Goodwill and other intangible assets and revenue recognition are among the most frequently communicated critical audit matters (CAMs), according to the Public Company Accounting Oversight Board’s first report on the new disclosure.
The PCAOB rolled out a new model for the audit report in 2017, though it gave auditors extra time to prepare for CAMs, which began to be reported for large accelerated filers in mid-2019. In its first CAMs spotlight, the PCAOB selected 12 audits of large accelerated filers with fiscal years ending on or after June 30, 2019, to specifically review how auditors of these filers implemented CAM requirements.
Through its review, the PCAOB said it learned firms appear to have made “significant investments” in their approaches to the new requirements and that starting CAM determination and drafting early proved a difference maker for audit teams.
“To date, preliminary results from our outreach to audit committees suggest that they generally found the audit team’s practice run processes to prepare for implementing the CAM requirements to be helpful and believe that CAM implementation has not changed their interactions with the auditor,” the PCAOB said. “While CAMs are the sole responsibility of the auditor, audit committees shared with us that they generally began discussing CAMs with their auditor in 2017 or 2018, well in advance of the effective date of the requirements in 2019.”
Of the 189 reports containing CAMs filed to the Securities and Exchange Commission’s EDGAR system and the PCAOB Office of Economic Risk Analysis as of Nov. 30, 88 listed goodwill and other intangible assets as CAMs. Revenue recognition was close behind at 64, followed by taxes (43) and business combinations (40).
Those numbers fall in line with a Deloitte report on early CAMs. Deloitte also shared in August its audit of Microsoft’s financial statements, in which it identified revenue recognition and uncertain tax positions as CAMs. Deloitte cited “significant judgment” needed on revenue and “transfer pricing issues that remain unresolved with the Internal Revenue Service” for taxes when describing why the two were listed.
The PCAOB said its staff will next conduct a preliminary analysis in 2020 to evaluate whether early evidence from implementation of CAM requirements is suggestive of significant costs or unintended consequences. “The preliminary analysis we will perform in 2020 will not be a comprehensive evaluation of the overall effectiveness of CAM requirements because it is being performed prior to full implementation of CAMs on audits of smaller issuers,” the regulator said.
The second effective date for audits subject to CAM requirements is for fiscal years ending on or after Dec. 15, 2020, and “after a reasonable period of time following the completion of implementation for December 2020 audits” the PCAOB will conduct a “full post-implementation review to analyze the overall effect of the new requirements.”