On Oct. 23, the Securities and Exchange Commission (SEC or Commission) approved the Public Company Accounting Oversight Board (PCAOB or Board) proposal on The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and other related amendments to other auditing standards (the Approved Standard). The Approved Standard imposes significant changes to the auditor’s reporting model and will impact all NAREIT members due to the fundamental changes to the audit report. The Approved Standard will require the auditor to provide new information about the audit that is intended to make the auditor’s report more informative and relevant to investors and other financial statement users.
Key Changes to Existing Audit Guidance
The Approved Standard retains the pass/fail opinion of the existing auditor’s report, but makes significant changes to the existing auditor’s report, including disclosure of critical audit matters (CAMs) and the addition of new elements to the auditor’s report related to auditor independence and auditor tenure.
Critical Audit Matters
The Approved Standard will require the auditor to 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 defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
- Relates to accounts or disclosures that are material to the financial statements; and,
- Involves 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 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 and judgement related to these transactions;
- The degree of auditor subjectivity in 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; 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 CAM;
- Describing the principal considerations that led the auditor to determine that the matter is a CAM;
- Describing how the CAM was addressed in the audit; and,
- Referring to the relevant financial statement accounts and disclosures.
For each matter arising from the audit of the financial statements that: 1) was communicated or required to be communicated to the audit committee, and, 2) relates to accounts or disclosures that are material to the financial statements, the auditor must document whether or not the matter was determined to be a CAM and the basis for such determination.
Additional Changes to the Auditor’s Report
The Approved Standard requires many other changes to the auditor’s report that are intended to clarify the auditor’s role and responsibilities related to the audit of the financial statements, provide additional information about the auditor, and make the auditor’s report easier to read. These changes include disclosure of:
- Auditor tenure – a statement disclosing the year in which the auditor began servicing consecutively as the company’s auditor;
- Independence – a statement regarding the requirement for the auditor to be independent;
- Addressee – the auditor’s report will be addressed to the company’s shareholders and board of directors or equivalents;
- Amendments to basic elements – certain standardized language in the auditor’s report has been changed, including 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,
- Standardized form of the auditor’s report – the opinion will appear in the first section of the auditor’s report, and section titles have been added to guide the reader.
The Approved Standard has staggered effective dates.
All paragraphs in the Approved Standard excluding those related to CAMs are effective for all audits of fiscal years ending on or after Dec. 15, 2017.
All paragraphs in the Approved Standard that are related to CAMs are effective for fiscal years ending on or after June 30, 2019 (for large accelerated filers), and for fiscal years ending on or after Dec. 15, 2020 for all other companies.