Reporting improves with KAM disclosures, study says

After a year of reporting “key audit matters” to investors in audit reports abroad, financial reporting has improved, says a study by a global accounting group.

The Association of Chartered Certified Accountants studied 560 audit reports across 11 countries that sported the new KAM disclosures as required by the International Auditing and Assurance Standards Board beginning in 2016. The ACCA report concludes the disclosures not only provide better information to investors, they also have encouraged improvements throughout the financial reporting chain.

The new KAM disclosure under the IAASB rules requires auditors to list in their audit reports the areas of the audit that involved the most risk. Auditors also must explain the audit approach that was taken in those areas.

In the United States, the Public Company Accounting Oversight Board has adopted a similar requirement for auditors to disclose “critical audit matters,” but those disclosures will not begin appearing in audit reports until 2019 and 2020, depending on the size of the company. CAMs under U.S. rules are matters that were communicated to the audit committee, or were required to be communicated, relating to material accounts or disclosures that involved especially challenging, subjective, or complex auditor judgment.

The ACCA says its research involved both quantitative and qualitative analysis of the first year of KAM reporting, including roundtable discussions with auditors, preparers, audit committee members, investors, and regulators. The analysis revealed KAMS have produced three key benefits since they began appearing in audit reports — better governance, better audit quality, and better corporate reporting.

Across the 560 audit reports, the ACCA analysis identified a total of 1,321 KAMs. More than one-fourth of all reports, or 162, disclosed KAMs related to asset impairments other than goodwill, while 102 reports contained KAMs regarding revenue recognition issues other than fraud. Only 16 reports disclosed KAMs relating to revenue recognition fraud risks.

Other leading topics for KAM disclosures included allowance for doubt debt (95), goodwill impairment (90), taxation, including deferred tax (88), investments (87), financial instruments (84), ,valuation of inventories (80), and property valuations (79). Then smaller numbers of reports listed KAMs around topics such as insurance, fixed assets, acquisitions and disposals, going concern, legal provisions, IT-related issues, provisions other than legal matters, and and accounting for long-term contracts.

Audit reports in the United Kingdom contained on average more than four KAMs per audit report, “significantly greater” than the next highest country, which was Zimbabwe. In most countries, the ACCA found no more than two to three KAMs in each audit report. 

In roundtable discussions, the ACCA heard concerns that the disclosures have considerably lengthened audit reports, piling onto the mounds of information made available to investors. Some also “expressed misgivings about the complexity of language used in KAMs,” the report says, although the ACCA says its analysis concluded most disclosures are written in relatively plain language that was easy to understand.