Auditor reporting: Changes coming

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Point of view , PwC US Dec 01, 2017

The PCAOB's new auditor reporting standard will usher in significant change. Read our Point of view to know what’s ahead.

Insights from the auditor

  • The PCAOB's new auditor reporting standard sets forth the most significant changes to the auditor's report in over 70 years. While the pass/fail opinion has been retained, certain changes have been made to the form and content of the auditor's report, including a requirement to share critical audit matters (CAMs).
  • CAMs are matters arising from the audit that involved especially challenging, subjective or complex auditor judgment, that relate to material accounts or disclosures in the financial statements, and that were discussed with the audit committee. Auditors will be required to disclose CAMs in the audit report and describe how they addressed them during the audit.
  • The PCAOB believes that the inclusion of CAMs in the auditor's report can enhance the report's informational value by providing stakeholders with perspectives on the financial statements through a deeper understanding of the audit. Providing visibility to areas that involved significant judgment by the auditor is responsive to calls from users to make the auditor’s report more informative - but brings challenges that must be considered.
  • Implementing this standard will likely be a significant undertaking. Management and audit committees should engage in a dialogue with auditors to understand the types of matters that may be CAMs based on their company's facts and circumstances. Management and audit committees may want to focus on disclosures in these areas in advance of the new auditor reporting.

Insight about the audit


The current pass/fail auditor reporting model states whether the financial statements are presented fairly in all material respects in accordance with the applicable accounting framework (e.g., US GAAP). However, some stakeholders have suggested that the auditor's report contains little additional communicative value beyond its conclusion. These stakeholders believe that auditors could provide additional insights based on their audits and the related interactions that take place with audit committees. To address this feedback, the PCAOB has adopted a new standard, which will require greater transparency from auditors through the disclosure of CAMs and through other changes to the auditor's report.

The PCAOB has provided tiered effective dates for different components of the new auditor's reporting model.

The communication of CAMs will be a significant shift in the auditor reporting model, beginning with financial statements of large accelerated filers for fiscal years ending on or after June 30, 2019. Other companies will need to report CAMs beginning with fiscal years ending on or after December 15, 2020.

Some changes to the content of the auditor's report are effective in 2017, the most noteworthy being the disclosure of audit firm tenure. While over 60% of S&P 500 companies already disclosed this information in their proxies,1 this required disclosure will make it more readily accessible.

While users may benefit from this increased transparency, the PCAOB acknowledges auditor tenure is merely another data point about the auditor - and that its own research and academic research on the relationship of tenure to audit quality is inconclusive. We believe users should look to the audit committee's report to understand the audit committee's holistic considerations regarding oversight of the audit firm.

Other changes to the auditor's report will also become effective for 2017 calendar-year ends. These changes are intended to clarify the auditor's role and responsibilities and make the auditor's report easier to read, but are not expected to have a significant impact on auditors or companies. To learn more, read PwC's In depth.

What is a CAM?

CAMs are any matters arising from the audit of the financial statements communicated, or required to be communicated, to the audit committee that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment.


The implementation of CAMs will benefit from robust dialogue between auditors and audit committees about what matters are likely to be CAMs and how auditors will communicate them. Communications in advance of the effective date, and as new CAMs are identified during an audit cycle, will help avoid unexpected surprises as financial reporting deadlines approach.

Many jurisdictions outside the US now have experience implementing similar reporting provisions that can be leveraged. However, there are likely to be differences in the implementation of CAMs compared to those jurisdictions due to differing (1) definitions of CAMs and related guidance, (2) disclosure regimes and (3) regulatory and litigation environments.

A framework for determining CAMs

By definition, CAMs are intended to be unique to each audit engagement. The PCAOB has set out factors for the auditor to consider in deciding whether a matter is a CAM.

While the number of CAMs will vary for each audit engagement, it is expected that most auditor's reports will have at least one CAM. A lengthy list of boilerplate matters, however, could detract from the intent of communicating CAMs.


1 Center for Audit Quality, 2017 Audit Committee Transparency Barometer, November 1, 2017.

Insight about the audit

Visibility to the most important auditor judgments in the current year's audit

The increased complexity of financial reporting requires the auditor to evaluate complex calculations and models and make challenging and subjective judgments. Users have said they would benefit from understanding more about the auditor's judgments and want insight into the auditor's approach to an audit and related communications with the audit committee.

