about its usefulness and appropriateness in the auditor's report throughout the course of this project.[6] The new standard will require disclosure of the duration that the auditor has been auditing a public company.

The adopting release expressly disclaims any relationship between an auditor's tenure and either audit quality or auditor independence. The rationale for disclosure in the audit report, however, is based solely on providing the information "in a readily accessible and consistent location" to reduce search costs for those investors and others who seek the information.

I am concerned that including this information in the auditor's report may convey an implication that there is a generalizable relationship between auditor tenure and audit quality and/or auditor independence, assumptions that may not be valid. If information about auditor tenure is important and relevant for investors and other users, then I would support an analysis of alternatives for the best party to make the disclosure and the mechanism for doing so.

In the meantime, I would encourage academic research about the impact and usefulness of the auditor tenure disclosure as it becomes implemented as part of this standard.

Need for Additional PCAOB Action

Investors and other stakeholders have called for increased auditor responsibilities and communications with respect to "other information" that accompanies audited financial statements and financial information otherwise released by the company. The Board's action today does not address this issue that was originally included in the 2013 proposal.[7]

The staff has added to its research agenda the topic of "The Auditor's Role Regarding Other Information and Company Performance Measures, Including Non-GAAP Measures."[8] As part of this project, an interdivisional team will perform research, outreach, and economic analysis to assess whether there is a need for a change to the PCAOB standards or other regulatory approaches in this area, and make recommendations to the Board. This is a complex and important project, and I look forward to further progress on this issue.


In closing, I repeat my support for the new standard and related technical amendments. In my view, the incremental improvements to the standard auditor's report will benefit investors and serve the public interest.

I would like to join my fellow Board members in thanking the staff for their efforts on this multi-year project. In particular, I would like to recognize the significant contributions of the staff from the Office of Chief Auditor, Office of Economic and Risk Analysis, and the Office of General Counsel.

I would also like to thank the staff of the Securities and Exchange Commission for their questions, comments, and feedback during this project.

[1] As I noted in my statement on the Board's first proposal in 2013, academic research describes the expectations gap broadly as "a gap between the information that is currently provided about the entity in the financial statements and through the audit report and the information that users perceive to be useful." This gap includes the difference between (1) what users expect from the financial statement audit and what the audit actually represents; (2) the information that users want and what is conveyed in the financial statements and the auditor's report; and (3) what the auditors communicate and what users desire as part of the auditor's communications. See Jeanette M. Franzel, Board Member, Statement on Proposed Auditing Standards Regarding the Auditor's Report and the Auditor's Responsibilities Regarding Other Information, Aug. 13, 2013.

[2] See Jeanette M. Franzel, Board Member, Audit Expectations Gap: A Framework for Regulatory Analysis, Dec. 13, 2016.

[3] See International Standard on Auditing ("ISA") 701, Communicating Key Audit Matters in the Independent Auditor's Report, Sep. 2014, and ISA (UK and Ireland) 701, Apr. 2016; see also Article 10, Audit Report, of Regulation (EU) No 537/2014 of the European Parliament and of the Council, Apr. 16, 2014.

[4] See Franzel, 2013.

[5] See PCAOB Release No. 2017-001, at 75-80.

[6] Franzel, 2013; Jeanette M. Franzel, Board Member, Statement on Reproposed Auditing Standard on the Auditor's Report, May 11, 2016.

[7] PCAOB Release No. 2013-005, Aug. 13, 2013.

[8] PCAOB, Standard-Setting Update, Mar. 31, 2017.