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May 23, 2016
PCAOB Re-proposes Changes to the Auditor’s Report
On May 11, the Public Company Accounting Oversight Board issued The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (the Re-proposal) that would impose significant changes to the auditor’s reporting model. The Re-proposal would impact all NAREIT members due to the proposed fundamental changes to the audit report. If you are interested in participating in a NAREIT Task Force that will discuss the Re-proposal and evaluate whether NAREIT should develop a response to it, please contact Christopher Drula (cdrula@nareit.com) by May 31. The comment letter deadline is Aug. 15.
Key Aspects of the Re-proposal
The Re-proposal would retain the pass/fail model in the existing auditor's report, but would provide additional information to investors and other financial statement users about the audit and the auditor. The Proposal would require:
- The communication of critical audit matters as determined by the auditor; and,
- The addition of new elements to the auditor's report related to auditor independence and auditor tenure.
How the Re-proposal differs from the 2013 Proposal
The Re-proposal is a second iteration of the PCAOB’s 2013 Proposal that would have introduced changes to the auditor’s report and incorporated additional requirements for other information outside of the financial statements. The Re-proposal modifies the requirements to disclose critical audit matters in the auditor’s report by:
- Limiting the criteria of potential critical audit matters to matters required to be communicated to the audit committee;
- Adding a materiality component to the definition of critical audit matter;
- Narrowing the definition to only those matters that involved especially challenging, subjective, or complex auditor judgment;
- Narrowing the related documentation requirement consistent with the definition; and,
- Expanding the communication requirement so that the auditor describes how the critical audit matter was addressed in the audit.
In addition, the Re-proposal does not include the provision for a new auditing standard regarding the auditor's responsibilities for other information outside the financial statements. The PCAOB held a meeting with its Standing Advisory Group on May 18-19 in Washington, DC where it discussed among other items whether auditors should have any responsibility for non-GAAP measures included in company filings with the SEC. The PCAOB is still currently evaluating next steps given the feedback that it received.
Discussion of Critical Audit Matters and the Auditor’s Response
The Re-proposal would require a discussion in the auditor report of critical audit matters. Critical audit matters would be considered as those matters that were communicated or required to be communicated to the audit committee that:
- Relate to accounts or disclosures that are material to the financial statements; and,
- Involve especially challenging, subjective or complex auditor judgement.
The determination of what would qualify as a critical audit matter would depend upon:
- The auditor’s assessment of the risks of material misstatement, including significant risks;
- The degree of auditor subjectivity in determining or applying audit procedures to address the matter or in evaluating the results of those procedures;
- The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter;
- The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty;
- The nature and timing of significant unusual transactions and the extent of audit effort or judgment related to these transactions; and,
- The nature of audit evidence regarding the matter.
Auditors would be required to disclose the following information for each critical audit matter:
- Identifying the critical audit matter;
- Describing the principal considerations that led the auditor to determine that the matter is a critical audit matter;
- Describing how it was addressed in the audit; and,
- Referring to the relevant financial statement accounts and disclosures.
The documentation of critical audit matters would include the basis for the auditor’s determination of whether each matter that both:
- Was communicated or required to be communicated to the audit committee; and,
- Was related to accounts or disclosures that were material to the financial statements involved, especially challenging, subjective, or complex auditor judgment.
Discussion of Auditor Tenure and Auditor Independence
The Re-proposal would require an explicit statement in the audit report regarding auditor independence from the entity under audit. Additionally, it would introduce a requirement to disclose the length of time that the public accounting firm audited the entity.
Contact: George Yungmann at gyungmann@nareit.com or Christopher Drula at cdrula@nareit.com
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