And just like that, the next phase of Critical Audit Matters (CAM) implementation efforts will soon be in full swing for certain SEC filers. CAMs first debuted for large accelerated filers for fiscal years ending on or after June 30, 2019. Now it’s time for the next batch of in-scope SEC filers to enter stage right. Let’s review what’s unique about this PCAOB requirement, including some helpful hints for management and auditors as you begin to plan the year-end financial reporting production.
The purpose of CAMs is to provide audit-specific information in the auditor’s report that conveys meaningful information to investors and other financial statement users about matters that required especially challenging, subjective, or complex auditor judgment. These matters are the subject of much discussion during the planning and execution of engagement procedures (and let’s be honest, they are the areas that normally keep audit partners awake at night and are the source of stress until that final PCAOB inspection result report arrives!).
Mike included a section on CAMs in his annual update blog from the 2019 AICPA Conference. As a refresher, CAMs are defined under AS 3101 as matters arising from the audit of an entity’s financial statements that:
- Have been communicated or were required to be communicated to the audit committee
- Relate to accounts or disclosures that are material to the financial statements; and
- Involve especially challenging, subjective, or complex auditor judgment
Mike described these criteria in depth in his blog introducing this requirement back in 2018 (that is not a typo, I promise!).
The goal is to communicate CAMs in a nontechnical manner that allows users of the financial statement to understand the auditor’s assessment of, and response to, risks specific to an entity. The determination of CAMs is principles-based and depends on the facts and circumstances of each audit. The auditor’s report must include the following:
- Identification of the CAM
- Description of the principal considerations that led the auditor to determine that the matter is a CAM
- Description of how the CAM was addressed in the audit; and
- Reference to the relevant financial statement accounts or disclosures that relate to the CAM
The PCAOB provided some helpful hints in a Spotlight publication about areas of interest for investors, including:
- Significant management estimates and judgments made in preparing the financial statements
- Areas of high financial statement and audit risk
- Significant unusual transactions
- Other significant changes in the financial statements
The PCAOB also published other resources, including an overview of the new Auditor’s Report, access to previously recorded webinars, and fact sheets. The PCAOB did highlight some frequently communicated CAM topics during the first phase of implementation, including:
- Goodwill and intangible assets
- Revenue recognition
- Income taxes
- Business combinations
Be hair and makeup ready
Here are some helpful cues for both first-time implementation as well as ongoing assessment of CAMs in an engagement:
- Establish and maintain open dialogue
Starting the conversation early is key to the successful implementation of the CAM requirement. Auditors must be proactive with management and audit committees and communicate throughout the engagement process. Best practices include a drafting process to review these matters well in advance of the reporting date.
- Keep it (the CAM report) simple and consistent
CAMs are meant to be read (and understood) by nontechnical users! It is important for auditors to keep this in mind during the drafting process. In addition, the SEC remains diligent in citing that the information disclosed in CAMs should be consistent with matters disclosed in both the financial statements and MD&A.
- Remember, this is not a sprint
Modifications to the structure of audit reports are not a regular occurrence. Simliar to “A Chorus Line”, the inclusion of CAMs is likely here for the foreseeable future. While there is proven benefit to educating members of the audit committee on the auditor’s assessment and response to financial statement risk, the value of diclosing these matters is still not fully known for other financial statement users. CAMs may impact the risk profiles of companies, or impact ESG ratings. Only time will tell!
Stay in the loop
CAMs is just one of several topics covered in our SEC Update course! This course is available in two of our bundled offerings:
And stay tuned to more updates in future blogs about recent trends for SEC filers!
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