PCAOB Issues Interim Analysis Report on Initial Impact of CAM Requirements
On October 29, the Public Company Accounting Oversight Board (PCAOB) released an interim analysis report, along with two accompanying white papers, in which the board provides its analysis and perspectives on the initial impact of its critical audit matter (CAM) requirements and the insights learned from stakeholders.
Our Point of View
Despite the PCAOB’s initial view that it has found no significant unintended consequences from implementation of the CAMs requirements for large accelerated filers, there still are several potential consequences that organizations should monitor as these requirements come into effect for all other companies during this coming year-end. First, the PCAOB anticipates additional costs related to increased time needed to prepare and review auditors' reports, including discussions with management and consultation with audit committees, as well as legal costs to review the information provided in the CAMs. In addition, auditors may choose to perform more audit procedures related to areas reported as CAMs (even though the attestation requirements in those areas did not change due to the addition of CAM disclosure), with a resulting cost implication for both auditors and issuers. Questions remain as to how substantial these additional audit procedures and related costs will be over the long term.
Another consequence to consider: The CAM requirement is a significant change in practice that could alter the relationship dynamics between the auditor and the audit client – both management and the audit committee. From the auditor’s perspective, it will present an opportunity to offer more insight to investors and regulators (and, indirectly, the plaintiff’s bar) as to the underlying audit issues. It is reasonable to expect accounting firms to determine specific areas by industry or capital structure that are most likely to involve especially challenging, subjective or complex auditor judgment and are, therefore, likely candidates for CAM treatment. The objective, thus, would be to insulate audit partners from the difficulties of making such determinations on a client case-by-case basis.
It also will be interesting to see if the items reported as CAMs are used by the SEC as a guide in developing questions posed in comment letters to registrants, and how that dynamic, if manifested, impacts the attorney-auditor-client interactions in drafting and issuing securities filings. Likewise, the PCAOB may compile CAM data as a source of input for determining the scope of its inspections process, although, as mentioned, the CAMs reported to date involve financial reporting risk areas well known to the PCAOB.
Another question relates to how auditor communications with management and the audit committee will evolve. PCAOB inspections could create subtle pressure on auditors to “say something” in the audit report whenever a matter is communicated. In our view, it is vital to the auditor-client relationship that auditors be able to distinguish between CAMs and other matters. Inability to do so with clarity could result in a chilling effect on the relationship and communications. Accordingly, PCAOB monitoring is important, as the CAM requirement could impact both the matters communicated by auditors to management and the audit committee, as well as the manner in which those matters are communicated.