No Critical Audit Matters Identified for Redfin Corp.

Critical audit matters (CAMs), as required by PCAOB Auditing Standard 3101 (AS 3101), took effect for audits of large accelerated filers with fiscal years ending on or after June 30, 2019, and on or after December 15, 2020 for all other required companies.1

Large accelerated filers are required to file their annual reports within 60 days after the end of the fiscal year. Considering the majority of these filers have December 31 fiscal year ends, the upcoming weeks will bring an influx in filings and critical audit matters contained therein.

As of February 12, 2020, we have seen almost 400 unique opinions under the new CAM requirements. On average, these opinions included 1.7 critical audit matters, remaining unchanged from our most recent CAMs analysis, with a high of 4 matters.

Of the opinions filed so far, we have identified topics that have been frequently cited as critical audit matters – the most common being revenue. Other recurring topics include intangible assets, business combinations (structure events), income taxes, and contingent liabilities.

As illustrated below, just four topics make up more than half of all critical audit matters disclosed.

As a reminder, critical audit matters are any matters arising from the audit of the financial statements that was communicated, or required to be communicated, to the audit committee and that:

  1. Related to accounts of disclosures that are material to the financial statements and;
  2. Involved especially challenging, subjective, or complex auditor judgment

As more filings are coming in, we are noticing opinions that contain novel disclosures related to critical audit matters.

For example, on February 12, 2020, Redfin Corp [RDFN] filed its annual report for the fiscal year ended December 31, 2019. Redfin, a real estate company, is a large accelerated filer – therefore, is required to disclose CAMs in the Report of Independent Registered Public Accounting Firm’s Opinion on the Financial Statements.

However, the audit opinion for Redfin’s financial statements stated that there were no critical audit matters – making it one of the first (among companies required to do so under AS 3101) to not have any CAMs identified by the auditor.

Critical Audit Matters
Critical audit matters are matters arising from the current-period audit of the financial statements that were 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) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

Redfin Corp, Annual Report for FYE December 31, 2019, Filed February 12, 2020

CAMs are meant to be determined on an audit-by-audit basis, depending on facts and circumstances unique to the audit for a specific filing entity. According to the PCAOB, most audits where the CAM requirements apply are expected to have at least one CAM identified but, as in Redfin’s case, it is possible for an auditor to determine there are no CAMs.

Redfin discloses the most common critical audit matter – revenue recognition – as a critical accounting policy and estimate (CAPE). CAPEs, unlike CAMs, are determined by management and relate to items that have a material impact on financial statements and require significant estimates, judgments or assumptions.

Based on Redfin’s CAPE revenue recognition disclosure, brokerage revenue transactions with promotional pricing offers create a second performance obligation, changing the timing of a portion of revenue. Overall, Redfin recognizes about 63% of total revenues from brokerage transactions; however, the Company notes in the footnotes that “promotional pricing offers have not resulted in a material impact to timing of revenue recognition or contract liabilities.” More insight into how much of this revenue is dependent on promotional pricing would be appreciated, but the lack of materiality may be why these transactions did not prompt a critical audit matter.

Redfin’s intangible assets, including goodwill, total less than 2% of the company’s total assets. The Company disclosed no material acquisitions of mergers. Historical operating losses require a full valuation allowance of the company’s US tax assets. And Redfin’s only potential contingency is a preliminary stage claim against the company. Overall, the most common critical audit matters do not apply to Redfin.

Redfin also includes a CAPE for inventory. The inventory CAPE includes two policies and estimates. The first is direct home acquisitions and improvement costs, which are capitalized. The second is the calculation of net realizable value. As of the end of 2019, inventory represented 12.5% of Redfin’s total assets and net realizable write-downs were $143 thousand of $275 million cost of inventory revenues.

Inventory and capitalized costs represent roughly 6% and 5% of critical audit matters, respectively. Based on Redfin’s immaterial write-downs and the relatively stable housing market, the lack of an inventory critical audit matter is not surprising.

In reviewing Redfin’s annual report, it is understandable how no critical audit matters came to light. But this should not be taken as a sign that more opinions will have zero critical audit matters. Redfin’s was the first of almost 400 opinions to disclose no critical audit matters.

On the flip-side of Redfin – whose audit was subject to the CAM requirement but had no items identified as a CAM – are audit opinions for companies that are not yet required to disclose CAMs, but have voluntarily done so.

The PCAOB stated that auditors may early adopt CAM requirements or apply them voluntarily to audits for which they are not required. To date, we have seen 27 opinions containing voluntary CAM disclosure, with an average of 0.3 CAMs per report and a maximum of 3 CAMs.

With the anticipated increase in annual reports over the coming weeks, we expect to see emerging trends in the number and type of CAMs disclosed.


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1. Communication of critical audit matters is not required for audits of (1) brokers and dealers reporting under Exchange Act Rule 17a-5; (2) investment companies registered under the Investment Company Act of 1940 (“Investment Company Act”), other than companies that have elected to be regulated as business development companies;12 (3) employee stock purchase, savings, and similar plans; and (4) emerging growth companies.