Auditor’s Report Changes
The SEC unanimously approved a PCAOB auditing standard that requires significant enhancements to certain public company auditor’s reports, including the communication of critical audit matters (CAMs) and the disclosure of auditor tenure. These changes are intended to make the auditor’s report more informative. The new auditor’s report is designed to provide investors with more meaningful information about the audit, including significant estimates and judgments, significant unusual transactions, and other areas of risk at a company.
SEC Chairman Jay Clayton noted that he strongly supports the objective of the rule to provide investors with meaningful insights into the audit from the auditor. Mr. Clayton noted that “CAMs are designed to provide investors and other financial statement users with the auditor’s perspective on matters discussed with the audit committee that relate to material accounts or disclosures and involved especially challenging, subjective, or complex auditor judgment. Investors will benefit from understanding more about how auditors view these matters.”
Mr. Clayton further indicated that he is sensitive to some of the concerns with the changes to the auditor’s report raised by different stakeholders. Mr. Clayton has stated that he would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships. Accordingly, Mr. Clayton urges “all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB, to pay close attention to these issues going forward, including carefully reading the guidance provided in the approval order and the PCAOB’s adopting release.” Clayton is encouraged by the PCAOB’s stated intent to monitor the results of implementation, including consideration of any unintended consequences. Clayton noted that post-implementation review “of new standards, including the use of economic analysis tools, is an important component of high-quality regulatory decision-making.”
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