PCAOB Proposes Significant Changes To Auditor’s Report And Responsibilities For Annual Reports Filed With The SEC

by Perkins Coie


As a result of ongoing efforts to improve the informational value of the auditor’s reporting model, on August 13, 2013, the Public Company Accounting Oversight Board (PCAOB) proposed two new auditing standards for public comment that would expand the scope of the auditor’s report on a company’s audited financial statements and require the auditor to perform an evaluation of other information included in the company’s annual report filed with the SEC.  The comment period for these proposed standards and related amendments ends on December 11, 2013.  The proposed standards and amendments would be effective, subject to approval by the SEC, for audits of financial statements for fiscal years beginning on or after December 15, 2015.  The proposed standards would:

  • require the audit report to disclose and describe “critical audit matters” that were specifically examined by the auditor during the audit;
  • require the auditor to report on “other information” that is outside of the audited financial statements but is included in the annual report filed with the SEC under the Securities Exchange Act of 1934; and
  • add elements to the audit report relating to auditor tenure and the auditor’s independence from the issuer.

The PCAOB did not, however, propose any standards regarding the inclusion of an auditor’s discussion and analysis in the auditor’s report, an approach that the PCAOB had raised in its June 2011 Concept Release.

New Standard on Disclosure of Critical Audit Matters

This new audit standard would retain the existing, binary (or pass/fail) form of the audit report which provides an opinion that the audited financial statements do or do not fairly present the financial condition of the issuer, but also would require the communication of critical audit matters as determined by the auditor.  The communication of critical audit mattters may provide investors and other users of financial reports with insight on how the auditor reached its conclusions.  The auditor would be required to disclose and describe the matters that: 

  • involved the most difficult, subjective or complex auditor judgments;
  • posed the most difficulty to the auditor in obtaining sufficient appropriate evidence; or
  • posed the most difficulty to the auditor in forming an opinion on the financial statements. 

These critical audit matters have been described by some commentators and PCAOB members as those matters that “kept the auditor awake at night.” Under the proposal, if critical audit matters are disclosed, the auditor would be required to describe the considerations or reasons that led the matter to be identified as critical and refer to the relevant financial statement accounts and disclosures that relate to the critical matter, when applicable. 

If adopted, this proposal likely would make public some discussions that traditionally have been kept private between the audit committee and the auditor.  The proposal reflects a global trend:  last month, the International Auditing and Assurance Standards Board exposed for public comment a similar proposal, requiring auditors to report “Key Audit Matters.”

Auditor’s Obligation to Evaluate the “Other Information”

Under this proposed standard, auditors would be required to perform an evaluation of, and report on, information outside of the audited financial statements that is included in a company’s annual report filed with the SEC.  This proposed standard would expand the auditor’s existing responsibility to read and consider the “other information” included in the annual report

This “other information” would include management’s discussion and analysis of financial condition and results of operations, exhibits to the annual report, and items incorporated by reference.  Auditors would be required to read and evaluate this information, and would be required to perform additional procedures to determine whether the “other information” contains a material misstatement of fact or a material inconsistency with amounts or information in the audited financial statements.  The auditor would be required to communicate in the audit report the results of the auditor’s evaluation.  Adoption of this proposal would likely increase audit costs. 

Disclosures on Auditor’s Relationship with Company

Finally, the PCAOB proposed that the audit report contain a statement regarding the auditor’s existing requirements to be independent from the issuer, and a statement disclosing the year that the audit firm began serving consecutively as the company’s auditor.  Opinion differs on whether an auditor’s tenure information is useful to readers of financial statements, although the PCAOB acknowledged that it has not drawn any conclusions about the correlation between auditor tenure and audit quality. 

Additional Information

The full text of the PCAOB’s release can be found here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.