SEC Approves New PCAOB Auditor Reporting Standard: New Standard Expands the Scope of the Auditor’s Report and Requires Auditors to Identify and Discuss “Critical Audit Matters”

Sullivan & Cromwell LLP - October 30, 2017

On October 23, 2017, the U.S. Securities and Exchange Commission approved Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments to its auditing standards in the form adopted by the Public Company Accounting Oversight Board in June 2017. The new standard expands the scope of the auditor’s report for certain public companies while retaining the “pass/fail” opinion of the existing auditor’s report.  Most notably, the new standard will require auditors to identify and discuss, in the audit report, “critical audit matters” (CAMs) that were addressed in the audit. SEC reporting companies and their audit committee should initiate a dialogue with their auditors, to the extent they have not already done so, to understand how their auditors expect to approach CAMs, what types of matters may merit this designation and how the auditors expect to address them in the audit report.  The new standard will take effect (1) with respect to CAMs, for audits for fiscal years ending on or after June 30, 2019, for large accelerated filers; and for fiscal years ending on or after December 15, 2020, for all other covered companies, and (2) with respect to all other provisions, for audits for fiscal years ending on or after December 15, 2017.