Tag Archives: critical audit matters

Are “other key operating metrics” the new non-GAAP financial measures?

by Cydney Posner

As reported by BNA, the top accounting staff at the SEC are quite satisfied with companies’ responses to the SEC’s assault on abuses of non-GAAP financial measures. The staff’s concern was that companies’ reporting was often inappropriately painting, through the use of non-GAAP measures, healthier-than-justified pictures of companies’ performance, potentially misleading investors.  In response, the staff mounted a campaign against the non-GAAP practices that the staff viewed as abusive. At a 2017 Baruch College Financial Reporting Conference, Mark Kronforst, chief accountant at Corp Fin,  discussing the SEC’s effort, concluded  that “I have to say, I think it was a success.” Wesley Bricker, SEC chief accountant, concurred. Is the SEC now applying that same strategy to other reporting metrics? Continue reading

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Should non-GAAP financial measures be audited?

by Cydney Posner

At a meeting yesterday of the PCAOB’s Investor Advisory Group, two working groups reported on topics that might be of particular interest: non-GAAP financial measures and enhanced audit reports. Continue reading

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Study finds disclosure of “critical audit matters” may reduce legal exposure for auditors

by Cydney Posner

When the PCAOB originally floated the idea of an expanded audit report in 2011, the proposal fueled quite a controversy.  Supporters of the concept contended that the current form of the auditor’s report was just boilerplate that “tells investors little of substance about a company’s true condition,” while audit firms were concerned that one consequence of an expanded auditor’s report could be the possibility of increased auditors’ legal exposure. The PCAOB’s recent reproposal, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (see this Pubco post), which provides for inclusion in the auditor’s report of “critical audit matters,” attempts to address some of those concerns. While the reproposal has generally been viewed favorably by investors, among the groups still crying foul are audit firms and organizations (see this PubCo post).

In that light, it’s somewhat ironic to see the results of an academic study showing, among other things, that disclosure of CAMs could help protect auditors from legal exposure if a misstatement were subsequently discovered in the CAM area. More specifically, the study found that the “types of CAMs illustrated by the PCAOB are more likely to prompt a ‘disclaimer effect’ by warning users of the inherent subjectivity and complexity associated with auditing CAM areas. Specifically, we find that CAM disclosures lead to less confidence in the CAM area before a misstatement is revealed and less assessed auditor responsibility after a misstatement is revealed in the CAM area.” Continue reading

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Comments on PCAOB reproposal of expanded auditor’s report reflect predictable split

by Cydney Posner

As discussed in this PubCo post, in May of this year, after five years of outreach, the PCAOB once again attempted to make the auditor’s report more relevant and informative to investors by reproposing the auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. While the reproposal would retain the standard pass/fail model, it would also provide for the inclusion of critical audit matters (CAMs) in the auditor’s report, as well as new elements related to auditor independence and auditor tenure. Comment letters to the PCAOB regarding its reproposal of the standard have reflected a predictable split.  As discussed in this Bloomberg BNA article, investors generally have approved of the proposed changes, while auditors have continued to express concern that, even under the reproposal, they — not management — remain a primary source for the new disclosures regarding CAMs. Continue reading

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They’re baaack! PCAOB reproposes disclosure of “critical audit matters”

by Cydney Posner

Last week, after five years of outreach, the PCAOB once again attempted to make the auditor’s report more relevant and informative to investors by reproposing the auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments.  Typically, as you know, auditors just give companies a pass/fail grade and provide no description of any issues or problems that occurred during the audit process; those problems are instead taken up with the audit committee.  However, PCAOB Chair Jim Doty commented, “in today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors want a better understanding of the judgments that go into an opinion – not a recitation of the standard procedures that apply to any audit, but the specific judgments that were most critical to the auditor in arriving at the opinion.”    While the reproposal would retain the standard pass/fail model, it would also provide for the inclusion in the auditor’s report of “critical audit matters” and new elements related to auditor independence and auditor tenure. According to the proposing release, the communication of critical audit matters “would inform investors and other financial statement users of matters arising from the audit that required especially challenging, subjective, or complex auditor judgment, and how the auditor responded to those matters.” Here is the press release and a fact sheet.  Continue reading

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