In a move to enhance transparency and provide investors and stakeholders with deeper insights into the financial health of public companies, the Securities and Exchange Commission (SEC) implemented a significant update to the audit reporting model. This update, introduced last year, mandates the inclusion of Critical Audit Matters (CAMs) in audit reports, thereby ensuring that pertinent issues are brought to the forefront for scrutiny. CAMs are integral to helping stakeholders gain a comprehensive understanding of a public company’s financial reporting practices, while also enabling company management to proactively mitigate potential risks

Imminent Deadline for Mandatory CAM Reporting

The deadline for mandatory reporting of CAMs is rapidly approaching. This shift from voluntary to obligatory inclusion of CAMs in audit reports is poised to create a more comprehensive picture of a company’s financial landscape. The new regulations are effective for audits of fiscal years ending on or after June 30, 2019, for large accelerated filers, and as of December 15, 2020, for all other companies to which this requirement is applicable.

Exemptions for Emerging Growth Companies (EGCs)

It is important to note that the new rule does not apply to emerging growth companies (EGCs) – those companies with less than $1 billion in revenue and meeting specific criteria. EGCs are granted regulatory leniency for a five-year period following their public debut under the Jumpstart Our Business Startups (JOBS) Act.

Understanding the Criteria for Critical Audit Matters

In 2017, the Public Company Accounting Oversight Board (PCAOB) published Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards.

Central to this rule is the auditors’ requirement to elucidate CAMs in their audit reports. These critical matters are identified by specific characteristics:

  1. Communication with the audit committee.
  2. Relevance to material accounts or disclosures in the financial statements.
  3. Involvement of intricate, subjective, or complex judgments by the auditor.

The identification of a CAM signals that a matter necessitates heightened attention. Examples encompass intricate valuations of indefinite-lived intangible assets, uncertain tax positions, goodwill impairment assessment, and the use of manual accounting processes reliant on spreadsheets rather than automated software.

Guidance from the Center for Audit Quality

To facilitate understanding and seamless integration of CAMs into the revised audit reporting model, the Center for Audit Quality issued Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements in July 2018. This guide aids auditors in selecting CAMs based on factors such as:

  • The risks of material misstatement,
  • The degree of auditor judgment for areas such as management estimates,
  • Significant unusual transactions,
  • The degree of subjectivity for a certain matter, and
  • The evidence the auditor gathered during the review of the financial statements.

While the guide refrains from specifying a fixed number of CAMs required or providing a checklist of potential issues, it emphasizes that CAM determination will be context-dependent.

The Future of Critical Audit Matters

PCAOB Chairman James Doty anticipates that CAMs will infuse vitality into audit reports, catering to investor demands for more comprehensive information. By pinpointing CAMs in audit reports, auditors highlight intricate, subjective, or complex matters that may necessitate closer attention from management.

To delve deeper into the realm of CAMs and their implications, feel free to get in touch with us. We’re committed to fostering a more transparent financial landscape for all stakeholders.