The Future of Auditor Reporting is Here

The Auditor’s Report: Similar But Different?

The PCAOB spent seven years and addressed close to 500 comment letters from companies, audit firms, and investors in developing the new standard that provides additional information investors have been requesting without otherwise modifying the auditor’s opinion on the financial statements as a whole. The pass/ fail opinion, which investors value, is retained.  The intended purpose of CAMs is to allow the auditor's report to be more relevant to investors and other financial statement users.

What can Management do to Avoid Common Adoption Pitfalls?

Engage in meaningful conversation with your auditors around the CAM process. CAM adoption is not a check-the-box exercise, but rather a process that requires thoughtful assessment of the areas of the audit and how those areas align with the definition of critical audit matters in the audit standards.

Consider asking your auditors the following questions:

		Do your most common CAM areas align with what the market is seeing (e.g. Business Combinations, Income Taxes, Revenue and Goodwill and Intangibles Impairment)? If not, what are you seeing for most common CAM areas?
		Are the identified CAMs aligned with the matters discussed by management in the critical accounting policies?
		Does management’s internal assessment/grading of the areas of complexity (i.e. areas of management’s significant judgments) to prepare financial statements correlate to the areas of complexity identified in the auditor’s CAMs?

With respect to reviewing draft CAMs, management should assess whether the content of the CAM includes “original information” or sensitive information that was not previously disclosed by the entity and discuss these matters with their auditors.

With respect to critical accounting policies, management should consider reviewing critical accounting policies with a fresh look at how those are determined, if the language describes in plain English what about those areas are critical, and whether the disclosures clearly articulate all areas of complexity. While there is not a one-for-one relationship between critical accounting policies and CAMs, there are some similarities between the two definitions that often lead to matters identified as CAMs being critical accounting policies.

What can the Audit Committee do to Avoid Common Adoption Pitfalls?

Engage in meaningful conversation with your auditors around the CAM process. Adoption of critical audit matters has placed even more emphasis on the importance of quality discussions between audit committees and the external auditors. Audit committees should consider asking auditors the following questions to drive discussion around CAMs:

		Will increased focus on CAMs affect the scope of the audit plan and the amount of audit work that needs to be performed?
		What is the expected timeline of discussions and review of draft CAMs with auditors (e.g., during Q2 – Q3)?
		What is the protocol to resolve Audit Committee and Management questions and comments on the draft CAMs?
		What effect did CAM identification have on the auditor’s risk assessment process? identified for the audit?
		How will we resolve instances when the content of the draft CAM includes “original information” or sensitive information that was not previously disclosed by the entity?
		What are the most substantive issues identified or lessons learned as a result of the firm’s dry runs related to communicating CAMs in the auditor’s report?
		Were there any matters considered to be "close calls" when evaluating potential CAMs but determined not to be a CAM? What were the considerations that led to the determination that these matters were not CAMs?

What are the Regulators Saying?

In December 2019, the PCAOB issued a CAM Spotlight highlighting its observations from engaging with auditors and audit committees on effective CAM implementation about:

• Investments in frameworks for CAM implementation
• Preliminary CAM determination and drafting
• Ongoing CAM evaluation throughout the audit process
• Subject matter experts involved in the CAM process
• Management and audit committee involvement
   

"Timely and robust engagement with management and the audit committee were important factors in the CAM implementation process. Starting with practice runs and throughout the first year of implementation, regular dialogue among the audit team, management, and the audit committee was helpful in building a common understanding of the purpose of the CAM requirements and in discussing CAM determinations and draft CAM descriptions. To date, preliminary results from our outreach to audit committees suggest that they generally found the audit team’s practice run processes to prepare for implementing the CAM requirements to be helpful and believe that CAM implementation has not changed their interactions with the auditor. While CAMs are the sole responsibility of the auditor, audit committees shared with us that they generally began discussing CAMs with their auditor in 2017 or 2018, well in advance of the effective date of the requirements in 2019". 
-PCAOB CAM Spotlight

The PCAOB has issued its observations as part of the overall post-implementation review of PCAOB Audit Standard 3101: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Refer to the resources section below for links to the PCAOB’s observations.