By John Filar Atwood
In light of the circumstances created by the COVID-19 pandemic, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) has asked the PCAOB to postpone the effective date for implementing phase two of reporting critical audit matters (CAMs). The CCMC recommended a one-year delay, with the option of voluntary early implementation.
In a comment letter responding to the PCAOB’s request for feedback on stakeholders’ initial experiences with auditor reporting of CAMs, the CCMC noted that because of the pandemic other accounting and auditing standard-setters such as the Financial Accounting Standards Board, the Auditing Standards Board, and the American Institute of Certified Public Accountants have postponed the effective dates for implementing their new standards. The CCMC urged the PCAOB to do the same.
Under a phased implementation plan, the PCAOB’s auditor reporting standards related to CAMs took effect for fiscal years ending on or after June 30, 2019 for large accelerated filers. The second effective date, which affects the audits of all other companies to which the CAM requirements apply, is for audits of fiscal years ending on or after December 15, 2020.
The SEC has asked the PCAOB to complete a post-implementation review, including some analysis between effective dates for CAMs. The PCAOB intends to complete the interim analysis before the second phase of CAM implementation begins.
The CCMC said that it supports post-implementation reviews of accounting and auditing standards. It noted, however, that phased implementation provides an opportunity for the PCAOB to consider necessary adjustments to its standards.
Due to the spread of the coronavirus and the accompanying shutdown of the U.S. economy, this is not a time for business as usual for any stakeholder, the CCMC said. Instead, all stakeholders are busy meeting their professional and personal responsibilities, and will be forced to do so for the foreseeable future as the industry works to navigate a path forward.
Advantages to a delay. Under these circumstances, the CCMC suggested that the PCAOB postpone the effective date for phase two of CAM reporting. The group cited what it sees as several advantages to this approach.
First, in addition to giving some relief during difficult times, postponement would provide an opportunity for a high-quality implementation of the second phase of CAM reporting, hopefully when the distractions from the pandemic are diminished, the CCMC stated.
Second, given the PCAOB’s concern about conducting an interim review of auditor reporting of CAMs before the second phase of implementation of the requirements, postponing the phase two effective date would provide extra time for the PCAOB to consider evidence from an interim analysis and make any necessary adjustments related to auditor reporting of CAMs, according to the CCMC. The group added that postponement would provide adequate time for phase two auditor reporting to incorporate any adjustments, which otherwise would not occur under the PCAOB’s current approach.
Third, the CCMC believes that postponing the effective date for phase two, while allowing for voluntary early implementation, would also facilitate the PCAOB’s post-implementation review of CAM reporting standards by expanding the conditions for, and circumstances of, the PCAOB’s phased implementation.
Comments from the U.K. The PCAOB also received comments from the U.K.’s Institute of Chartered Accountants in England and Wales (ICAEW). The ICAEW believes that the new CAM reporting requirements have made the audit report more relevant and informative to investors and other financial statement users. The group commended the PCAOB for its ongoing review of the new requirements.
The ICAEW said that while investors expect to see improvements in auditor reporting over time, they also expect changes in auditor reporting requirements where necessary. The U.K. accounting body said that the PCAOB should avoid excessive focus on failures in execution, particularly if it becomes clear that investors are looking for something different. In its view, standard-setters should seek to align their respective requirements to a greater extent than they have to date.
Investors, analysts, users, preparers and auditors of financial statements all have an interest in the differences between CAMs as reported in the U.S., and key audit matters (KAMs) reported in the U.K., Europe and elsewhere, according to the ICAEW. The group said that as the PCAOB develops its thinking in this area, it can afford to be clear about the differences, what it can learn from experience in other jurisdictions, and what it believes are the limitations of reporting under different regimes.
The ICAEW believes that the PCAOB is aware that investors are interested in these matters and that some auditors seek to minimize the differences in reporting where possible. It noted that the PCAOB has chosen to adopt a reporting model that diverges from the model adopted by the IAASB. The ICAEW stated that in the coming months and years, the PCAOB will be called on to defend that position, and to modify it, if investors believe it is warranted. The group encouraged the PCAOB to seek to understand the differences through its public outreach, as well as privately, to better serve investors.