United States: SEC Approves PCAOB's Proposed Rules On Audit Engagement Partners; PCAOB Re-Proposes Auditing Standard To Increase Transparency In Audit Reports

Last Updated: May 24 2016
Article by Ze’-ev D. Eiger and Elizabeth Schauber

On May 9, 2016, the Securities and Exchange Commission (the "SEC") issued an order approving the proposal of the Public Company Accounting Oversight Board (the "PCAOB") to adopt new rules (Rules 3210 and 3211), a new form, and amendments to auditing standards (collectively, the "Proposed Rules") relating to audit engagement partners and other accounting firms that participate in issuer audits.1 The PCAOB adopted the Proposed Rules on December 15, 2015 and filed the proposal with the SEC on January 29, 2016.2 On May 11, 2016, the PCAOB re-proposed its auditor reporting standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (the "Re-Proposal"), based on comments received after the PCAOB's 2013 proposal and its April 2014 public meeting.3

Pursuant to the Proposed Rules, a registered public accounting firm, when issuing audit reports for an issuer, must file with the PCAOB a report on Form AP that includes the name of the engagement partner and Partner ID, as well as certain identifying information about the auditing firm and information relating to the level of the firm's participation in the audit. The specific information required in the Form AP depends on whether or not responsibility for the audit was divided among other accounting firms and whether the accounting firm participated in at least 5% of the total audit hours. The Proposed Rules generally require the accounting firm to file the Form AP within 35 days after the date the auditor's report is first included in a document filed with the SEC, and within 10 days after the auditor's report is first included in a registration statement filed with the SEC. Firms will continue to file through the PCAOB's existing web-based Registration, Annual, and Special Reporting system.

The Proposed Rules would apply to audits of all issuers, including emerging growth companies, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). They would not apply, however, to audits of a broker-dealer (unless the broker-dealer was an issuer) under Rule 17a-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the Proposed Rules, registered public accounting firms must disclose the name of the engagement partner in the auditor's report, effective for auditor's reports issued on or after January 31, 2017. Firms must also disclose information about other accounting firms, effective for auditors' reports issued on or after June 30, 2017. In addition to the newly adopted rules and the Form AP requiring the new disclosures, the Proposed Rules would amend PCAOB auditing standards—AS 3101 (AU sec. 508), Reports on Audited Financial Statements, and AS 1205 (AU sec. 543), Part of the Audit Performed by Other Independent Auditors—to permit an audit firm to voluntarily disclose information about the engagement partner or other accounting firms in the auditor's report.

On May 11, 2016, the PCAOB issued the Re-Proposal regarding its auditing standard, The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The Re-Proposal would supersede parts of auditing standard AS 3101, Reports on Audited Financial Statements, and it would apply to audits conducted under the PCAOB standards. The Re-Proposal would not apply to audits of broker-dealers reporting under Exchange Act Rule 17a-5, investment companies other than business development companies, and employee benefit plans. The Re-Proposal aims to achieve the same transparency goal as the PCAOB's original 2013 proposal, but it includes several important changes, based on the numerous comments received after the 2013 proposal and the PCAOB's April 2014 public meeting. Comments on the Re-Proposal are due to the PCAOB by August 15, 2016.

The Re-Proposal would provide investors with more information about financial statement audits by improving the content and form of the auditor's report. The Re-Proposal would accomplish this goal principally through requiring that critical audit matters be communicated in the auditor's report. Under the Re-Proposal, a critical audit matter is any matter that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved especially challenging, subjective, or complex auditor judgment. By including critical audit matters in the audit report, investors would be able to better understand the methods, considerations, and processes an auditor employed to audit financial statements and other performance measures that would otherwise be unclear where an auditor would be required to use professional judgment and experience to handle complex matters.

As part of the requirement to include critical audit matters in the audit report, auditors would need to take into account several factors in determining whether a matter would be considered a critical audit matter, and auditors would be required to identify any critical audit matters, if any in the report. Auditors would also need to describe the considerations that led to the determination that a matter was a critical audit matter and also how the critical matter was addressed in the audit. Additionally, the Re-Proposal would require the auditors to refer to the relevant financial statements relating to the matter in the audit report.

As compared to the PCAOB's 2013 proposal, the Re-Proposal would more strongly emphasize critical audit matters, though it would limit the source of potential critical audit matters to those communicated or required to be communicated to the audit committee. The Re-Proposal would also add a materiality standard to the meaning of critical audit matter, relating specifically to those matters that involved especially challenging, subjective, or complex auditor judgment, further narrowing the scope of the requirement from the PCAOB's original 2013 proposal.

In addition to the PCAOB's Proposed Rules and Re-Proposal, the PCAOB's Standing Advisory Group will discuss, in meetings scheduled for May 18 and 19, 2016, the auditor's role regarding non-GAAP and other company performance measures, the auditor's reporting model, and how lead auditors supervise other auditors.4


1 See SEC Release No. 34-77787 (May 9, 2016), available at: https://www.sec.gov/rules/pcaob/2016/34-77787.pdf

2 See SEC Release No. 34-77082 (Feb. 8, 2016), available at: https://www.sec.gov/rules/pcaob/2016/34-77082.pdf

3 See PCAOB Release No. 2016-003 (May 11, 2016), available at: http://pcaobus.org/Rules/Rulemaking/Docket034/Release-2016-003-ARM.pdf

4 See Press Release, "PCAOB SAG Meeting on May 18-19 to Focus on Non-GAAP Measures, the Auditor's Reporting Model, and Supervision of Other Auditors" (May 6, 2016), available at: http://pcaobus.org/News/Releases/Pages/SAG-meeting-agenda-May-18-19.aspx

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions