The Public Company Accounting Oversight Board has adopted a new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, and related amendments to other auditing standards, to “modernize, clarify, and streamline” the foundational concepts of auditing. AS 1000 consolidates into one standard the general principles and responsibilities of the auditor, such as due professional care, professional skepticism, competence, and professional judgment. The press release announcing the adoption of AS 1000 describes the new standard as “enhance[ng] investor protection by reaffirming the general principles and responsibilities of the auditor and solidifying the foundation of every audit.” In his statement, Board Member George Botic described AS 1000 as “an evolutionary change that should not be considered trivial.”
Subject to SEC approval, AS 1000 and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024. A change in the documentation completion date – the date by which the auditor must finalize the work papers following issuance of the audit report – will be phased such that smaller audit firms will not be required to comply until performing audits of financial statements for fiscal years beginning on or after December 15, 2025.
The Board proposed AS 1000 for comment in March 2023. See PCAOB Proposes to Expand Auditor Responsibility for Financial Statement Fairness and for Legal Compliance, May-June 2023 Update. The final standard is substantially similar to the proposal. One significant change is that the Board has clarified that the auditor’s opinion on whether the financial statements “present fairly” in all material respects the company’s financial position and results of operations is grounded in the applicable financial reporting framework (e.g., GAAP). The proposal would have required the auditor to also consider broader securities law concepts, such as the SEC rule governing the completeness of company filings.
Key provisions of the AS 1000 and related amendments include:
The auditor’s obligation to protect investors. The first paragraph of AS 1000 introduces the proposition that the auditor “has a fundamental obligation to protect investors through the preparation and issuance of informative, accurate, and independent auditor’s reports.” The Board’s release adopting AS 1000 stresses that this provision “does not alter any existing regulatory or legal requirements or obligations between auditors and investors” and “does not establish a novel duty or new form of legal obligation.” Based on suggestions from some commenters, this paragraph also states that the auditor’s responsibility to investors “transcends an auditor’s relationship with management and the audit committee of the company under audit, providing the foundation for an objective and independent audit.” The release explains that this statement “expresses a longstanding principle of public accounting.”
The auditor’s responsibility to evaluate whether the financial statements are “presented fairly.” AS 2810, Evaluating Audit Results, currently requires the auditor to evaluate whether the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework, such as GAAP. The proposal would have amended AS 2810 to “clarify” that the obligation to evaluate the fairness of the financial statements “goes beyond mere technical compliance” with the requirements of the financial reporting framework. Some commenters asserted that this change could create a conflict between the auditor’s disclosure judgment and management’s and could introduce inconsistency in accounting treatment. Others pointed out that it could force auditors to override the requirements of GAAP if, in the auditor’s judgment, the GAAP financial statements did not fairly present the substance of the company’s financial results. In response to these concerns, the final standard and the adopting release make clear that revised AS 2810 does not change the auditor’s existing responsibilities for evaluating whether the financial statements are presented fairly in conformity with the applicable financial reporting framework. The amendments to AS 2810 state that “presents fairly” involves evaluating whether information in the financial statements is presented and classified appropriately and in a manner that is not misleading, within the applicable financial reporting framework. In addition, the amendments acknowledge that financial reporting frameworks recognize that additional company disclosures may be necessary to ensure fair presentation. A proposed reference in AS 2810 to SEC Rule 12b-20, which prohibits the omission from company filings of information necessary to prevent the filing from being materially misleading, has been omitted.
The engagement partner’s due professional care responsibilities. The new standards describe the responsibilities of the engagement partner, which include ensuring that the audit is properly planned and performed, evaluating significant findings or issues that arise during the audit, and ensuring that the conclusions reached are appropriate and supported by sufficient evidence. In response to comments on the proposal, the adopting release clarifies the distinction between the responsibilities applicable to all auditors and those that are incremental for engagement partners. The new standards also clarify that, while an engagement partner may seek assistance on specific tasks from other engagement team members, the engagement partner continues to retain the primary responsibility for supervising, reviewing, and ensuring the quality of the work performed in the audit and that the work of other engagement team members does not replace or reduce the engagement partner’s responsibility for the engagement and its performance.
Acceleration of the documentation completion date. Under the current standards, the auditor must assemble the audit documentation – the work papers – not more than 45 days after release of the audit report; this deadline is the “documentation completion date.” Under the new standards, the documentation completion date will be 14 days after release of the audit report. The Board’s press release states that the “new documentation completion date will reduce the window of opportunity for improper alteration of audit documentation and also enable the Board to potentially begin the inspection process sooner after completion of an audit.” The accelerated period will be phased in. For public accounting firms that, during the calendar year ending December 31, 2024, issued audit reports for more than 100 issuers, the 14-day documentation completion requirement will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024. For all other firms, the 14-day documentation completion requirement will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
Comment: AS 1000 and related amendments make many changes in the wording of the foundational auditing standards. While it does not appear that the PCAOB intended these revisions to cause any specific changes in the audit process, it may take some time for the profession to assimilate the new standards and determine their practical effect. Audit committees may want to ask their engagement partner whether he or she envisions any impact on the company’s audit. For example, the Board seems to assume that the acceleration of the documentation completion date will not have any significant effects on audits, in part because most auditors maintain work papers in electronic form. Audit committees may want to ask whether their engagement team has the same view.
The Board’s repackaging in the final standard of the auditor’s obligation to consider whether the financial statements are fairly presented in accordance with the financial reporting framework is a positive development. The original formulation of revised AS 2810 could have embroiled audit committees in disputes between the auditor and management about financial statement presentation, notwithstanding that the statements were in accordance with GAAP. The Board deserves credit for taking the concerns commenters expressed on this issue seriously.
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