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A Spotlight on CAMs

Note: This post was updated to reflect the number of CAMs disclosed in the audit opinions of Large Accelerated Filers as of December 17, 2019.

The Public Company Accounting Oversight Board (PCAOB) posted its first Spotlight yesterday, a publication highlighting timely and relevant observations for auditors and other key stakeholders.

This year, the PCAOB specifically reviewed how auditors of 12 large accelerated filers with fiscal years ending on or after June 30, 2019, implemented critical audit matter (CAM) requirements; Critical Audit Matters Spotlight focuses on the observations from these inspections, as well as other outreach and analysis activities.

The implementation of PCAOB Auditing Standard 3101 (AS 3101)The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, adopted on June 1, 2017, made the most significant changes to the auditor’s report in more than 70 years. Among the new requirements is the disclosure of CAMs, which took effect for audits of large accelerated filers for fiscal years ending on or after June 30, 2019, and on or after December 15, 2020, for all other required companies.

As of December 17th, we have collected 333 CAMs from the audit opinions of 193 Large Accelerated Filers, with an average of 1.7 CAMs per opinion.1 The top five topics most commonly identified as critical audit matters thus far have been Business Combinations, Goodwill, Revenue Recognition, Taxes, and Contingencies. However, it is important to remember that CAMs are meant to be specific to audits for individual companies, and that an audit opinion containing more CAMs or less CAMs than another is not inherently negative or positive.

The PCAOB’s Critical Audit Matters Spotlight is intended to provide insight into the initial observations gathered from the experiences of the first adopters of CAM requirements, in the hopes of providing useful and timely information to auditors, companies, audit committees, and other stakeholders.

When engaging with audit teams and audit committees regarding the initial adoption of CAMs, the PCAOB focused on three objectives:

  1. Understanding the policies and procedures that firms have put in place to support and monitor the effective implementation of CAM requirements.
  2. Understanding how selected audit teams implemented CAM requirements.
  3. Gathering information to support monitoring of CAM requirements implementation.

The initial observations found that “firms appear to have made significant investments in developing methodologies, tools, and training … Together with practice runs that most audit teams underwent, these investments appear to have made important contributions to support the firms’ implementation efforts.”

Other findings include preliminary CAM determination and drafting, ongoing CAM evaluation, subject matter expertise, and management & audit committee involvement, all of which emphasize the value of preparatory efforts.

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. 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.

The PCAOB will continue to follow the implementation of CAMs with a preliminary analysis in 2020. During this time, the Board will “evaluate whether early evidence from the implementation of CAM requirements is suggestive of significant costs or unintended consequences.” Additionally, the Board is hoping to gain some insight on auditors’ response to CAM requirements, usefulness of CAMs for investors, and audit committee and preparer experiences.

To further assist with the implementation of CAMs, the PCAOB staff developed several resource documents designed for the three specific audiences: auditors, audit committees, and investors.

It’s probably worth spending the time to brush up on CAMs, as SEC’s Chief Accountant in the Division of Corporation Finance, Kyle Moffatt, confirmed at the AICPA 2019 Conference that the SEC will review CAMs as part of its filing review process.

With the year winding down, and the number of large accelerated filers with 12/31 year-ends, the anticipation of CAMs disclosure is real.

1. This post was updated to reflect the number of CAMs disclosed in the audit opinions of Large Accelerated Filers as of December 17, 2019. ↩

For access to our Critical Audit Matters database, please contact us,
or request a demo to see Audit Analytics CAMs in action with a personalized online demonstration.

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