June 2, 2017

Audit Reports: PCAOB Approves Long-Awaited Major Expansion

Yesterday, after nearly a decade since the project kicked off, the PCAOB adopted a new standard for audit reports – “AS #3101.” Weighs in at 236 pages. The SEC still needs to approve the standard.

Among other items, audit reports will need to describe the auditor’s take on “critical audit matters” that are communicated to the audit committee. These are matters that relate to material financial statement accounts or disclosures & involve especially complex judgment. Here’s the PCAOB’s press release. And see this Jack Ciesielski blog – and this WSJ article. We’ll be posting memos in our “Audit Reports” Practice Area.

This represents the first major revision to the audit report in over 50 years. It requires a major revision in how auditors think about what – and how – they communicate to boards and investors. It requires increased transparency on the part of auditors, who will need to adapt to the change – or face the consequences. This is a positive development for both investors and auditors if done right.

If approved by the SEC, parts of the rule – relating to the auditor’s tenure & role – would be effective for 2018. And the requirement to describe critical accounting matters would be effective for large accelerated filers beginning mid-2019; all other companies starting in 2021.

Here’s an excerpt from the statement by PCAOB Board Member Steven Harris:

Today’s action is a direct response to calls from investors for the Board to expand the auditor’s report to include information about the difficult parts of the audit, and information that the auditor gained from the audit that he or she would like to know as an investor – basically what “kept the auditor awake at night.”

Audit Reports: What Other Countries Already Do

For an idea of what the newly-enhanced audit report in the USA will look like, we can look to the UK & other countries that already have similar requirements. See this excerpt from Deloitte’s 2016 report on Marks and Spencer, courtesy of this SEC Institute Blog:

We performed a full scope audit on seven components representing 99% of the Group’s revenue, 90% of the Group’s profit before tax and 90% of the Group’s net assets. During our first year as auditor of the Group, we visited all significant locations. For our second year, we have implemented a rotational approach to these visits. We determined materiality for the Group to be £30 million. We reported all audit differences in excess of £1 million.

PCAOB’s Proposal: Auditor’s Specialist Use

Yesterday, in this 142-page proposing release, the PCAOB proposed to strengthen requirements that would apply when auditors use the work of specialists in an audit. Here’s the PCAOB’s press release. Comments are due by August 30th.

PCAOB’s Proposal: Auditor’s Estimates (Including Fair Value Measurements)

Yesterday, in this 152-page proposing release, the PCAOB proposed to enhance the requirements that apply when auditing accounting estimates, including fair value measurements. Here’s the PCAOB’s press release. Comments are due by August 30th.

Liz Dunshee