AS 3101, the new auditing standard for the auditor’s report that requires disclosure of critical audit matters, is effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. And that means that audit reports communicating the first round of CAMs have now been filed for the pioneers—large accelerated filers with fiscal years ended June 30, 2019. In this Deloitte Heads Up, the audit firm takes a look at all 52 of them. Deloitte reports that an average of 1.8 CAMs were disclosed per audit report, and the most commonly disclosed CAMs related to goodwill and intangible assets. Other companies may want to listen up because CAM requirements will be upon them soon—for companies other than large accelerated filers (excluding EGCs), CAMs will be required for fiscal years ending on or after December 15, 2020.
As you may recall, CAMs are defined as “matters 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 especially challenging, subjective, or complex auditor judgment.” Deloitte observes that most of the CAMs reported so far were “related to accounts or disclosures in which there is a high degree of auditor subjectivity associated with applying audit procedures and evaluating the results of those procedures. However, a CAM could also be identified for an account or disclosure that is especially challenging or complex to audit.” For each CAM, the auditor is required to identify the CAM, describe the principal considerations that led to the determination that the matter was a CAM, describe how the CAM was addressed in the audit, and refer to the relevant financial statement accounts or disclosures that relate to the CAM.
According to the PCAOB, CAM disclosure is designed to “make the auditor’s report more informative and relevant to investors and other financial statement users. CAMs are intended to provide tailored information specific to the audit—from the auditor’s point of view—on matters that require especially challenging, subjective, or complex auditor judgment.” In approving the new CAM rule, the SEC observed that the new requirement “will add to the total mix of information available to investors by eliciting more information about the audit itself— information that is uniquely within the perspective of the auditor, and thus, not otherwise available to investors and other financial statement users.”
In its review, Deloitte found that 35% of the CAMs disclosed related to goodwill and intangible assets, followed by revenue (19%), income taxes (15%), acquisitions and related liabilities (6%), inventory (5%), other liabilities (5%) and contingencies (4%), with all other CAM disclosures aggregating 11%. However, 52 is not a very large sample, so it will be interesting to see if these proportions generally hold.
Deloitte also describes some of its lessons learned from prior “dry runs” performed for large accelerated filers. The biggest lesson: CAMs are not easy. For example, Deloitte writes that deciding whether an account was a CAM “required significant judgment” that was specific to each audit. In addition, writing about CAMs in a way that could be understood by “a broad readership can be challenging. For example, it can be difficult to convey concisely why a matter is a CAM or to summarize the audit procedures performed in a manner that is informative but not overly technical.” The dry runs enabled Deloitte to share drafts of CAMs with management. audit committees and legal counsel, set expectations and reach a common understanding about requirements, process and timing. As a result, Deloitte believes the dry runs “helped auditors, management, and audit committees be better prepared to implement the requirements when they became effective.” (See also this PubCo post.)