The SEC recently approved new Public Company Accounting Oversight Board ("PCAOB") auditing rules that will require the auditors of public companies to "include significant new information in audit reports." The new rules will more closely align U.S. auditing standards with those adopted (i) by the International Auditing and Assurance Standards Board, (ii) in the European Union and (iii) in the United Kingdom.
In a memorandum, Cadwalader attorneys explain the changes associated with the adoption of the new auditing rules. The most "significant" change is the requirement that auditors identify critical audit matters ("CAM") within their audit reports. Based on "subjective" criteria, auditors must report "any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment." The attorneys noted that auditors must (i) document whether certain matters communicated to audit committees are considered CAMs, and (ii) include all CAMs in an audit report, with an explanation of principal considerations for determining that matters are CAMs. These rules will become effective for audits of "large accelerated filers" for fiscal years ending on or after June 20, 2019, and for all other issuers for fiscal years ending on or after December 15, 2020.
In addition to the major CAM-related changes, the attorneys highlighted the following enhancements to audit reports instituted by the new rules: (i) the auditor's unqualified opinion (and the basis for the opinion) will appear near the top of the audit report in the first and second sections, (ii) audit reports must contain auditor statements disclosing the year in which the auditor began serving consecutively as the issuer's auditor, and acknowledging the auditor independence requirement, and (iii) certain formatting changes will be made to the audit report. All of these changes will become effective for audits of fiscal years ending from December 15, 2017 forward.
Commentary / Joseph V. Moreno
The SEC's unanimous approval of the new rules indicates an inclination by the current leadership to respond to longstanding calls for greater transparency around the audits of public companies, and an alignment with similar audit standards outside the United States. In the time leading up to the effective date, audit firms should prepare for how they intend to work with clients that are subject to the new rules on identifying, discussing, and communicating CAMs. And since the new rules do not include any templates or examples of what a CAM description should look like, there will be a learning curve as to how much detail should be provided to satisfy these new rules in the eyes of the PCAOB.
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