The average number of critical audit matters per audit report has declined over time, according to a
The average number of CAMs reported by large accelerated filers went from 1.69 in the fiscal year ending June 30, 2020, to 1.43 in the fiscal year ending May 31, 2022. For non-accelerated filers, the number of CAMs declined from 1.23 for the fiscal year ending Dec. 14, 2021 to 1.12 for the fiscal year ending May 31, 2022. The proportion of audit reports that communicate a single CAM has increased from 49% to 65% over a similar time period.
The study arose from an ongoing post-implementation review of a standard adopted in 2017 by the PCAOB. The CAMs requirements began phasing in gradually, with the biggest public companies with a market float of $700 million or more, known as large accelerated filers, needing to disclose them starting with fiscal years ending on or after June 30, 2019, while the requirement took effect for non-accelerated filers starting with fiscal years ending on or after Dec. 15, 2020.
Under the requirements, companies have to disclose to investors 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 involve especially challenging, subjective or complex auditor judgments. To develop the report, staffers from the PCAOB's Office of Economic and Risk Analysis surveyed a group of auditors and investors, interviewed audit committee chairs and preparers, and conducted large-sample statistical analysis. They also evaluated whether evidence gathered on initial and ongoing implementation of the CAM requirements suggests any significant benefits, costs or unintended consequences.
They found that the average number of CAMs per audit report has declined over time, even as investor awareness and use of CAMs continues to develop.
All six of the biggest global network auditing firms communicated fewer CAMs per audit report for large accelerated filers in year three of the standard than they did in year one. Audits of non-large accelerated filers resulted in fewer CAMs on average (1.18) than audits of large accelerated filers (1.57), which potentially reflected differences in the relative size and audit complexity of larger companies versus smaller companies. In 12.5% of all audits of non-large accelerated filers and 0.7% of large accelerated filer audits, the auditor determined there were no CAMs.
Some investors indicated they're using CAMs to identify key financial reporting risks at companies. However, based on an analysis by the PCAOB staff, evidence of significant unintended consequences from auditors' implementation of the CAM requirements has not been identified. In addition to an
They found that 76% of the investors who completed the survey reported they had heard of CAMs, compared to 63% in 2020. In addition, 57% of the investors who responded to the survey had seen CAMs. In the 2020 survey, less than a third (31%) of respondents reported they had seen CAMs.
Overall, most of the respondents agreed that CAMs provided sufficient details about the audit (60%). However, less than half (40%) of them viewed CAMs as at least somewhat tailored to the audit. Nearly half the respondents (44%) thought that CAMs were easy to understand.
Investors who had read CAMs reported using CAMs to identify risks associated with a given company (80%), focusing on key reporting issues or areas (56%), and better understanding disclosures made by management (60%). Twenty-four investors responded to an open-ended prompt asking them to share two reasons why they would, or would not, use CAMs in the future. Seventeen of the 24 investors said they would use CAMs in the future.
"These investors generally found CAMs helpful to identify critical reporting risks and to provide a basis for questions to ask management. Investors also mentioned that CAMs provide insights and clarity on the audit process," said the report. "Seven of the 24 investors said they would not use CAMs in the future."
Investors generally said that CAMs don't add more information to what is already disclosed in other parts of issuers' annual reports, such as the risk factors section.
Twenty-one investors who responded to an open-ended prompt asking for their perspectives and opinions on how CAMs could be made more useful suggested that auditors could use more specific, rather than generic, language in communicating CAMs.
"Some investors wanted to see more details on the auditor's perspectives of the assumptions made by the company, while other investors mentioned that it would be helpful for auditors to include a discussion of the outcome of audit procedures in CAMs," said the report. "Audit committee chairs and preparers indicated that they generally considered CAMs to have an overall positive impact on the ability of investors to understand and analyze financial disclosures."
Audit engagement partners reported that, on average, audit engagement teams spend 1% to 2% of total audit hours on CAM-related activities.
On average, non-U.S. auditors at the six biggest global network firms communicated more CAMs than U.S. auditors, suggesting that firms may have different approaches to applying their judgment when deciding whether a matter is in fact a CAM. That may be because non-U.S. auditors have greater familiarity with determining "key audit matters" under the KAMs standards issued by the International Auditing and Assurance Standards Board.
The PCAOB staff found no evidence of significant unintended consequences from auditors' implementation of the CAM requirements, either in substantively changing or constraining communications among auditors and their clients. In 2021, engagement partners of non-large accelerated filer audits reported that CAMs generally had no effect on (66%) or enhanced (32%) communication with the audit committee, similar to the PCAOB's 2020 survey results from engagement partners of large accelerated filer audits.
"Most audit committee chairs and preparers asserted that the CAM requirements did not substantively change the nature of their discussions with the auditor, although some noted an incremental increase in the level of focus, or attention, around topics designated as CAMs," said the PCAOB.
In response to an open-ended question included in the PCAOB's 2020 and 2021 engagement partner surveys, however, some engagement partners reported that audit committees showed a preference that their CAMs should be similar to others in the same industry, and the PCAOB acknowledged it's possible these pressures may, over time, contribute to standardization of CAM communications.
One longtime concern with CAMs is that they would lead to the kinds of boilerplate disclosures that companies typically make in their financial reports. The PCAOB said it plans to continue to monitor the implementation of CAM requirements and evaluate the timeline for developing a more comprehensive post-implementation review, but because the effects of the CAM requirements may take several years to fully manifest or stabilize, the PCAOB doesn't anticipate publishing the next analysis until after 2023.
