What keeps auditors up at night? Well, as public companies begin testing the implementation of new critical audit matters (CAM) requirements, we are starting to find out. A new report issued today by Intelligize reveals that public companies that have engaged in CAM-related dry runs are finding that adaptation to a new rule from the Public Company Accounting Oversight Board (PCAOB) will likely have a significant impact on corporate disclosures and accounting controls moving forward. The report, Critical Audit Matters: Public Company Adaptation to Enhanced Auditor Reporting, uses data from a survey of corporate compliance officials conducted by SourceMedia Research/Accounting Today. Intelligize is an industry-leading provider of powerful analytics tools for SEC compliance and transactional professionals.
Per the PCAOB rule enacted in 2017, auditor reports of public companies must now include a narrative section highlighting key issues (CAMs), which arose during their review of a company’s financial statements. These CAMs constitute matters arising from an audit that were communicated to the audit committee and that: 1) Relate to accounts or disclosures that are material to the financial statements; and 2) Involve especially challenging, subjective, or complex auditor judgment.
Auditors have begun reporting CAMs for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. All other companies to which the requirements apply will face implementation for fiscal years ending on or after December 15, 2020. CAMs are not required for emerging growth companies (EGCs), but executives at EGCs are already contemplating how CAMs might factor into their eventual transition away from EGC status.
A large number of survey respondents from all three of the aforementioned groups, and across numerous industry sectors, have embraced the concept of a CAM dry run. During these pilot tests, public company accounting firms typically use historical financial statements to walk audit committees and management through the new CAM process.
The majority of the 171 survey participants said they have conducted or plan to conduct CAM dry runs. For example, 54% of large accelerated filers conducted CAM dry runs. Similarly, 51% of respondents who will report CAMs on or after December 15, 2020 indicated they have conducted or plan to conduct CAM pilot testing, with a relatively large contingent (31%) still undecided.
“Clearly public companies are taking CAM reporting seriously and are testing various scenarios in order to limit potential disclosure surprises for investors,” said Marc Butler, lead author of the report and a director at Intelligize. “The companies that are proactively addressing potential CAM issues head-on and are meeting internally to ensure everyone is on the same page will certainly reap the benefits when it comes time to publish annual reports.”
The Intelligize report also reveals that 52% of large accelerated filers and 61% of other companies facing CAM obligations are considering updates to financial statement disclosures. Beyond this, 49% of companies surveyed are considering updating their Management Discussion and Analysis (MD&A) disclosure based on CAM results, suggesting that many issuers want investors to be able to see new CAM information through the eyes of management.
It is perhaps not surprising which substantive topics have routinely come up during CAM dry runs, as they are indeed issues that have demanded attention from auditors and management alike in recent months. According to survey respondents from large accelerated filers that have engaged in dry runs, the most common issues identified by auditors are income tax (57%), revenue recognition (49%) and lease accounting (38%).
“Public companies have been inundated with recent accounting-related changes, adapting to new revenue recognition and lease accounting standards in quick succession while also beginning to tackle the new Current Expected Credit Losses (CECL) methodology,” adds Butler. “Frankly, management is probably beginning to experience a bit of accounting fatigue. But, given that auditors will be communicating directly to investors, it’s incumbent on issuers to dive into CAMs now and chart a course for their own measured and strategically messaged disclosure.”
Intelligize is the leading provider of best-in-class content, exclusive news collections, regulatory insights, and powerful analytical tools for compliance and transactional professionals. Intelligize offers a web-based research platform that ensures law firms, accounting firms, corporations and other organizations stay compliant with SEC regulations, build stronger deals and agreements, and deliver value to their shareholders and clients. Headquartered in the Washington, DC metro area, Intelligize serves Fortune 500 companies, including Starbucks, IBM, Microsoft, Verizon and Walmart, as well as many of the top global law and accounting firms. In 2016, Intelligize became a wholly-owned subsidiary of LexisNexis®, a leading global provider of content-enabled workflow solutions designed specifically for professionals in the legal, risk management, corporate, government, law enforcement, accounting and academic markets. For more information, visit www.intelligize.com.