Why the best critical audit matter disclosures use entity-specific info

By Ken Tysiac

Auditors should look at critical audit matters as an important opportunity to communicate and show the value they add to the financial reporting process, PCAOB member J. Robert Brown said Monday at the AICPA Conference on Current SEC and PCAOB Developments.

Auditors began communicating critical audit matters (also known as CAMs) in auditor’s reports for large accelerated filers in 2019 in compliance with new PCAOB rules. The PCAOB defines a critical audit matter as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee that:

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

“This is an opportunity for you to show your expertise,” Brown said, speaking to auditors at the conference. “We all hear about the expectations gap, the so-called expectations gap. Well, this is an opportunity to let investors know how difficult audits can be and the expertise and skill that you bring to the process. Take advantage of the opportunity.”

There is concern that some of those opportunities are being wasted with disclosures that contain language that’s “boilerplate” in nature. SEC Professional Accounting Fellow Jeffery Joseph said at the conference that auditors’ reports are more effective when they use entity-specific information.

“Such language provides useful information to the users of the financial statements,” Joseph said. “For example, we have observed instances where the wording of the CAM describes the specific input and/or assumption driving a principal consideration, which we believe are useful when evaluating the judgments made in an audit.”

Brown said CAMs are unlikely to provide shareholders and other investors with useful information if the disclosures contain excessive amounts of generic or standardized information. As an example of a successful disclosure, he called attention to three CAMS out of more than 2,000 that were analyzed that specifically addressed the impact of climate change on various estimates and valuations in the financial statements.

“Do investors think these climate change CAMs have value? I think so,” he said. “Will they be looking for them next year? I think so. Will they be asking audit committees and audit firms about this topic, particularly at comparable companies where there was no similar climate change CAM? I’m predicting that they will. As we start year 2 [of CAMs in auditor’s reports], this disclosure will, I predict, only increase in value and increasingly become integrated into the decision-making process of investors and the public.”

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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