Recently, the SEC approved the PCAOB’s new auditor reporting standard, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Hailed as the most significant change to the auditor report’s format in over 70 years, AS 3101 significantly changes the format of the existing auditor’s report, arming investors and market participants with increased information to navigate an ever-expanding and increasingly complex and global marketplace.

Adopted by the PCAOB on June 1, 2017, AS 3101 requires auditors to provide new information about the audit and present a more informative and relevant auditor’s report to investors and other financial statement users. The new requirements include:

• Communication of critical audit matters (CAMs) – i.e., matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment;
• Disclosure of the year the auditor began serving as the issuer’s auditor; and
• A number of other improvements to the auditor’s report to clarify the auditor’s role and responsibilities, and make the auditor’s report easier to read.

The most controversial aspect of the new standard, the communication of CAMs, met with opposition from industry trade groups citing several concerns to the SEC:

• Disclosure of immaterial information;
• Replacing of management as the source of original information;
• Imposing additional expenses on firms; and
• A chilling effect on the audit committee/auditor relationship.

SEC Chairman Jay Clayton acknowledged these concerns, but expressed his support for the SEC’s unanimous decision to approve the PCAOB’s new standard. Clayton noted that AS 3101 “provide[s] investors with meaningful insights into the audit . . . [such as the] auditor’s perspective on matters discussed with the audit committee that relate to material accounts.” Clayton identified company independent audit committees “as one of the most significant and efficient drivers of value to Main Street investors [and] impairing or otherwise negatively affecting the work of well-functioning audit committees could have significant adverse effects on investors.”

AS 3101 will come into effect for large accelerated filers with fiscal years ending on or after June 30, 2019 and for all other companies to which the requirement applies with fiscal years ending on or after December 15, 2020. The PCAOB will be monitoring its progress through a post-implementation review.

Only time will tell whether the new disclosures will provide the intended benefit to the marketplace.