CAMs may drive more management disclosure, dry runs reveal

A pending requirement for auditors to list and describe critical audit matters in their reports may compel management to take a closer look at their own disclosures.

Auditors are learning a lot through dry runs of the requirement for auditors to disclose the critical matters they identify in each audit, said Marc Panucci, deputy chief accountant at the Securities and Exchange Commission, at a national conference of the American Institute of Certified Public Accountants. The CAM disclosure is the final piece of a new auditor’s reporting model taking effect with June 30 year-end reports for large accelerated filers.

Auditors are required to identify and explain those areas of the audit that proved most difficult because they involved especially complex or subjective auditor judgment. The earliest disclosures will begin appearing in filings in July 2019. In a phased approach to implementation, auditors will not be required to disclose CAMs for most public companies until the close of 2020.

The dry run process may be inspiring management to rethink some of its own disclosures as the experience identifies some overlap between critical accounting estimates and critical audit matters, said Panucci. “Critical accounting estimates might be a subset of critical audit matters,” he said. “We’re hearing over time that might drive management to reassess their disclosures.”

That’s consistent with what Dave Sullivan, national managing partner at Deloitte, is seeing. “As we’ve been drafting CAMs, we disclose original information, but it’s about our audit, not about the company’s accounting,” he said. “We’ve seen some companies decide they want to expand their own disclosures, whether in footnotes, management discussion and analysis, or critical accounting policies. But it hasn’t been rampant.”

Drafting the disclosures has proven especially difficult, said Sullivan. “It’s more challenging than you might think,” he said. “It hasn’t been the job of the auditor to communicate with the investors, so we have to make sure it’s drafted in a meaningful way.” Auditors are focusing on communicating in plain language, he said, not relying excessively on technical language.

The dry run process has not produced the chilling effect on dialogue between auditors and audit committees that some feared at the inception of the requirement, said Sullivan. “It does take some time, and it’s the partner, the senior people, on the engagement,” said Sullivan. “This is not something to delegate to a junior staff person.”

The Center for Audit Quality published a report describing the key lessons learned so far through the dry run process. The report says auditors are exercising plenty of judgment to determine which matters should be identified as CAMs, and they’re finding it important to communicate with management and audit committees early in the process of identifying and drafting CAMs.

Auditors are also finding it’s important for all major players in the process—auditors, audit committees, and management—to provide plenty of time in the reporting process to deal with CAM disclosures. The report identifies a number of questions audit committee members should consider asking their auditors, including:

• How will CAMs relate to management disclosures outside the primary financial statements?
• Will there be a CAM for every critical accounting estimate or for every significant risk identified by auditors?
• What matters will likely be the more common CAMs?
• Will a significant deficiency in internal control over financial reporting constitute a CAM?
• What is the auditor’s process for drafting CAMs, and how will management and the audit committee be involved?