SEC OK’s PCAOB rule requiring disclosure of ‘Critical Audit Matters’
The Securities and Exchange Commission has approved a new auditing standard issued by the Public Company Accounting Oversight Board, marking a significant change to the auditors reporting model. Key among the changes is a requirement that auditors disclose Critical Audit Matters (CAMs).
CAMs, auditor tenure CAMs are defined in the PCAOB rule as:
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.
There is also a new requirement for disclosure of auditor tenure; this is separate from auditor tenure disclosures by public companies within their proxy materials.
Other requirements are aimed at clarifying the auditor’s role and responsibilities and making the audit report more readable.
Controversy over CAMs The CAM requirement in particular received a fair amount of attention during rulemaking at the PCAOB – beginning with a concept release, and continuing through a proposed rule and reproposal - culminating in issuance of the final standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, on June 1.
The debate continued following the SEC’s Notice that it was reviewing the final rule – part of the SEC’s oversight role – including a final request for comment. Over 50 comment letters were received by the SEC.
Strong support to include CAMs was voiced by a number of stakeholders, including law professor J. Robert Brown, Jr. (a member of the PCAOB’s Standing Advisory Group) and seven other SAG members, saying that CAMS, “will reduce the information asymmetry between investors and auditors, which should in turn reduce the information asymmetry between investors and management about the company's financial performance,” and that the standard, “represents an appropriate and balanced updating of the auditor report.”
Other commenters including Joan C. Conley, SVP and Corporate Secretary of Nasdaq, voiced concern that the CAM requirement could force auditors to disclose matters, including immaterial matters, that would compromise confidentiality and reach beyond disclosures that public companies must provide to the SEC.
“This would also make the auditor a source of original information, substituting the auditor’s judgment on these matters for management’s long-standing responsibility to determine what to publicly disclose and when,” said Conley, adding that Nasdaq was among the signatories to a letter filed by the U.S. Chamber of Commerce outlining potential negative consequences of CAMS.
SEC response Statements were issued by all three SEC Commissioners, voting unanimously in support of the PCAOB rule.
Acknowledging concerns voiced by some stakeholders, Chairman Jay Clayton said, “I would be disappointed if the new audit reporting standard, which has the potential to provide investors with meaningful incremental information, instead resulted in frivolous litigation costs, defensive, lawyer-driven auditor communications, or antagonistic auditor-audit committee relationships.”
He called upon “all involved in the implementation of the revised auditing standards, including the Commission and the PCAOB,” to “pay close attention to these issues going forward.”
Emphasizing the importance of, “carefully reading the guidance provided in the [SEC’s] approval order and the PCAOB’s adopting release," Clayton added he was pleased the PCAOB intends to “monitor the results of implementation, including consideration of any unintended consequences.”
Calfee Halter attorney John J. Jenkins, writing in TheCorporateCounsel.net blog, said,
I’m old enough to remember the days of counting paragraphs in an auditor’s opinion – if there were more than 3, that meant the opinion was qualified. But counting paragraphs was all anybody did – the rest was useless boilerplate. That boilerplate was nibbled at around the edges over the years, but the report still didn’t convey much useful information.
Yesterday, the SEC didn’t just pare back the boilerplate – it blew up the boiler. Time will tell if anybody gets scalded. But CAMs have been disclosed in the UK for several years without much consequence…
Busy week Timing-wise, the SEC action was announced one day ahead of a meeting of the PCAOB's Investor Advisory Group (IAG), and the Senate Banking, Housing and Urban Affairs Committee's confirmation hearings on President Trump’s nominees to fill the two vacancies on the Commission.
Items on the IAG agenda include non-GAAP financial measures, audit quality initiatives, and the auditor's consideration of a client's noncompliance with laws and regulations (NOCLAR). The AICPA also has a NOCLAR initiative.