The PCAOB is Implementing a Change to the Auditor's Report

In an industry that revolves around money management, auditors and clients need to collaborate to establish a successful relationship free of any misunderstanding. The PCAOB’s (Public Company Accounting Oversight Board) solution is the AS 3101 report which requires auditors to develop a more effective way of presenting critical information to investors. These standards were released in 2017, and auditing firms are given two years to adjust their reports accordingly. The auditors’ duty is to plan and execute an appropriate audit by reviewing reasonable evidence ensuring there are no material misstatements publicized in management’s financial statements. Auditors will now be duty bound to communicate:

  • Their years of service since performing the audit,
  • Acknowledgment of crucial matters, and
  • Revamping the audit report to better assist the clients understanding the key factors pertaining to their audit.

Years of Service

In the audit report, auditors will now be required to provide the first year the auditors performed their client’s financial audit to be easily identified by whoever is reading the financial audit report. This guideline is more geared toward the client’s investors having an easy and accessible resource of how long they have been engaging with their auditors. This will allow the audit committee to assess their auditor’s performance and reliability given a constructive time frame.

The Crucial Matters

The crucial matters related to the audit are those communicated to the audit committee. Those could be accounts such as the Allowance for Loan and Lease Loss, Deposits, Loans, etc. Whether the audit committee requires the communication or the auditor feels the need to disclose accounts, the auditor will discuss their ultimate judgment on challenging matters. The auditor will have to judge if the account could be materially misstated. During the communication in the audit report, between the auditors and the client, there is a process the auditor must follow to relay a more understandable audit report.

  1. Firstly, the auditor will point out the critical matter at hand, such as an account that is material under or overstated.
  2. Secondly, the auditor is responsible for explaining to the client the primary reasons they are considering an account a crucial matter. More specifically, the auditor needs to explain the bases or core values as to why they may think one of the accounts is misstated.
  3. Thirdly, the auditor will need to inform the client how they addressed the account in the audit. Ultimately, they must describe the leading factors allowing the auditor to come to their conclusion of the account.
  4. Finally, the auditor must explain the purpose the material matter may have on the financial statements, to more accurately present the client’s income and balance sheet for the fiscal year.   

Revamping the Audit Report

The audit report will now contain a statement informing the client and their investors that the auditors are independently performing their duties. The PCAOB requires auditors to state explicitly which auditors are performing the audit, that they are independent and have no reason to have an ulterior motive. The PCAOB requires auditors to thoroughly explain their role and what they are responsible for during the audit so that the client can hold the auditors accountable for their work.

The ultimate goal the PCAOB is working toward through these three critical changes is to create a more standardized report. In this manner, clients can better absorb the information the auditor is presenting. Everyone that reviews the audit report will have the ability to reasonably understand the judgment of the audits and see the auditors reasoning as to why they are passing their judgment. As a whole, the communication between the auditor and the client will improve, which in turn will lead to better quality service provided from the auditors. This is a benefit both the auditor and client can appreciate in a relationship that will be around for years to come.