The US Public Company Account Oversight Board (PCAOB) has proposed significant changes to auditor’s reporting model for US public companies, in what PCAOB chairman James Doty called a "watershed moment."
The major change in the proposed standard will require auditors to identify the "critical audit matters," describe what led the auditor to deem the matter critical and refer to the relevant financial statement accounts and disclosures that relate to the critical audit matter.
‘Critical audit matters’ are matters addressed during the audit that involved the most difficult, subjective, or complex auditor judgements, posed the most difficulty for the audit to obtain sufficient evidence of or posed the most difficultly to the auditor in forming the opinion on financial statements.
The PCAOB says that it hopes the change will make the auditor’s report more informative, and therefore more relevant and useful to investors.
The new standards will also require a statement regarding the auditor’s independence to be added to be added to the auditor’s report, as well as the year the auditor began serving as the company’s auditor and other information.
It also changes certain standardised language in the auditor’s report, including the addition of the phrase "whether due to error or fraud."
The second proposed standard, "The Auditor’s Responsibilities Regarding Other Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report", will replace AU section 550, Other Information in Documents Containing Audited Financial Statements.
This change will apply the auditor’s responsibility for ‘other information’ in a company’s annual report filed with the Securities and Exchange Commission (SEC), which also contains the company’s audited financial statements and the related auditor’s report.
The PCAOB said this will enhance the auditor’s responsibility with respect to other information by adding procedures for the auditor to perform in evaluating the other information based on relevant audit evidence obtained and conclusions reached during the audit.
It will also require the auditor to evaluate the other information for a material misstatement of fact as well as for a material inconsistency with amounts or information, or the manner of their presentation, in the audited financial statements.
The PCAOB unanimously approved exposing the proposal for public comment, though not without reservations.
PCAOB member Steven Harris, for example, expressed concern that the proposals are not strong enough to meet the needs of investors, but still supported the publication of the proposed standards.
The proposal is open for comment until 11 December 2013, and is due to come into effect, subject to the US Securities Exchange Commission (SEC) approval, 15 December 2015