The PCAOB's Proposed Changes to the Auditor Reporting Model: An In-depth Overview for the Classroom and Beyond

After almost a decade of research, deliberation, and public input, the Public Company Accounting Oversight Board (PCAOB) appears poised to reach a conclusion on its proposal for changes to the auditor's reporting model. These changes, undoubtedly the most far-reaching in 70 years, would significantly impact what has largely been described as a pass/fail model of auditor reporting. Under current auditing standards, auditors of public companies typically follow illustrative examples of auditor reports originally adopted under SAS 58 by the Auditing Standards Board in 1988 (AICPA, 1988), and typically issue unqualified audit opinions with minor word variations from firm-to-firm. The new model includes the reporting of critical matters encountered during the audit, as well as other provisions aimed to provide financial statement users with more relevant information about the auditor and the audit process. This paper presents the evolution of the auditor reporting model, discusses the proposed changes to the standards, provides a timeline detailing the process of developing the proposed standard, summarizes the changes to the standard auditor's report, and presents unresolved issues regarding the proposed standard. This paper is a valuable resource for students to acquaint themselves with the proposed model, the history of the auditor's report, and an overview of the audit standard setting process. Accounting academics can use this paper in the classroom as supplemental material or assign it to students as a case project. Accordingly, we include two appendices with this paper. Appendix A provides learning objectives and implementation guidance, and Appendix B offers teaching notes with suggested questions and solutions. Additionally, the paper provides a basis for investors, creditors, academic researchers, and practitioners to understand the history and current developments affecting the auditor reporting model. Auditors play a significant role in the quality of information available in the capital markets. In as much as our society depends on high-quality financial reporting for capital allocation decisions, understanding the nature and limitations of the auditor's report will be helpful to investors and creditors. Finally, the summary of the requirements and changes affecting the standard auditor's report presented in this paper will be useful to time-constrained practitioners, investors, and creditors when evaluating the changes to the auditor's reporting model.