By Jacquelyn Lumb
The comment period has closed on the PCAOB’s reproposed standard to revise the auditor’s reporting model to include communications about critical audit matters (CAMs) that arose during the audit of a company’s financial statements. The project began with a concept release in 2011 in which the PCAOB received 155 comment letters, followed by a proposal in 2014 that resulted in 248 responses, and a reproposal that garnered an additional 51 comment letters. In the PCAOB’s reproposal, it included materiality in the definition of what constitutes a critical accounting matter, partly to ensure that the auditor would not be the original source of information that appears in the report.
Center for Audit Quality. The Center for Audit Quality does not believe the revised definition fully aligns with the Board’s intent, and proposed a further revision to the definition so that a CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee, is material to the financial statements taken as a whole, and involved especially challenging, subjective or complex auditor judgment.
Another measure to help ensure that auditors are not the original source of information for a company is to revise the factors with respect to their most challenging, subjective, or complex judgments, according to CAQ, and it proposed a number of tweaks to those factors. CAQ also suggested revisions to the Board’s illustrations to ensure that auditors do not interpret the examples as requiring detail beyond the principal considerations and the principal way in which the CAMs were addressed.
Enhanced auditor reporting will inevitably increase the risk of litigation, CAQ noted, and the Center said it is concerned that the requirement to describe how CAMs were addressed may significantly increase that risk. The auditor must not be required to include information in the report when the source should be the company to prevent an increased risk of liability, CAQ advised.
Because it does not see a correlation between auditor tenure and audit quality, CAQ said it does not support including that disclosure in the auditor’s report. If the audit committee believes the information is important to users of its financial statements, the audit committee report is the appropriate place for the disclosure, in CAQ’s view.
CAQ supports the application of the standard to emerging growth companies, and recommended a two-phased adoption of the proposal, the first of which would apply to large accelerated filers for audits ending two years after the approval of the final standard, and for the others, one year after that. This approach would enable the PCAOB to share its inspection observations and provide insight to assist the phase two adopting issuers.
Deloitte & Touche LLP. Deloitte & Touche LLP wrote in support of the PCAOB’s proposal, but does not believe disclosure about auditor tenure should be included in the auditor’s report. The firm said the disclosure should appear in new form AP instead, with the ability to provide supplementary contextual information if needed. Communication about CAMs should not be required for audits of brokers and dealers, investment companies other than business development companies, or benefit plans, while allowing for the voluntary inclusion of CAMs for these entities. Deloitte said there is no basis for exempting the audits of emerging growth companies from the standards.
As for auditor liability concerns, Deloitte raised the possibility that plaintiffs may use descriptions of the auditors’ procedures in their CAM disclosures to ty to “plead around” the strict requirements of the Private Securities Litigation Reform Act. However, Deloitte concluded that concerns over auditor liability should not stand in the way of the PCAOB moving forward.
AFL-CIO. The AFL-CIO expressed concern about adding a materiality threshold in the definition of CAMs and urged the Board to look to the IAASB’s definition of key audit matters (KAMs) which requires auditors to select the most significant matters in the audit for discussion in the auditor’s report. The IAASB’s approach avoids reliance on the auditor’s determination of whether a matter was especially challenging, subjective, or one involving complex judgment.
The AFL-CIO supports the inclusion of the auditor’s tenure in auditor’s reports and noted that its own proxy voting guidelines recommend that voting fiduciaries consider voting against the ratification of an auditor when a company has had the same audit firm for more than seven years. While many companies have begun to provide this information voluntarily, the AFL-CIO believes that investors should be able to access it in a standardized location.
Institut der Wirtschaftsprufer. Institut der Wirtschaftsprufer wrote that it is in the process of revising its auditing standards to reflect the revised international standards on auditor reporting, and repeated its previous comments urging the Board to strive for maximum global consistency in auditor reporting. The reproposal represents an improvement, but the Institut perceives a lack of conviction by the Board with respect to the importance of international comparability. The Institut found no discussions in the release that justify the differences for matters to be reported as CAMs or KAMs, and urged the Board to carefully consider the need for international comparability as it moves forward.