SEC Approves New PCAOB Standard on Enhanced Audit Reports

October 26, 2017

New requirements represent sweeping changes to the form and content of reports.

The Securities and Exchange Commission (SEC) approved a new Public Company Accounting Oversight Board (PCAOB) auditing standard on October 23 that requires sweeping changes to how public company auditors provide information within their audit reports. According to SEC Chairman Jay Clayton, this new standard is intended to make the audit process more transparent, and audit report more informative, to investors and other users of financial statement information. The new standard, PCAOB Accounting Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (AS 1301), implements the following changes to audit reports:

  • The traditional pass/fail opinion will be retained, but a new disclosure requires communication of critical audit matters (CAMs) that arise from the current period audit (or a statement that the auditor determined that there are no CAMs);
  • Additional information must be disclosed about the auditor’s role and responsibilities related to the audit, including disclosure of auditor tenure and a statement regarding the auditor’s independence; and
  • Basic elements of the audit report have been revised, including changes to certain standardized language and the addition of the phrase “whether due to error or fraud” when describing the auditor’s responsibility to obtain reasonable assurance as to whether the financial statements are free of material misstatements.

Mr. Clayton indicated that including communication of CAMs in the audit report is designed to provide investors with additional information on those matters discussed between the auditor and the audit committee—including matters that involve particularly challenging, subjective, or complex auditor judgment—thus giving investors greater insight into how the auditor reached its opinion. The redesign of the audit report format is aimed at greater readability and ease of understanding.

AS 3101 will apply to all audits conducted under PCAOB standards; however, audits of emerging growth companies, brokers and dealers, investment companies (other than business development companies), and employee stock purchase, savings and similar plans will be exempt from the CAMs disclosure requirement. The effective dates for the new requirements are as follows:

  • All requirements other than those relating to CAMs are effective for audits of fiscal years ending on or after December 15, 2017;
  • Disclosure of CAMs is effective for large accelerated filers for audits of fiscal years ending on or after June 30, 2019; and
  • Disclosure of CAMs for audits of all other public companies (other than those exempted from the CAMs disclosure requirement) is effective for audits of fiscal years ending on or after December 15, 2020.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Celia Soehner, or any of the following Morgan Lewis lawyers:

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