By Allison M. Henry, CPA, CGMA, vice president – professional and technical standards

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) finalized its six-year project to overhaul the auditor’s report. The new standard, The Auditor's Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion, requires auditors to communicate critical audit matters in the audit report. The PCAOB defines critical audit matters as any issue communicated to the audit committee relating to material accounts or disclosures that “involved especially challenging, subjective, or complex auditor judgment.”

Proponents of the new report format argue that auditors have valuable insight into their clients’ businesses that should be shared with investors. Martin F. Baumann, PCAOB chief auditor and director of professional standards, said in a statement that “The communication of critical audit matters in the auditor’s report will mark a new era in the way auditors communicate with investors. Investors will have a view inside the audit and will be armed with useful information when making important decisions.”

While auditors largely agree with this underlying premise, some argue that they should not be required to communicate information publicly that has not previously been communicated by management (such as confidential client information). Since no changes in the confidentiality requirements are expected to be made, auditors will need to navigate this new reporting requirement with caution. Ongoing communications with audit committees will be crucial to ensure the quality of the final audit report.

The PCAOB’s requirement to communicate critical audit information is effective for large accelerated filers for fiscal years ending on or after June 30, 2019 (2020 for other filers). Fortunately, U.S. auditors will have the experience of others to lean on since similar standards have already been implemented in other parts of the world. The United Kingdom’s Financial Reporting Council made changes to reports effective for fiscal years on or after Oct. 1, 2012, and published a comprehensive review of the auditor’s transition experience. Changes to the auditor’s reports in the European Union are effective for fiscal years on or after June 17, 2016. And the International Accounting and Assurance Standards Board rolled out changes for fiscal years ending on or after Dec. 15, 2016.

In addition to “critical matters,” the PCAOB’s new standard also requires auditors to communicate specific items related to auditor independence and tenure, and to include a new statement that the auditor “obtains reasonable assurance about whether the financial statements are free of material misstatements whether due to error or fraud.” These other changes are effective for fiscal years ending on or after Dec. 15, 2017.

PICPA’s Accounting and Auditing Procedures Committee is monitoring the progress of the AICPA Auditing Standards Board’s project on auditor’s reports. If you would like to share your perspective on this project with the committee, please forward your comments to me at ahenry@picpa.org.