The Center for Audit Quality (CAQ) earlier this month released its review of the first year of auditor reports for over 2,000 large accelerated filers that included critical audit matters (CAMs). The first phase of CAM implementation is complete, and all large accelerated filers have issued financial statements with auditor’s reports addressing the new requirement.
CAMs are defined by the Public Company Accounting Oversight Board (PCAOB) as any matter arising from the audit that was communicated or required to be communicated to the audit committee relating to accounts or disclosures that are material to the financial statements and involve especially challenging, subjective, or complex auditor judgment.
According to the CAQ, the average number of CAMs for S&P 100 companies was 1.98 per report, and every S&P 100 audit report included at least one CAM. Although CAMs are specific to each audit, the most frequently communicated categories observed among the S&P 100 were taxes (32, or 16 percent); goodwill and/or intangibles (28, 14 percent); contingent liabilities (23, 12 percent); and revenue (18, 9 percent).
The other 49 percent of CAMs covered 23 different categories. Industry-specific trends were also noted, including all financial institutions with banking operations having an allowance for loan or lease loss CAM.
The CAQ observed public company auditors have embraced the PCAOB’s requirement to report CAMs. “The audit profession’s extensive, up-front planning resulted in disclosures that give investors a better understanding of the areas of the audit that involved especially challenging, subjective, or complex auditor judgment,” said CAQ Executive Director Julie Bell Lindsay.
Dennis McGowan, CAQ senior director, was not surprised by the top four CAM categories. “They are complex audit areas requiring a high degree of management and auditor judgment,” he said.
Further, McGowan felt the average number of CAMs reported made sense. “There is no magic number to expect, because CAMs are unique to each audit, but most audits have some area of subjectivity and complexity,” he noted.
In the larger population of all large accelerated filers, the CAQ noted there were 16 auditor reports without a CAM. “When smaller public companies are required to report CAMs, I would expect to see more reports with no CAMs because they have less complexity,” McGowan said.
Lisa Smith, managing director of national audit/assurance at Deloitte, has been leading the firm’s CAM implementation in the United States and globally. “Since the standard came out in 2017, auditors of large accelerated filers have had time to prepare tools and guidance, do dry runs, identify implementation questions, and address quality control issues,” she said. Smith noted the average number of CAMs of approximately 2 was consistent with what happened during the dry runs.
McGowan agrees dry runs and the timing of implementation helped auditors to prepare. “The profession has done a lot of work,” he said. “They took it seriously; trained; and were ready, so there were no surprises.”
Smith encourages auditors to start early to identify and communicate CAMs, beginning the planning process for current year as soon as the prior year audit report is issued. She also encourages engagement partners to lead the process and be involved in drafting and reviewing CAMs, rather than delegating it to the engagement team. “Matters that could be CAMs should be tracked and evaluated in real time throughout the audit—not just when the audit report is issued,” she said.
She recommends auditors start drafting and socializing CAMs with clients as part of each quarterly review. In her experience, there has not been much pushback from clients about reporting CAMs. “Companies have been educated about the purpose of CAMs, and management and company counsel understand that CAMs are part of the audit process and audit report,” she said.
The ongoing COVID-19 pandemic has already had significant implications on companies and will continue to impact audits. “COVID-19 is not a CAM itself but will be considered in determining why something is a CAM,” Smith said. Goodwill and going concern are two examples where uncertainties about future cash flows as a result of the pandemic may need to be considered in the CAM determination for certain companies.
The PCAOB has a phased implementation approach to reporting CAMs based on filing status. The second effective date for audits subject to CAM requirements is for fiscal years ending on or after Dec. 15, 2020. The PCAOB and CAQ plan to continue to analyze and report on CAMs over time as more of them are included in auditor’s reports.
“The PCAOB has reported not all investors are aware of CAMs and using them for decision-making,” McGowan said. “But some are using them, and as time goes on and there are multiple years of CAMs available, more investors will use them.”