Dry runs for implementing the new “critical audit matters” requirement for financial reporting reveal that public companies are likely to make significant changes as a result of the new rules, according to a new report.
Among other things, the report from compliance management resource provider Intelligize Inc. found that more than half of large accelerated filers (52 percent) and almost a third of other companies (61 percent) expect to update their financial statement disclosures as a result of conducting CAMs dry runs. Just under half of those who have conducted dry runs, meanwhile, are considering updating their managing discussion and analysis disclosures.
The CAMs rules — which require auditors to include mention in their reports of issues they communicated to their client’s audit committee that relate to accounts or disclosures that are material to the financial statements and involve particularly challenging, subjective or complex auditor judgement — went into place for large accelerated filers on June 30 of this year, and will go into effect for all other affected filers on Dec. 15, 2020.
“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, in a statement. “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.”
Not all companies are taking CAM dry runs that seriously, however. Just over half (54 percent) of large accelerated filers reported conducting dry runs, and a similar number (51 percent) of those who have to report beginning Dec. 15, 2020, reported that they had conducted or planned to conduct test runs.
“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 methodology,” stated 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.”
Other findings
While outside auditors have their own responsibilities for CAMs — they’ll be the ones identifying and reporting them, after all — they can also expect to be involved in helping their clients prepare, according to the report. Over a third of the large accelerated filers (37 percent) reported having at least three or four meetings with their auditors as part of their dry runs, and more than a quarter (27 percent) reported having five or six. Another 19 percent had seven more meetings.
Most large accelerated filers reported that their dry run lasted four or more months, with 41 percent saying it took four to six months, 14 percent saying seven to nine months, and 8 percent saying 10 or more months. Just over a third (35 percent) said it took three or fewer months, while none reported a dry run that lasted over a year.
By far, the top CAMs identified during dry runs involved income tax (at 57 percent of large accelerated filers) and revenue recognition (at 49 percent), followed by lease accounting (at 38 percent) and intangible assets (at 32 percent).
For more details, register for
