Making critical audit matters more readable

It shouldn’t take an advanced college degree to understand newly required information in an auditor’s report.
By Edward Lynch, CPA, Ph.D.

Making critical audit matters more readable
Photo by Ferrantraite/iStock

A PCAOB interim report on critical audit matter (CAM) disclosures finds that investors are using CAMs to better understand the work of the auditor and company disclosures. Furthermore, as part of the report, a survey of investors finds that most respondents were likely to use CAMs to identify risks associated with a given company. However, the survey results indicate that just 55% of respondents viewed the CAMs as easy to understand.

This article summarizes a study that examines a random sample of SEC Form 10-K submissions with respect to the readability of CAM disclosures. The study includes: (1) calculation of a readability score for each CAM (including a statistical analysis); (2) an examination of each CAM for certain attributes of writing in "plain English" that were identified by the SEC in A Plain English Handbook: How to Create Clear SEC Disclosure Documents; and (3) three findings or recommendations to improve the readability of CAMs.


PCAOB Auditing Standard 3101 requires auditors to include CAMs in a separate section of the auditor's report. A CAM is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

  • Relates to accounts or disclosures that are material to the financial statements; and
  • Involved especially challenging, subjective, or complex auditor judgment.

As used in this study, the term readability refers to the ease with which a reader can understand a CAM disclosure. As financial professionals know, the practices of accounting, tax, and auditing require an extraordinary amount of specialized formal education and work experience to become proficient with the required complex concepts and techniques represented in financial reports. But not all investors (or other stakeholders) who may use audit reports are trained in accounting. Therefore, it's not surprising that crafting a CAM disclosure that is clearly written and easy to understand by others is challenging.

As noted in the SEC's plain English handbook, a clearly written disclosure better informs investors as they decide whether to buy, sell, or hold. In addition, brokers and investment advisers can potentially provide more timely advice to clients if they can read and understand CAMs quickly and easily. Furthermore, clear communication also saves the time and cost of explaining a CAM — and perhaps dealing with confused and sometimes angry investors. Finally, it's likely that reviewers will catch and correct mistakes more easily.

CAMs also have attention-directing impact. Accounting research suggests the CAM disclosures presented as part of the audit report receive more attention. While the financial statements are the responsibility of management, the audit report and disclosure of a CAM is the sole responsibility of the auditor. Therefore, as a direct communication between the auditor and the stockholders, the readability contributes to the stockholder's overall assessment of an audit firm's professionalism.


In October 2020, the PCAOB issued Release No. 2020-002, which provides insights and the perspectives of the PCAOB on the initial impact of CAM requirements on key stakeholders in the audit process. As part of the report, PCAOB staff conducted a survey to gather information about investor awareness, perceptions, and the use of CAM communications. The staff received 97 complete responses from investors who: (1) research investments for their personal accounts and/or as part of their job; (2) research individual companies; and (3) conduct fundamental or governance analysis of companies.

The staff survey provides evidence that CAMs provide useful information to investors with respect to risk and that there is room for improvement in CAM readability. Specifically, the survey found that 66% of respondents reported they were likely to use CAMs to identify risks associated with a given company. However, a common theme among investors was that CAMs are not specific enough to provide useful information or do not provide additional value beyond what already is included in financial statements.

In 2022, the PCAOB expects to issue another report to provide perspectives on any changes the staff observes in the communication of CAMs. The report will also include insights on the initial impact of CAMs included in the audit reports of smaller issuers. The PCAOB also acknowledges that since some of the effects of the CAM requirements may take several years to fully manifest or stabilize, a more comprehensive post-implementation review will be performed and published in 2024.

The SEC's plain English handbook (which is for informational purposes only) suggests well-established techniques for creating clearer and more informative disclosure documents.

The SEC handbook includes advice from those in the private sector with experience preparing disclosure documents, as well as contributions from highly regarded experts in the field such as William Lutz, Ph.D., professor of English at Rutgers University, and the consulting firm Siegel & Gale in New York City.


The initial step in this study was to conduct a preliminary or exploratory review of a convenience sample of SEC Form 10-K submissions to identify to what extent the CAM disclosures adopt the SEC handbook's suggestions. The intent was to identify opportunities for relatively quick and easy improvements to readability that would not require additional training. Consequently, the preliminary review found three attributes of clear and informative writing (identified in the SEC handbook) that were not extensively used in the CAM disclosures. These attributes are:

  • The use of subheadings;
  • Vertical lists; and
  • Zero or limited use of passive voice.

