05 November 2017

US Corporate Law News: SEC approves PCAOB new auditing standard requiring communication of 'critical audit matters'

Gregory Pun
Associate | US

On October 23, 2017, the Securities and Exchange Commission (SEC) approved new auditing standards for the Public Company Accounting Oversight Board (PCAOB), which had been proposed on July 19, 2017. As a result, AS 3101 (The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion), which replaces portions of AS 3101, Reports on Audited Financial Statements, and re-designates the remaining portions of AS 3101 as AS 3105, Departures from Unqualified Opinions and Other Reporting Circumstances, and related amendments to other auditing standards will go into effect. The rules require that the auditor provide new information about the audit, which information is intended to make the auditor's report more informative and relevant to investors and other financial statement users. Although the new standards will continue the “pass/fail” opinion model presently in effect (in which an audit opinion is either “clean” or “qualified”), they also require that an auditor identify and communicate “critical audit matters” (CAMs) specific to each audit. Reportable CAMs include matters communicated (or required to be communicated) to the audit committee and that relate to accounts or disclosures material to financial statements and involve especially challenging, subjective or complex auditor judgment. The new standards apply only to audits conducted under PCAOB standards. Auditors need not communicate CAMs for investment companies (other than business development companies) or as part of audits of brokers and dealers reporting under Exchange Act Rule 17a-5. The new auditing standard rules goes into effect for fiscal years ending on or after (1) as to CAMs, (a) June 30, 2019 for audits of large accelerated filers and (b) December 15, 2020 for audits of all other companies and (2) December 15, 2017 as to non-CAM changes. For additional information, see https://www.sec.gov/rules/pcaob/2017/34-81916.pdf.

Gregory Pun Associate | Greenwich