Critical audit matters (CAMs) relate to accounts or disclosures that are material to a company鈥檚 financial statements and involved especially difficult judgment from the auditor. Audit reports for large public companies began to include CAMs in fiscal year 2019. In the coming months, smaller public companies could start seeing CAMs communicated in their audit reports, too.
What are CAMs?
Auditing Standard (AS) 3101,听The Auditor鈥檚 Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion,听represents a major change to the brief pass-fail auditor reports that had been in place for decades. The updated guidance requires auditors to add a discussion of CAMs to the audit report. CAMs are essentially the most complicated issues that arose during the audit of a company鈥檚 financial statements.
Specifically, CAMs are defined as matters that:
- Have been communicated to the audit committee,
- Are related to accounts or disclosures that are material to the financial statements, and
- Require an auditor to make a subjective decision or use complex judgment.
Under the updated guidance, auditors must identify each CAM, detail the reasons why it was selected and back up their assertions using relevant financial information. The Public Company Accounting Oversight Board (PCAOB) doesn鈥檛 provide a list of possible CAMs or prescribe a specific number of CAMs that must be stated in an auditor鈥檚 report. In fact, in some audits, it鈥檚 possible that the auditor will determine that there are no CAMs to report.
Auditors of large accelerated filers 鈥 public companies with market values of $700 million or more 鈥 are required to report CAMs for fiscal years ending on or after June 30, 2019. Smaller public companies must report CAMs for fiscal years ending on or after December 15, 2020.
What鈥檚 being reported?
In October 2020, the PCAOB published Release No. 2020-002,听Interim Analysis Report: Evidence on the Initial Impact of Critical Audit Matter Requirements. The PCAOB鈥檚 interim analysis found that 2,420 companies with fiscal year-ends ranging between June 30, 2019, and June 29, 2020, had reported CAMs.
The average number of CAMs was 1.7 per report. The range of the number of CAMs per report was zero to seven. The most frequently reported items were:
- Revenue recognition (604 reports),
- Goodwill (462 reports),
- Other intangible assets (385 reports), and
- Business combinations (355 reports).
鈥淎mong other things, investors are using CAMs to better understand the work of the auditor and company disclosures,鈥 the PCAOB said in its interim analysis. 鈥淪ome investors have emphasized that they value CAMs that are specific and tailored to the audit, and others have encouraged auditors to expand CAM communications to provide information about the outcome of audit procedures.鈥
Reporting CAMs has caused management to make changes to financial statement disclosures or other corporate reporting in 39% of the audits. However, in the open-ended response section of the PCAOB survey, about half of audit partners said that CAM information provides little value to investors.
Is COVID-19 a CAM?
CAMs are specific to the engagement and the year of the audit. As a result, they鈥檙e expected to change from year to year.
One of the biggest developments in 2020 has been the COVID-19 pandemic. The Securities and Exchange Commission (SEC) recently clarified that COVID-19 itself is听not听a CAM. But how the virus has impacted a material account or disclosure may need to be reported as a CAM. For example, market conditions during the pandemic may have triggered additional impairment analysis that was particularly challenging or complex.
Stay tuned
The PCAOB plans to issue another analysis of CAMs in 2022, after smaller public companies have implemented the changes. Then, 鈥渂ecause some of the effects of the CAM requirements may take several years to fully manifest or stabilize,鈥 the PCAOB plans to publish a comprehensive post-implementation review in 2024.
漏 2020