An exception report refers to a very important and critically significant piece of documentation that is essential to the proper and effective functioning of a project in that it documents not what has gone right, but rather, what has gone wrong. In the course of a project, there will exists mountains upon mountains of paperwork that is meant to provide every bit of detail as to what was done, how it was done, who did it, what it cost, etc, in relation to a project. There are many purposes for this, but accountability and budgeting are more than likely numbers one and two. However, the exception report actually itemizes and documents the major mistakes, goofs, or mishaps. Essentially the things that went wrong. This is in reality a critical document for many reasons. First, it provides a carefully written documentation of the mistakes for look back at a later point within the life of a project in hopes of avoiding making the same mistakes again; however, it is also important because, for future projects, it can help the project team learn from its mistakes made this time around.
This term is defined in the 3rd edition of the PMBOK but not in the 4th.