The Public Company Accounting Oversight Board (PCAOB) adopted a new auditor reporting standard on June 1, 2017.1 If approved by the U.S. Securities and Exchange Commission (SEC), the new standard would impose additional disclosure requirements in auditor's reports, including communication of "critical audit matters" (CAMs),2 and should merit particular attention from audit committee members, chief financial officers, chief accounting officers, and general counsels.

The new standard is aimed at providing investors with information traditionally communicated only to the audit committee. Although designed to make audit reports more informative and relevant to investors and other financial statement users,3 several commenters have noted that the new standard could impair internal discussions in the interest of shielding company matters from potentially misleading public disclosure, or result in additional liabilities or costs.


  • Auditor's reports required to communicate the existence of "critical audit matters" (CAMs) identified during the course of the audit

  • If approved by the SEC, CAM disclosure required starting with fiscal years ending on or after June 30, 2019 for audits of large accelerated filers4 and for fiscal years ending on or after December 15, 2020 for audits of all other companies

  • CAM disclosure not required for audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; and employee stock purchase, savings, and similar plans

  • Given that the proposed CAM disclosure is "principles-based" and subject to varying interpretation, it remains to be seen how auditors will present the disclosure for particular companies

  • Some commenters wary the standard may result in chilling communications between audit committees and auditors, increase liability and costs and create redundant or boilerplate disclosure

  • Additional disclosures related to auditors' tenure and independence and clarifying the scope of auditors' responsibility for material misstatements required starting with fiscal years ending on or after December 15, 2017

Changes to Existing Reporting Standards

Auditor's reports will now have to state that the auditor is required to be independent, disclose the year the auditor began serving consecutively as the company's auditor, specify the addressees of the report, and contain the phrase "whether due to error or fraud" when describing the auditor's responsibility to obtain reasonable assurances about whether the financial statements are free of material misstatements.5

In addition to those more technical changes, beginning in 2019 for the largest public companies, the new standard will require auditors to identify and disclose "critical audit matters." Currently, the auditor's report provides assurance that the financial records and statements of a company fairly present the company's financial position in all material respects. The new standard retains the binary pass/fail designation of the report, but requires the auditor to communicate any CAMs identified during the course of the audit. If no CAMs are uncovered, the auditor must so state.

To qualify as a CAM, a matter must meet the following three requirements:

  1. It must be voluntarily communicated to the audit committee or required to be communicated to the audit committee pursuant to AS 1301, Communications with Audit Committees;6

  2. It must relate to accounts or disclosures that are material to the financial statements (though the matter itself need not be material);7 and

  3. It must involve "especially challenging, subjective, or complex auditor judgment."8

The PCAOB highlighted the following non-exhaustive list of factors auditors should consider when evaluating whether a matter constitutes a CAM under prong (3) above:

  • The auditor's assessment of the risks of material misstatement, including significant risks;

  • The degree of auditor subjectivity in determining or applying audit procedures to address the matter or in evaluating the results of those procedures;

  • The nature and extent of audit effort required to address the matter;

  • The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty;

  • The nature and timing of significant unusual transactions and the extent of auditor effort and judgment related to these transactions; and

  • The nature of audit evidence obtained regarding the matter.9

If the auditor determines the existence of a CAM, the auditor must disclose both the principal considerations that prompted the auditor to determine that the matter was a CAM and how the auditor addressed the CAM in the audit report (with references to the relevant financial statements or disclosures).10 The release provides a useful flow chart summarizing the process for determining and communicating CAMs.11

The new standard would bring U.S. practices closer to the standards already implemented abroad.12 If greenlit by the SEC, it would be the first major change to the standard form auditor's report in more than 70 years.13

Full implementation of the new standard will take time. First, as mentioned, the standard is subject to review by the SEC, and swift approval may not be forthcoming given that the Trump administration remains vocal in its opposition to many new regulations.14 Even if the SEC approves the standard as is, the PCAOB adopted a phased approach for the new requirements as noted above.

Potential Negative Implications for Transparency, Liability and Efficiency

The PCAOB's chairman lauded the new standard as "giv[ing] investors the information they've been asking for from auditors,"15 but commenters have suggested the CAM disclosure requirements could have the opposite effect. In their view, the new standard may inadvertently impair full and frank discussion between management and audit committees, particularly when applied to voluntary communications, because disclosure of such communications could increase the potential liability for issuers and auditors or subject sensitive company information to public scrutiny. As the PCAOB acknowledged, statements about CAMs could provide the basis for legal claims,16 leading to increased litigation costs and audit fees.

Several commenters questioned the efficacy of the CAM disclosure requirements on other grounds as well. If CAM disclosures in auditor's reports devolve into redundant or boilerplate disclosures, a concern which the PCAOB itself has raised,17 their usefulness to investors will be minimal, and in fact they may result in obfuscation rather than increased clarity. Additionally, despite the PCAOB's claim that the heightened requirements will "give investors the information they've been asking for," investors already have access to much of what will be covered by CAM disclosures through existing regulations requiring the disclosure of companies' critical accounting policies.

The PCAOB also acknowledged other potential drawbacks - for example, that the new standard could bring additional one-time and recurring costs relating to additional audit procedures, time to prepare and review auditor's reports and legal review. Reviewing for CAMs could also delay completion of audits, especially given the uncertainty surrounding exactly what types of matters rise to the level of a CAM.18

Although the PCAOB determined that, after revising the proposal in response to commenters' suggestions, the benefits of the new standard outweigh the costs, it remains to be seen whether issuers, auditors and investors (or the SEC, for that matter) will feel the same way.