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The Rulemaking Process: Two Accounting and Auditing Mini-case Studies: Materiality and Auditor's reporting

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Aug 22, 2017

On August 22, 2017, the Securities and Exchange Commission (SEC) released a speech by Stephen Deane, CFA, Investor Engagement Advisor, Office of the Investor Advocate

In his speech, Mr. Deane talks about two mini-case studies: FASB’s proposals to remove its definition of materiality, and the PCAOB’s final rule that, if approved by the SEC, would significantly enhance the audit reporting model.


In its proposed Update on the Conceptual Framework, FASB proposed to remove its own definition of materiality and instead to rely on the courts to provide the definition. FASB did so, it explained, because, “The Board became aware that the current definition of materiality was inconsistent with the legal concept of materiality in the United States.” FASB proposed to replace that definition with new language that essentially said two things: First, materiality is a legal concept; and, second, it is not up to FASB to define it.

Auditor's reporting model

The PCAOB has adopted a new standard that, if approved by the SEC, will expand the report significantly. The standard aims to give readers of the audit report greater insight into the most challenging, subjective and complex aspects of the audit.

The heart of the new standard is a requirement for the audit report to identify all critical audit matters, or CAMs, and disclose information on the auditor’s response to each CAM. The new standard defines a CAM as a matter that was communicated or required to be communicated to the audit committee and that meets two further tests:

  1. The matter must relate to accounts or disclosures that are material to the financial statements, and
  2. The matter must involve especially challenging, subjective, or complex auditor judgment.

Review the full speech on the SEC's website.

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