Critical audit matters. The term itself sounds like a big deal, and a new report from Intelligize indicates that they will significantly impact public companies’ disclosures, accounting controls, and even investor relations in the near future.
The Public Company Accounting Oversight Board (PCAOB) enacted a new rule in 2017 calling for auditor reports of public companies to include a section outlining the critical audit matters – better known as CAMs – involved in their reviews. CAMs include issues that are both material to financial statements and require challenging, subjective judgments on the part of auditors. They are “the things that keep the auditor up at night.” Auditors of large accelerated filers started reporting CAMs for fiscal years ending on or after June 30 of this year, while the CAM requirements will take effect for audits at all other applicable companies for fiscal years ending on or after Dec. 15, 2020. (Emerging growth companies, notably, are exempt. However, EGC auditors may early adopt CAM requirements or apply them voluntarily.)
The Intelligize report, Critical Audit Matters: Public Company Adaptation to Enhanced Auditor Reporting, analyzes data from a survey of corporate compliance officials conducted by SourceMedia Research/Accounting Today. The majority of companies surveyed said they have either engaged with auditors in CAM “dry runs” or plan to do so. These exercises involve simulating CAM identification and drafting, and directly engaging with management teams and audit committees.
Some of the most common issues that have come up during the dry runs include accounting topics du jour. Fifty-seven percent of large accelerated filers said auditors have identified CAMs related to income tax, while 49% cited revenue recognition and 38% said lease accounting issues are popping up.
Furthermore, the survey results suggest the CAM requirements will change financial statement disclosures, with 52% of large accelerated filers and 61% of all other companies reporting that they are evaluating updates. Nearly half of all companies surveyed said they are considering changing their Management Discussion and Analysis disclosures as a result of CAMs.
Companies interested in doing dry runs that have yet to start them may want to hurry up. More than 60% of large accelerated filers reported holding between three and six meetings with their auditors during dry runs. Over 60% of large accelerated filers said the entire process lasted four months or longer. In total, 62% of their audit committees either identified additional controls to be implemented or are considering such changes as a result of the dry runs.
Click here to read the Intelligize report in its entirety.