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Auditors Gear Up for Fight as PCAOB Brings Back Critical Audit Matters to Research Agenda

November 15, 2023 

Some of the key players in the auditing profession are already gearing up for a potential standard-setting fight on the auditor’s reporting of critical audit matters (CAMs), which the Public Company Accounting Oversight Board (PCAOB) on November 1, 2023, put on its research agenda following criticisms by investors that CAM disclosures have not been useful.

Investors want changes in requirements that will lead to significant improvements in the number and quality of CAM disclosures, which some say are full of boilerplate language as if auditors treat the reporting as another compliance exercise. But as has always been the case, the auditing profession prefers that the board take a conservative and incremental approach to any standard-setting effort.

Since the project was just put on the board’s research agenda, it is too early to say whether the PCAOB will move it to its standard-setting agenda in the future. If the board does, it is also not clear whether it will be added to its near-term or mid-term agenda.

Perhaps alarmed that the PCAOB put CAMs on its agenda shortly after the Investor Advisory Group (IAG) recommended actions that the board should take, however, audit firm representatives who sit on the PCAOB’s Standards and Emerging Issues Advisory Group (SEIAG) brought the topic up during the panel’s meeting on November 2 even though CAM was not part of the meeting’s agenda.

Audit firm representatives on SEIAG are: PricewaterhouseCoopers LLP Partner Brian Croteau; Christine Davine, national managing partner for quality, risk & regulatory at Deloitte & Touche LLP; Josh Jones, Americas director of audit and chief auditor of Ernst & Young LLP; and Steven Morrison, partner with CohnReznick LLP. Sara Lord is chief auditor of RSM US LLP, and she is also chair of the AICPA’s Auditing Standards Board, which writes audit standards for private companies. The PCAOB is in charge of writing standards for public companies that are regulated by the Securities and Exchange Commission.

Audit firm representatives on the advisory panel all diplomatically said that improvements can be made. But PwC’s Croteau quickly added that he does not “object to incremental disclosures.”

In his view, the reason for CAMs is to “signal” to investors about matters that are the most important.


“If we want to call them critical and routine audit matters and call them CRAMs, we can fit a lot of things into the auditor’s report,” said Croteau who previously served as a deputy chief accountant at the SEC. “But in the context of a CAM, I think there is informational value that’s being provided by focusing on those things that were most challenging, subjective, and complex. Maybe just call the other disclosures that investors and others may want something different.”

He said the board should be cautious about suggesting all matters are somehow of equal value and the same weight should be placed on them.

“I think you will lose an important signal if you do that, relative to those things that are most important,” Croteau said.

Former SEC chief accountant Lynn Turner said he disagreed with Croteau.

“I had this discussion with Brian ad nauseam when he was at the SEC,” Turner said. “We disagreed then. It was a fight then. It’s still a fight. But I think the difference is now that we have seen what language works and doesn’t work and we are seeing in actual product of that in terms of K KAMs versus CAMs. I don’t care if you call them CRAMs.”

Then he mentioned an appellate court ruling in New York that found the auditor’s report in the case meaningless as it was too generic.

“We actually have to get actual meaningful content, or we are going to have huge problems,” Turner said.

IAG Request for Change

During a meeting in October, IAG presented several recommendations to the board on CAMs, including a request for the staff to revise a 2019 guide in determining the matters.

About three weeks later during the SEIAG meeting, Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII) who is a member of both advisory groups, requested one more time that the board take steps to change some of the language in the standards and the staff guidance.

A phrase—“relative basis within the specific audit”—that is not in the standard somehow made its way to a March 2019 staff guide. But under the standard, the auditor should evaluate and disclose each matter, not pick among critical matters identified.

“So, I believe that language has led some to reduce the number of CAMs than they otherwise would have,” Mahoney said. He also noted that Marty Baumann, who was the chief architect of CAMs while the standard was being developed, also believes that auditors are disclosing fewer CAMs than was intended. Baumann left the board in 2018 before the staff guide was drafted.

Mahoney believes that this can be done relatively quickly; thus, the board tackle it first. The board should also undertake a narrow standard-setting project to revise the definition of CAMs by removing or changing the word “especially,” Mahoney said.

Baumann believes that this also led to fewer CAMs than what was intended by the language.

“I heard the same thing in my discussions with IAASB that they believed that there is some more K KAMs than CAMs” partly because of the “word ‘especially’ that’s in our standard.”

Another important change that is needed is an implementation note in the standard about what and how the auditor should write CAMs.

Mahony wants auditors to describe their observations, not simply the procedures they performed. And he believes a note in the standard may be hindering auditors from providing useful disclosures.

“Not only investors but many other stakeholders wanted…was more about what the auditor found, what was the outcome,” Mahoney said.

CohnReznick’s Morrison advised caution because there is a point of diminishing returns when there are too many CAMs.

“I am just curious as to how much value would that really bring because after you read the same CAM 50 times, and you are going to say ‘oh, they are boilerplates again because they all did the same procedures.’ And those are the procedures to get sufficient appropriate audit evidence,” he said. “And it will turn into this contest of make the CAMs longer and make them more specific, more customized. But there’s a point of diminishing returns.”

The discussions on CAMs also come as the panel was discussing inventory and use of a service organization, and some investors expressed more disclosures about them.

[Thomson Reuters]

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