PCAOB Adopts New Expanded Auditor's Report

The 1970’s rock group, Kansas, lyrically claimed in their hit song “Dust in the Wind,” that “nothing lasts forever, but the earth and the sky.” Four decades later, even the traditionally sedentary accounting sector is proving those words true.

After surviving over 75 years with little substantive change, the standard auditor’s report is about to undergo a significant evolution. The Public Company Accounting Oversight Board (PCAOB) voted to adopt an expanded auditor’s report—still awaiting approval from SEC chairman Jay Clayton— to provide investors with an inside look at the interactions between an auditor and the entity’s audit committee.

The new audit report, eight years in the making, will enhance the traditional pass/fail opinion with a discussion of “critical audit matters” (CAMs). CAMs are matters involving especially challenging, subjective, or complex auditor judgment. The report must also include a disclosure of the auditor’s tenure to clarify the auditor’s independence requirements and their role in the audit of financial statements.

The PCAOB feels the new report will give investors additional insight into key judgments that the auditor has made and communicated to the audit committee. The report will identify each CAM and the considerations that led the auditor to identify it as a CAM. The report will describe how the CAM was addressed in the audit and identify the relevant financial statement accounts and disclosures that were affected. The auditor’s opinion will remain the key part of the audit report.

The auditor’s report will now include:

  • A statement that the auditor is required to be independent;

  • A statement “whether due to error or fraud” will be added to the description of the auditor’s responsibility to determine if the financial statements are free of material misstatements.

The PCAOB is currently working on two additional proposals regarding requirements when auditing accounting estimates and when auditors use the work of specialists.