On October 23rd, the Securities and Exchange Commission (SEC) approved a new audit reporting standard from the PCAOB (Public Company Accounting Oversight Board). The standard will require auditors within their official report to shareholders to disclose much more about what they learn while auditing a company.
Law firm Morgan Lewis described the changes as “sweeping.” Meanwhile, the Council of Institutional Investors (CII) said that it and other investor groups have been advocating for a stronger standard since the step was recommended by a U.S. Treasury Department advisory body in 2008.
Although auditors will continue to grant the companies that they audit a pass or fail, they will also be required to include a discussion of critical audit matters—or CAMs— within the audit report. As part of the CAM disclosure, the auditor will be required to disclose matters that arose out of a financial statement audit that were communicated to the audit committee and that relate to accounts or disclosures that are material to the financial statements.
Central to this new reporting standard is the definition of CAMs. The PCAOB defines CAMs as “matters communicated or required to be communicated to the audit committee that (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective or complex auditor judgment.”
For large accelerated filers, the CAM disclosure requirements will take effect for audits of fiscal years ending on or after June 30, 2019. For all other filers, the requirement will take effect for fiscal years ending on or after December 15, 2020. Other additional disclosure requirements regarding auditor tenure and independence will take effect for all filers for audits of fiscal years ending on or after December 15, 2017.
The SEC has been full-throated in its support for the new auditing standard.
SEC Chairman Jay Clayton has said: “I strongly support the objective of the rule to provide investors with meaningful insights into the audit from the auditor. 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.”
Meanwhile, in a statement on the matter, Commissioner Kara Stein said that the new “standard marks the first significant change to the auditor’s report in more than 70 years.”
Law firm Wachtell Lipton weighed in, as well, issuing a memo that advised Issuers to make sure that their audit committees are initiating a conversation with their auditors about how the new standard might affect the audit process. The firm also recommended that issuers ask their auditors to notify them early if they intend to disclose a CAM.
The PCAOB’s fact sheet on the new standard.
And the SEC release.