PCAOB Issues Guidance on Critical Audit Matters

PCAOB Issues Guidance on Critical Audit Matters

Major League Baseball held this season’s Opening Day festivities last week, marking the official start of the 2019 season. Players who reported for preseason workouts in February were more than ready to start the 162-game regular season. Accounting firms and publicly traded companies are now going through their own version of spring training, as they prepare for the biggest change in decades to auditor reports. And just before the start of the season, they got some tips from the Public Company Accounting Oversight Board (PCAOB).

Under the new standards, auditors must discuss so-called critical audit matters (CAMs) in their auditor reports. The goal is to make the reports more useful by disclosing their trickiest and most important accounting issues. Specifically, auditors have to disclose issues that are communicated to audit committees and meet two additional criteria: (i) those that “relate to accounts or disclosures that are material to the financial statements,” and (ii) “involved especially challenging, subjective, or complex auditor judgment.”

After at least seven years in development, the Securities and Exchange Commission and PCAOB approved the CAM rules in 2017. For large accelerated filers, the requirements take effect for fiscal years ending on or after June 30, 2019. They will apply to all other companies after 2020.

Last month, the PCAOB published guidance on implementing the CAM requirements. The instructional documents include information on what details to cover in the report, such as the factors that led auditors to classify issues as CAMs and how CAMs were addressed in the course of the audits. The guidance also offers more in-depth analysis on the determination of CAMs.

The PCAOB actually based its guidance in part on CAM methodologies submitted by U.S. audit firms and feedback from auditors that have already started doing dry runs on CAMs with clients. (That’s the accounting equivalent of an exhibition game.) Some recent company filings offer a preview of what CAM disclosures may look like once the new requirements go into effect.

In its opinion on the financial statements of Texas-based Church Capital Fund, accounting firm McBee & Co., PC included a CAM disclosure involving valuations of the company’s investments, which include church mortgage bonds and loans. Noting the “absence of readily determinable fair values,” the auditors laid out their procedures for testing the fund’s valuation methodologies.

The auditor’s report for chemical manufacturer Apex Resources Inc. included a more worrisome type of CAM note. It opined that the company’s operating performance and negative net worth “raises substantial doubt” about the likelihood of it remaining a going concern for another year. The auditor’s report in the Form 10-K/A for Poverty Dignified Inc. contained a similar CAM disclosure.

For practitioners interested in more information on the CAM requirements, the PCAOB will hold  webinars on April 25 and May 8.

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