Heads-Up for the Audit Committee-PCAOB Approves Expanded Auditor’s Report

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) voted to adopt a new auditing standard that, if approved by the Securities and Exchange Commission (SEC), will significantly expand the current auditor's report.1 The new report will augment the traditional pass/fail opinion with a discussion of "critical audit matters" (CAMs), disclosure of the auditor's tenure and certain other information. Audit committees overseeing ongoing management efforts to comply with new generally accepted accounting principles (GAAP) on the near horizon-including those relating to revenue recognition, leases and financial instruments- should factor in the enhanced level of critical auditor scrutiny that AS 3101 portends with respect to management judgments and assumptions made in applying the new GAAP. [...]the standard will require disclosure of auditor tenure, and make a number of other substantive changes intended to clarify the auditor's independence requirement and role and responsibilities in the audit of financial statements, and to make the auditor's report easier to read. According to the PCAOB, the new auditor's report will give investors and other users of financial statements additional insight into the underlying key judgments that a company's outside auditor has made and communicated to the audit committee- thereby reducing 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 lead to more efficient capital allocation. See, e.g., Ernst & Young Center for Board Matters, Audit Committee Reporting to Shareholders in 2016 (September 2016) (E&Y survey relating to...