At a meeting on Thursday, the Public Company Accounting Oversight Board approved a new standard that will significantly change the auditor’s report.

The new standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, will, among other things, require auditors to include a discussion of “critical audit matters” that have been communicated to the audit committee, particularly those that involve “especially challenging, subjective or complex auditor judgment.”

"The communication of critical audit matters in the auditor's report will mark a new era in the way auditors communicate with investors," said Martin Baumann, PCAOB chief auditor and director of professional standards, in a statement. "Investors will have a view inside the audit and will be armed with useful information when making important decisions."

Auditors will also need to disclose how many years they have consecutively audited the company.

Other changes to the report include:

  • The addition of a statement that the auditor is required to be independent.
  • New standardized language, including adding the phrase “whether due to error or fraud” in discussing the auditor’s responsibility to get reasonable assurance that financial statements are free of material misstatements.
  • A more standardized format, with the opinion in the first section, and new section titles.

"The changes adopted today breathe life into the audit report and give investors the information they've been asking for from auditors," said PCAOB Chairman James Doty in a statement. "The U.S. also now joins many other countries in adopting an expanded audit report."

In a statement released shortly after the board’s announcement, Center for Audit Quality executive director Cindy Fornelli said, "The CAQ applauds the PCAOB's efforts to enhance the auditor's reporting model to provide additional information to stakeholders in an increasingly complex and global business environment. We appreciate the board's responsiveness to concerns raised and recommendations made by the CAQ and the audit profession throughout the proposal process, including observations from the CAQ's field testing of the expanded model. This is a positive step toward continuous improvement of the audit to better serve investors and our capital markets.”


PCAOB chairman James Doty
PCAOB chairman James Doty Photographer: Rich Clement/Bloomberg

A long time coming

The board has been considering changes to the auditor’s report since 2010, with an original concept release being issued in 2011, and a proposed standard in August 2013.

“Investors have long called for enhancing the auditor’s report, given the effort involved and the value the auditor brings to investor confidence,” Doty said in a statement. “The new auditing standard before the board today is the first significant change to the standard form auditor’s report in more than 70 years. … The standard before the board today is grounded in considerable outreach to investors, auditors, capital-seeking securities issuers, academics and others, plus three extended public comment periods over a period of more than six years. It is backed up by a robust economic analysis of the impact of making audit reports more informative to our capital markets.”

Given the magnitude of the new requirements, the board is phasing in implementation of a relatively long period:

  • Changes other than the communication of critical audit matters will go into effect for audits for fiscal years ending on or after Dec. 15, 2017.
  • Communication of CAMs for large accelerated filers will be effective for audits for fiscal years ending on or after June 30, 2019.
  • Communication of CAMs for all other filers will be effective for audits for fiscal years ending on or after Dec. 15, 2020.

The new standard replaces parts of AS 3101, Reports on Audited Financial Statements, while the other parts will be renamed AS 3105, Departures from the Unqualified Opinions and Other Reporting Circumstances.

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Daniel Hood

Daniel Hood

Daniel Hood is editor-in-chief of Accounting Today and Tax Pro Today, and has covered the tax and accounting field for over 20 years.