Volume 25, No. 8

PCAOB: Have “Critical Audit Matters” Reached “Critical Mass?”:  Five years ago, the Public Company Accounting Oversight Board (PCAOB) issued a concept release with the intention of garnering feedback on a revolutionary idea: bring the auditor’s report into the twenty-first century. The PCAOB received feedback, but mostly in the form of brickbats.

In retrospect, the concept release was too radical for auditors and issuers to handle. It proposed a required “Auditor’s Discussion and Analysis,” and the use of “emphasis paragraphs” in the report. It would also have proposed auditor assurance on other information outside the financial statements, and clarified language in the standard auditor’s report regarding auditor responsibilities. In 2013, the PCAOB floated a proposed auditing standard that eliminated the controversial Auditor’s Discussion and Analysis and the emphasis paragraphs. In their place, the PCAOB introduced the concept of “critical audit matters,” or CAMs – issues that mattered most to auditors that would be communicated to investors in the audit report.

More brickbats ensued: CAMs proved to be not much more popular than the idea of an Auditor’s Discussion and Analysis. Three years later, after another turn at the drawing board, the PCAOB is once again floating a proposal for improving the audit report, and CAMs are once again the hot button issue. This time, the PCAOB is streamlining the requirements for them while still providing incremental investor information. Maybe the third time will be the charm. This report reviews the potential changes in the audit report, while examining their pros and cons.

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