On Monday, October 23, the SEC accepted the Public Company Oversight Board’s new standard for enhanced audit reports. Previously approved by the PCAOB in June, the new standard significantly expands the scope of audit reports to include a discussion of “critical audit matters” (CAMS) and requires a new report format that will include, among other material, information on auditor tenure.
SEC chairman Jay Clayton supports the new standard. “CAMs are designed to provide investors and other financial statement users with auditors’ perspectives on matters discussed with the audit committee that relate to material accounts or disclosures and involve especially challenging, subjective or complex auditor judgment. Investors will benefit from understanding more about how auditors view these matters.”
The Commission’s decision to approve was not without significant discussion and debate. A number of industry groups, including the U.S. Chamber of Commerce, expressed their concern over the impact of the new standard, and the additional stress it will impose on auditor/client relationships, especially with the audit committee.
The new standard becomes effective in three phases, as follows:
New auditor’s report, tenure and other information: audits for fiscal years ending on or after December 15, 2017
Communication of CAMs for large accelerated filers: audits for fiscal years ending on or after June 30, 2019
Communication of CAMs for all other companies: audits for fiscal years ending after December 15, 2020
Ultimately, SEC filers and their audit committees will need to understand the impact these changes will have on their audit reports, and begin to educate investors and other stakeholders on what the changes could mean for their audit reporting.