Yesterday, the PCAOB Staff issued implementation guidance addressing the changes in audit reports that are mandated under its new standard – AS 3101. As Liz blogged at the time of the standard’s adoption, AS 3101 requires a major revision in how auditors think about what – and how – they communicate to boards & investors.
The PCAOB Staff’s new guidance addresses both format & content and includes an annotated version of the new auditor’s report. Here’s an excerpt addressing the most controversial aspect of the new standard – the requirement that the report include a discussion of “Critical Audit Matters” (known as “CAMs”):
When the relevant requirements take effect, auditors of certain issuers will be required to include in the auditor’s report a communication regarding CAMs. CAMs are defined under AS 3101 as matters arising from the audit of the financial statements that have been communicated or were 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 communication of CAMs is not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans.
CAMs may be included voluntarily before the effective date or for entities for which the requirements do not apply. In advance of implementation, auditors may want to discuss the new CAM requirements with management and audit committees.
With the exception of the provisions relating to CAMs, the new standard goes into effect for audits of fiscal years ending on or after December 15, 2017. For large accelerated filers, the provisions relating to CAMs go into effect for audits of fiscal years ending on or after June 30, 2019. They go into effect for all other filers for audits of fiscal years ending on or after December 15, 2020.
Yesterday, PCAOB Chair Jim Doty delivered this speech entitled “The PCAOB’s Initiatives to Bolster Investor Trust in the Audit”…
Still More on “GAAP Means Nothing to Me”. . .
As another follow-up to my recent blog about institutional investors’ increasing disdain for GAAP, Broc pointed me in the direction of a series of articles in “Accounting Today” that say that it’s time for a paradigm shift in the way the accountants & standard setters approach GAAP. Why? According to the authors – two accounting profs – it’s because GAAP simply isn’t very useful:
We’re convinced that the consequence of practitioners’ inability to change is a status quo that is an unserviceable hodge-podge remnant of out-of-date practices. Specifically, we find today’s GAAP financial statements are as far removed from reports that meet the capital markets’ needs as hand-cranked telephones differ from smartphones. It follows, then, that financial accounting is stunningly ready for disruption.
Toward that end, we’re offering up paradigm-challenging truths to suggest that today’s financial accounting is bound to collapse. So, why would it?
It’s because the inability of practitioners to question their paradigm also keeps them from actually serving accounting’s ostensible information-providing purpose. Although they say they aim to present useful information, many inconsistencies between those words and their actions prove otherwise. Ultimately, their choices always favor what’s useful to themselves, not users.
Subsequent articles in the series drill down into some of the specific problems they have with the current financial reporting paradigm.
Corp Fin Updates “Financial Reporting Manual” for New Accounting Standards
On Friday, as noted in this Cooley blog, Corp Fin updated its “Financial Reporting Manual” to revise guidance on the pro forma impact of new accounting standards, address adoption of new accounting standards upon termination of EGC status, and clarify the effective date of the new revenue recognition & lease accounting standards for certain entities.
– John Jenkins