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PCAOB’s New Auditing Standard Requires Disclosure of What Kept the Auditor up at Night

June 16, 2017

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard aimed at enhancing the relevance and usefulness of the auditor's report to investors. The new standard, which remains subject to SEC approval, retains the pass/fail model of the existing auditor's report, but makes significant changes to the nature and scope of the report, most notably a requirement that auditors must communicate any “critical audit matters” arising from the current period's audit.

The new standard defines a critical audit matter (CAM) as a matter 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. According to a statement by PCAOB Board Member Steven Harris, the new standard “is a direct response to calls from investors for the Board to expand the auditor's report to include information about the difficult parts of the audit, and information that the auditor gained from the audit that he or she would like to know as an investor.”

Provisions of the new standard other than those related to CAMs will take effect for audits for fiscal years ending on or after December 15, 2017. Provisions requiring communication of CAMs will take effect for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and for audits of all other public companies for fiscal years ending on or after December 15, 2020.

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