This study conducted by the Association of Chartered Certified Accountants reports on the results of a year of international reporting of “key audit matters,” the International Auditing and Assurance Standards Board’s analog to “critical audit matters” in the U.S. The study looked at 560 audit reports across 11 countries. These types of studies may provide some useful insights for companies in the U.S.: disclosure of “critical audit matters” will be required as part of the auditor’s report in the U.S. for audits of fiscal years ending on or after June 30, 2019 (for large accelerated filers) and December 15, 2020 (for all other companies to which the requirements apply). According to the study, financial reporting improved following the adoption of KAMs in 2016. Not only did the disclosures themselves provide better information, but the study saw improvements in governance, audit quality and corporate reporting.
In what were surely unprepared remarks to the American Institute of CPAs conference on SEC and PCAOB developments, as reported by Bloomberg BNA, SEC Chair Jay “the Dude” Clayton commented on the impact he expects the new form of auditor’s report could have on his mood: “‘If it results in quality, I’ll be happy….And if it results in boilerplate, I’ll be really bummed out.’”
Yesterday, the SEC approved the PCAOB’s proposed rules requiring changes to the auditor’s report, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, along with related amendments to other auditing standards. The new auditing standard for the auditor’s report, while retaining the usual pass/fail opinion, will require auditors to include a discussion of “critical audit matters,” that is, “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although at a later phase-in date). The SEC also determined that the new standard, other than the provisions related to CAMs, will apply to emerging growth companies. As Commissioner Kara Stein observed in her statement, the new “standard marks the first significant change to the auditor’s report in more than 70 years.”
With the SEC now considering whether to approve AS 3101, the PCAOB’s new enhanced disclosure requirement for the auditor’s report (see this PubCo post), and SEC concept releases and other disclosure projects still hovering in the ether, there seems to be a steady march by companies toward inclusion of more supplemental audit committee disclosures on a voluntary basis, according to a new study by the EY Center for Board Matters. The study, which reviewed audit committee reporting in proxy statements by companies in the Fortune 100 for 2017, showed that companies in that elite group have demonstrated “[y]ear-over-year growth in voluntary audit-related disclosures in 2017 filings … similar to that seen in 2015 and 2016, indicating that companies and audit committees continue to reflect upon and make changes to the information that they communicate to shareholders.”
by Cydney Posner Yesterday, as anticipated, the PCAOB adopted, subject to SEC approval, a new auditing standard for the auditor’s report that, while retaining the usual pass/fail opinion, will require auditors to include a discussion of “critical audit matters,” that is, “matters communicated or required to be communicated to the […]
by Cydney Posner At a meeting yesterday of the PCAOB’s Investor Advisory Group, two working groups reported on topics that might be of particular interest: non-GAAP financial measures and enhanced audit reports.