Transparency – Just Tell Me What Really Matters

“In a time of universal deceit, telling the truth is a revolutionary act.”  – George Orwell

Innovation in the world of financial statement audits is slow and deliberate. The consistency of the profession can at times fail to keep up with market demands, and now the regulators are asking for more from auditors. The PCAOB recently issued guidance on Critical Audit Matters (CAMs), requiring public company auditor reports to include a discussion of CAMs in the opinion. Audits of large accelerated filers will begin reflecting these matters in 2019, with others following in 2020.

The enhancements to the auditor’s report are intended to provide information that investors and financial statement users find meaningful. These matters are audit-specific and provide a bit more commentary on challenging, subjective, or complex items impacting the financial statements. These discussions are not intended as additional to the information and disclosures provided publicly, but to give the reader insight into the auditor’s perspective.

What can you look for when CAMs start popping up in opinions? For starters, the key components are:

• Identification of the CAM
• Description of the considerations that led the auditor to decide the item is a CAM
• Discussion of how the audit addressed the CAM
• Reference to the accounts and disclosures impacted by the CAM

This is not to say that the opinion is piecemeal, nor should the CAM discussions undermine the overall auditor conclusion. The discussions are meant to provide users with some understanding of how the auditor concluded on the various challenging matters. There also may not be CAMs for every significant risk, because not all risks involve complex analysis or subjective judgment.

Possible examples of CAMs include:

• Goodwill impairment when evaluating forecasts of future cash flows
• Revenue recognition when contract terms are confusing, complicated, and require judgment
• Business combinations, particularly purchase price allocation judgments
• Hard to fair value financial instruments
• Income taxes, including evaluation of valuation allowances
• Legal contingencies

As with any change, implementation will be initially awkward. However, as firms refine the process and become comfortable within creased transparency, financial statement users will be better served. These users should be on the lookout for firms that understand how to make complex matters easier to grasp.

“Any fool can make something complicated.  It takes a genius to make it simple.”  – Woody Guthrie

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