The second stage of the study used a larger sample to more extensively investigate the use of subheadings, vertical lists, and passive voice. Definitive research findings were then developed based on a review of a random sample of 50 Form 10-K filings submitted by Fortune 500 companies as of Nov. 30, 2020. In total, 96 CAM disclosures were reviewed. A Microsoft Excel spreadsheet was used to record, accumulate, and analyze the data. Each CAM was entered as a separate record consisting of the identity of the auditor, audit client, CAM topic, readability score, and the use of subheadings, vertical lists, and passive voice. In addition, each record provided for additional observations regarding readability that could be added to and addressed in this study. A statistical analysis was performed on the readability scores and passive voice usage for each audit firm. An analysis of variance (ANOVA) was also used to test whether there was a statistically significant variation among audit firm readability scores.

A readability score for each CAM was calculated using the embedded Microsoft Word feature that calculates the Flesch-Kincaid Grade Level index. Readability formulas share a common flaw in that they are unable to directly assess the content and instead tend to focus on word count, syllables per word, words per sentence, and the number of sentences. Therefore, while the score may provide some useful feedback, it cannot by itself assure that a disclosure is easy to understand.


Consistent with an earlier article on the JofA website ("Critical Audit Matters: What Firms are Reporting," JofA, Oct. 4, 2019, available at, the CAMs in this study primarily addressed topics such as goodwill/intangibles, contingencies, revenues, and taxes. The average number of CAMs per company was 1.9, and the largest number of CAMs for a company was four. One company in our sample had no CAMs. The average Flesch-Kincaid Grade Level score for CAMs in the sample was 20.62, which equates to being very difficult to read and requiring an advanced college degree. The readability results are also not surprising, considering that they are consistent with similar studies of audit reports and other accounting disclosures.

Since the readability index does not include analysis of content, the score by itself is incomplete. However, the score does serve as a reminder that CAMs involve inherently complex topics that deserve every effort to improve on readability. Here are three tips or takeaways from the study to improve readability:

Use subheadings

One of the quickest and simplest ways to improve the readability of CAMs is to use subheadings. Subheadings were absent from 54% of the CAMs in this study (see the exhibit, "Example Screenshot of a CAM Without Subheadings or Vertical Lists" below). Subheadings enable the reader to recognize at a glance how the CAM is organized. Subheadings also provide the reader (in advance of fully reading the text) information about the role and/or relationship between the different levels of text. In the course of the review, the typical subheadings (where applied) were: Critical Audit Matter Description; and How the Critical Audit Matter Was Addressed in the Audit.


Use vertical lists (e.g., bullets)

Another relatively quick and easy improvement is to use vertical lists. Vertical lists were absent from 71% of the CAMs in the sample. A vertical list is a tool to add emphasis and clarity to two or more pieces of relatively more important information. A vertical list (when used) usually appeared in a discussion of: How the Critical Audit Matter Was Addressed in the Audit. In the course of the review of each CAM, virtually every disclosure included at least one instance where the criteria for at least one vertical list was satisfied. For example, the steps taken by the auditor to address the CAM could easily be displayed in a vertical list.

Be cautious with the use of passive voice

Across the entire CAM sample studied, 19% of sentences used passive voice. The extent to which passive voice was used varied widely from 0% to 40%.

As noted in the SEC handbook, active voice is quicker and easier to understand because it follows how people think and process information. On the other hand, passive voice forces readers to take extra mental steps as they convert the passive into the active. However, passive voice may make sense when the person or thing performing the action is of secondary importance to another subject that should play the starring role in a sentence. Therefore, in the words of the SEC handbook: "Don't ban the passive voice, use it sparingly."


Unfortunately, there is no silver bullet (including these three tips) that is guaranteed to improve the readability of a CAM disclosure. Ultimately, the ease of understanding is decided in the minds of the stockholders (and other interested parties). However, in the interim, and given the benefits associated with a clearly written and informative CAM disclosure, it is to everyone's advantage to use every available tool for improving readability.

About the author

Edward Lynch, CPA, Ph.D., is an assistant professor of accounting at California State University at Fullerton.



"Why the Best Critical Audit Matter Disclosures Use Entity-Specific Info," JofA, Dec. 8, 2020

"Practitioners Provide New Transparency Through Critical Audit Matters," JofA, Dec. 3, 2020

"How Critical Audit Matters Relate to Critical Accounting Estimates," JofA, Dec. 9, 2019

"Critical Audit Matters: What Firms Are Reporting," JofA, Oct. 4, 2019


Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example, Center for Audit Quality

Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements, Center for Audit Quality


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