As the implementation of the new disclosure requirement for critical audit matters (CAMs) continues, Audit Analytics is examining S&P 1500 companies that have disclosed the audit committee’s role in CAMs.
CAMs are matters which arise during the audit that are communicated or required to be communicated with the audit committee, are material to the financial statements, and involve especially challenging, subjective or complex auditor judgment.1 Though these matters are required to be communicated with the audit committee, the audit committee has no role in determining or approving CAMs.
The PCAOB points out in its Critical Audit Matters Audit Committee Resource that “while the auditor is required to share the draft auditor’s report including any CAMs identified with the audit committee, CAMs are the sole responsibility of the auditor.”
So, what have audit committees been doing in response to the new disclosure?
We have looked at 770 proxy statements between July 1, 2019 and March 31, 2020 to see how S&P 1500 audit committees are engaging in the new disclosures. To date, just over 6% of S&P 1500 companies have included a disclosure regarding the audit committee’s role with CAMs.
In the second half of 2019, 187 proxy statements were released for companies in the S&P 1500. Of these proxy statements, 8 mention CAMs in the audit committee’s report within the proxy and 3 mention CAMs elsewhere within the proxy.
In the first quarter of 2020, 583 proxy statements were released for companies in the S&P 1500. Of these proxy statements, 27 mention CAMs in the audit committee’s report within the proxy, 11 mention CAMs elsewhere within the proxy, and 1 proxy statement mentions CAMs both within the audit committee report and elsewhere within the proxy.
To get a better sense of the type of companies that included a CAM reference in their proxy statements, we looked at each S&P index separately. As expected, a greater percentage of S&P 500 large cap companies – nearly 10.5% – compared to S&P 400 mid cap and S&P 600 small cap – around 4% – have disclosed the audit committee’s role in terms of CAMs.
Of the companies within the S&P 1500 that mention CAMs within their proxy statements filed between July 1, 2019 and March 31, 2020, 61% are from the S&P 500.
Disclosures in these proxy statements often identify the audit committee’s role as either reviewing the CAMs, discussing the CAMs with the independent auditor, or both. Below is an example from Exelon Corp.
Critical Audit Matters
Exelon Corp [NYSE:EXC] DEF14A – filed March 18, 2020
In conformance with Public Company Accounting Oversight Board rules, the Committee reviewed and discussed with PwC four critical audit matters arising from the current period audit of Exelon’s financial statements. Critical audit matters (or CAMs) are defined to be any matter arising from the audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that 1) relate to accounts or disclosures that are material to the financial statements and 2) involve especially challenging, subjective, or complex audit judgment. The Committee concurred with PwC’s assessment and identification of the CAMs contained in its Audit Report included within Exelon’s 2019 Annual Report on Form 10-K.
The audit committee should exercise its role in oversight of the independent audit process. In order to effectively perform their duties, the PCAOB provided questions for audit committees to discuss with their independent auditor:
These questions should be used as a guide for the audit committee to ensure their auditor is prepared to issue CAMs and that those CAMs are appropriate. We expect to see more companies disclose the audit committee’s role in critical audit matters in the second year of the new disclosure requirement.
For more information about this analysis, or for access to our Critical Audit Matters database, please contact us.
1.CAMs are required disclosure in the audit opinion starting fiscal years ended on or after June 30, 2019 for Large Accelerated filers and December 15, 2020 for all other required registrants. ↩