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As reported in last week's Society Alert, the Society is but one of a number of organizations of all types that urged the SEC via the recently-closed comment letter process to revise or reject the PCAOB's proposed new standard that would expand the auditor's report to include "critical audit matters" (CAMs).

Concerns expressed about the proposed standard raised common, inter-related themes, including its: (i) effecting significant, adverse deviations from the current financial reporting framework, and auditor/client roles and relationship; (ii) prompting auditor disclosure of original and potentially confidential/sensitive information about the company that the company is otherwise not required or intending to disclose; (iii) undermining the role of the audit committee; (iv) chilling communications between auditors and management/audit committees; (v) increasing audit costs, and (vi) motivating auditors to err on the side of over-disclosure, thus exacerbating all of the other concerns.

In addition to the Society's letter and concerns expressed by commenters in earlier comment letters in response to the PCAOB's comment solicitations (as noted on Rants), below are observations about and excerpts from just a handful of the numerous noteworthy comment letters illustrating some of the most significant and commonly-expressed concerns:

- Pinnacle West Capital Audit Committee Chair (also CPA with Nordstrom & Assoc) letter excerpt re: undermining the role of the audit committee:

The audit committee is comprised of members of the shareholder-elected board of directors, and provides oversight of accounting policies, internal controls, financial reporting, and the audit process. The audit committee has access to auditors, management, and the board of directors. The audit committee has the knowledge, perspective, and authority to provide oversight over relevant information properly disclosed by management to shareholders and other users of the financial statements. This oversight role ensures key audit matters are properly addressed and communicated to investors through management's financial disclosures. The audit committee oversees the financial reporting process and audit process to ensure that matters that are material to shareholders are appropriately disclosed. The disclosure of CAMS undermines this audit committee oversight role, and effectively shifts the auditors' role from providing an attest function into serving in a management role.

- The letter from the US Chamber CCMC is particularly noteworthy for a number of reasons, including its judicious use of examples to illustrate key concerns, its recommendations to the SEC in the event the SEC decides to proceed with the standard regardless, and its observation (supported by examples) of the PCAOB's use of the SEC Investor Advocate's (IA) August 2016 comment letter to deflect other commenters' concerns - creating at least a perception of unfairness in the process in view of the IA's employment by the SEC (and reporting to the SEC Chair), which has oversight authority over the PCAOB - including approval authority over this standard. (Note this speech yesterday, wherein the IA Investor Engagement Advisor discussed the IA's 2016 comment letter, indicating: "[W]e hoped that our letter could help in the effort to push this rule over the goal line." Of course, every commenter hopes and expects that their comments will be fairly and seriously considered.) Here is an excerpt re: auditor disclosure of material and confidential company information:

The PCAOB acknowledges that auditors could be disclosing immaterial information as CAMs. Additionally, the PCAOB recognizes that auditors may disclose original (confidential) information that would not otherwise be made public by the company. The PCAOB believes the Proposed Standard that provides for auditor disclosure of both immaterial and original (confidential) information is needed “in the public interest” and “to ensure that the fact that management did not provide a disclosure would not prevent the auditor from communicating a critical audit matter” [FN]. Regardless of whether the auditor alone or both auditors and companies disclose this information, management will need to respond to inquiries from investors and analysts about otherwise immaterial and confidential matters. Indeed, the PCAOB characterizes this as a benefit of the Proposed Standard [FN]. An acknowledgement by the PCAOB that the Proposed Standard will lead to the disclosure of immaterial and confidential material should give the SEC pause.

In the event the SEC decides to proceed notwithstanding the numerous and significant collective concerns, the CCMC recommends that it: (i) provide a safe harbor around auditor reporting of CAMs, (ii) coordinate with the PCAOB on a modified inspection approach for CAMs for some reasonable time period, (iii) postpone the effective date of the proposed standard (which the CCMC described as "very aggressive" and ill-timed based on the several impending new accounting standards that companies are grappling with), and (iv) include a sunset provision subject to post-implementation review and analysis.

- Quest Diagnostics letter excerpt re: chilling of auditor/company communications:

By setting the boundary at not just matters that are "required to be communicated" but at any matter that is communicated to the audit committee, whether or not required, a company may decide to limit communications to only that which is strictly required under the applicable financial reporting framework. This chilling of communications between management and their auditor will prevent the auditor from receiving the benefit of background or other contextual information that better informs the audit team, which would lead to a more comprehensive audit.

While we acknowledge that, as the PCAOB points out, the current scope of matters required to be communicated under the applicable existing frameworks is quite extensive, we do not agree with the PCAOB's conclusion that "there may be few, if any, relevant communications affected." If the relevant parties are aware that any communication may form the basis for a conclusion regarding a CAM, then parties necessarily will shape their communications in response to this possibility. Even if the overall engagement between the company and its auditor does not change, it is unavoidable that the tone and tenor of such engagement will change as a result of the Proposed Standard.

- Ely Lilly letter excerpt re: financial reporting framework:

We believe the proposed scope of CAMs is inconsistent with the US regulatory reporting framework. According to the framework, management is responsible for financial statement and related disclosures. According to the Proposal, CAMs should be selected from “any matter that was communicated or required to be communicated to the audit committee.” This sets the auditor up to be responsible for disclosing information about the company that is not previously disclosed. Many companies, us included, are concerned that the auditor’s report would disclose information not otherwise required to be disclosed by the company.

The explanatory note in the Proposal articulates the auditor is “not expected to provide information about the company that has not been made publicly available”. But, the significant caveat “unless such information is necessary to describe the principal considerations that led the auditor to determine a matter is a CAM” instructs the auditor to do exactly that. To the extent the Proposal compels the auditor to disclose information not otherwise required to comply with U.S. GAAP, the company has lost authority over issue reporting and diminished the regulatory authority of the SEC.

Also, while not the #1 concern expressed by commenters in light of the numerous other significant concerns about CAM disclosure, several letters also recommended the SEC reject the auditor tenure disclosure (which the CCMC letter notes was also opposed by PCAOB Board member Jeanette Franzel) due to the PCAOB's failure to support its relevance and - relatedly - the seemingly inevitable potential for investors to inappropriately correlate the disclosure with auditor independence or audit quality.