The new rules, which the Public Company Accounting Oversight Board (PCAOB) published in June, retain the pass/fail opinion of the existing auditor’s report, but also require auditors to list critical audit matters.

These are defined as ‘as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: relates to accounts or disclosures that are material to the financial statements; and involved especially challenging, subjective, or complex auditor judgment.’

The SEC has given unanimous approval to the new reporting format, which it says should 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. 

However, during the consultation process a number of large corporations and industry groups raised concerns around critical audit matters, including whether they will result in an increase in litigation that does not benefit investors; whether critical audit matters will convey meaningful information specific to the audit or will instead provide boilerplate; and whether critical audit matters will chill auditor-audit committee dialogue.

In response, SEC chair Jay Clayton acknowledged the concerns and said that impairing or otherwise negatively affecting the work of well-functioning audit committees could have significant adverse effects on investors.

‘I 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 — with Main Street investors ending up in a worse position than they were before.

‘I therefore urge 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 said.

Clayton also urged the PCAOB to take into account the results of early-stage analysis through its post implementation review of the standard, saying that depending on the findings of this analysis, including an evaluation of unintended consequences, the board should be open to making changes, if necessary, to the revised auditing standards, including to the effective date for companies other than large accelerated filers.

The SEC order on the PCAOB auditor reporting standard is here.

Report by Pat Sweet