Qualification of the Unqualified: SEC Approves PCAOB Rule Regarding Auditors’ Reports


On October 23, 2017, the Securities and Exchange Commission (“SEC”) approved the Public Company Accounting Oversight Board’s (the “PCAOB”) new standard for audit reports concerning the financial statements of public companies, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (“AS 3101”), which will require that auditors provide new information intended to make auditor’s reports more informative and relevant to investors and other financial statement users. 

Among other things, AS 3101 requires the following:

  • Critical Audit Matters (“CAMs”): The auditor must communicate in the auditor’s report any CAMs arising from the current period’s audit or state that the auditor determined that there are no CAMs. A CAM is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved especially challenging, subjective, or complex auditor judgment. The communication of each CAM in an auditor’s report must (i) identify the CAM, (ii) describe the principal considerations that led the auditor to determine that the matter is a CAM, (iii) describe how the CAM was addressed in the audit and (iv) refer to the relevant financial statement accounts or disclosures. Communication of CAMs is not required for audits of emerging growth companies, certain brokers and dealers, investment companies other than business development companies and employee stock purchase, savings and similar plans.

    It remains to be seen whether the requirement of these CAM disclosures will chill communications between auditors and their public company clients. On the other hand, other amendments approved by the SEC may engender communications between auditors and their public company clients. For example another amendment to the PCAOB standards requires that the auditor provide the audit committee a draft of the auditor’s report, in order to discuss the report and to evaluate the engagement team’s determination, communication and documentation of CAMs. 

  • Additional Changes to Auditors Report: Audit reports (i) must include a statement disclosing the year in which the auditor began serving consecutively as the public company’s auditor, (ii) must include a statement regarding the requirement for the auditor to be independent, (iii) the auditor’s report will be addressed to the company’s shareholders and board of directors or equivalents; (iv) certain standardized language in the auditor’s report has been changed, including adding the phrase “whether due to error or fraud,” when describing the auditor’s responsibility under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatement; and (v) must have the auditor’s opinion in the first section of the auditor’s report, and section titles have been added to make the report easier to read.

Audit reports for large accelerated filers must communicate CAMs for fiscal years ending on or after June 30, 2019. Audit reports for other filers must communicate CAMs for fiscal years ending on or after December 15, 2020. The additional changes noted above will take effect for audits for fiscal years ending on or after December 15, 2017.

For additional information regarding the AS 3101, please contact Marc Adesso, Wes Scott or any member of Waller’s Capital Markets and Securities team.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.