While CAMs provide more information about the audit, they may also help users by providing incremental perspective on the financial statements and focusing their attention on the related financial statement accounts and disclosures.

But the value of CAMs must be considered in the overall context of an audit. While an auditor’s work is risk-based and tailored to the engagement, an audit involves obtaining reasonable assurance that the financial statements as a whole are not materially misstated because of error or fraud. An audit does not provide absolute assurance.

CAMs are not intended to call into question the auditor's overall opinion on the financial statements taken as a whole—either by suggesting the auditor is providing separate conclusions on individual financial statement line items or specific accounts or disclosures, or implying they might be materially misstated.

Linkage between CAMs and the related financial statement accounts or disclosures

CAMs should provide the auditor's perspective on certain important matters arising during the audit. However, a balance must be struck so as not to blur the lines between management's financial reporting responsibilities and the auditor’s role to opine on the financial statements.

The communication of CAMs … will provide additional information about the audit—and from the auditor's own unique perspective—that will be useful to investors and other financial statement users in assessing a company's financial reporting and making capital allocation and voting decisions.

SEC Release 34-81916 granting approval of the proposed rules

When describing a CAM in the auditor's report, auditors will be required to refer to the relevant accounts or disclosures in the financial statements.

Limiting CAMs to matters that relate to material accounts or disclosures and anchoring the auditor's description of CAMs to information management has disclosed should reduce the likelihood the auditor will disclose information about the company that it has not already disclosed (referred to as “original information”). Rather, the focus will be on communication of information about the audit, from the auditor's perspective.

If auditors can adequately convey to investors the principal considerations and how the auditor addressed the matter without including previously undisclosed information, it is expected that they will.

PCAOB Rulemaking Docket Matter No. 034

To the extent original information would need to be communicated in a CAM, the auditor, management, and the audit committee will likely engage in a dialogue about that communication.

More broadly, management and audit committees may find it helpful to reconsider the nature and extent of the company's disclosures in relation to matters likely to be CAMs in anticipation of potential increased user attention on these disclosures, in particular how tailored the disclosures are to the company's facts and circumstances. This is because the auditor may choose to draw upon aspects of the company’s disclosures to complement the auditor’s perspectives on why a matter is a CAM. Users may benefit from hearing both management's and the auditor's perspectives on particular matters in the context of their respective roles.

A proactive approach to CAMs

The auditor's perspective

Auditors are also required to describe the principal considerations that lead the auditor to determine the matter is a CAM and how the matter was addressed in the audit.

In describing how the CAM was addressed in the audit, the auditor may explain their response or approach to the matter that was most relevant; provide a brief overview of the audit procedures performed; give an indication of the outcome of the audit procedures; include key observations with respect to the matter; or some combination of these.

The auditor's objective in this regard is to provide information about significant aspects of the audit in a concise and understandable form. Limiting the use of highly technical accounting and auditing terms may be necessary to help users better understand the CAMs.

A phased approach to CAM implementation

For CAM reporting to achieve its intended objective, companies and their auditors - as well as audit committees - should take advantage of the PCAOB's phased approach to implementation. As the reporting of CAMs is a significant change in practice, the auditor, management, and the audit committee will need to work together to make the implementation of CAMs successful.

Talking about the effects of the new standard now will help identify opportunities to embed CAMs into the existing two-way dialogue during the audit (e.g., beginning with the planning phase of the audit).

Next steps

Describing the most challenging, subjective and complex judgments specific to an audit will necessarily involve a significant amount of judgment by auditors.

Investor education may be needed to help better explain what CAMs are - and what they are not. For example, the description of a CAM can inform users about the auditor's overall approach, but on its own is unlikely to enable users to form a view as to the quality of the audit. CAMs could help users better engage with companies, and may help audit committees focus on particular matters in their audit committee reports.

Continued dialogue and feedback among stakeholders will be beneficial to understand whether the PCAOB's standard is achieving its intended objective, as will the PCAOB's planned post-implementation reviews.

To have a deeper discussion, please contact:

Len Combs

US Chief Auditor, PwC US


Brian T. Croteau

Partner, National Professional Services Group, PwC US


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Heather Horn

Heather Horn

US Strategic Thought Leader, National Professional Services Group, PwC US

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