Starting in 2019, auditors’ reports for certain public companies must contain a new element: critical audit matters (CAMs). The requirement was in effect for audits of large accelerated filers (with market values of $700 million or more) in fiscal years ending on or after June 30, 2019. It goes into effect for smaller public companies in fiscal years ending on or after December 15, 2020.
Regardless of where you are in the implementation process, anticipating the CAMs that will appear in your auditor’s report may be especially challenging given the uncertainty caused by the COVID-19 crisis.
The auditor’s report
The auditor’s report offers an opinion as to whether the financial statements fairly present the company’s financial position, results of operations and cash flows in conformity with U.S. Generally Accepted Accounting Principles or another applicable financial reporting framework. In 2017, the Public Company Accounting Oversight Board (PCAOB) expanded the pass-fail format of the auditor’s report.
The PCAOB rule requires auditors to describe CAMs, which are matters that, from the auditor’s point of view, require especially challenging, subjective or complex judgment. CAMs aren’t necessarily meant to reflect negatively on the company or indicate that the auditor found a misstatement or internal control deficiencies, but they can raise a red flag to stakeholders.
Close-up on CAMs
When identifying CAMs, the auditor must:
- Describe the principal considerations that led the auditor to determine that the matter is 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.
In May, research firm Audit Analytics reported that the four most common CAMs in auditors’ reports issued for large accelerated filers through April 30, 2020, were: 1) goodwill and intangible assets, 2) revenue recognition, 3) structure events (valuation of acquiring assets), and 4) income taxes. Together, these topics accounted for more than half of all CAMs. These matters are expected to continue to present auditing challenges during the COVID-19 crisis.
Moving target – CAMs may change yearly
CAMs may change from year to year, based on audit complexity, changing risk environments and new accounting standards. Each year, auditors determine and communicate CAMs in connection with the audit of the company’s financial statements for the current period.
A significant event — such as a cybersecurity breach, a hurricane or the COVID-19 pandemic — may cause the auditor to report new CAMs. Though such an event itself may not be a CAM, it may be a principal consideration in the auditor’s determination of whether a CAM exists. Such events may affect how CAMs were addressed in the audit.
Avoid surprises regarding CAMs
Management and the audit committee should know what to expect when the financial statements are delivered. A dry run before year-end can help you anticipate the CAMs that will appear on your auditor’s report for fiscal year 2020, so you can provide clear, consistent messaging to stakeholders.