PCAOB Investor Panel Calls for Better Critical Audit Matters;
Will Seek Nominations for Best Disclosures
January 23, 2025
The Public Company Accounting Oversight Board (PCAOB) Investor Advisory Group (IAG) will again ask the public to nominate the most decision-useful critical audit matters (CAMs) or key audit matters (KAMs) for 2024 in the spring of 2025.
The PCAOB requires CAMs while auditors following international standards prepare KAMs.
This follows the three best CAMs selected by members of IAG last year for the first time, and the panel hopes that this yearly evaluation will prompt auditors to voluntarily improve the disclosures.
“And we are optimistic that the 2025 nominations will demonstrate that our objective to improve the quality of information communicated to investors in the audit opinions of public companies is being achieved,” according to a December 2024 report by members of the IAG. The PCAOB posted the report this month in 2025.
IAG member Jeffrey Mahoney, general counsel of the Council of Institutional Investors, is spearheading the effort, and the request comes as investor advocates like Mahoney say that CAMs have not been valuable because of largely boilerplate language used as well as the shrinking number of matters disclosed over the years.
Rather than providing insight into the financial statements by describing the auditor’s observations, the disclosures tend to describe the procedures performed by the auditor. And the IAG in October 2023 recommended seven items to the PCAOB to take action to improve the matter. This IAG evaluation of CAMs is one of the seven recommendations.
In the inaugural review of CAMs in 2024, two of the three most useful CAMs were by Deloitte & Touche LLP for its audit of Berkshire Hathaway Inc., and the other was by Ernst & Young LLP for its audit of Moderna, Inc.
The winning CAMs were all nominated by former IAG member Jack Ciesielski, president and portfolio manager of R.G. Associates.
The three were selected among 15 CAMs and 11 KAMs nominated from 2023 audit reports of 11 companies. Of the 26 matters nominated, 13 were from Deloitte, 10 from EY, and three from PricewaterhouseCoopers LLP. CAMs from KPMG LLP auditors were not nominated.
While Deloitte and EY did a good job on those CAMs, the advisory panel believes those three disclosures could be improved in two ways at least and hopes that the best CAMs will reflect applicable improvements.
First, the IAG believes that the “CAMs should integrate key observations that go beyond procedural details (what the auditor did) to provide insights or outcomes related to the procedures performed (what the auditor found),” the report said.
Second, auditors should provide more CAMs. While Berkshire and Moderna both had more than the 1.5 average CAMs, Ciesielski said “for a company of the size and sweep of Berkshire Hathaway, one would have expected many more. Practically every corner of U.S. business has a Berkshire Hathaway presence in it.”
He was also disappointed with the number of CAMs for Moderna—two.
“While they addressed critical issues that an investor might expect, they didn’t address everything,” he said. “For instance, the company’s research & development (R&D) expense was 73% of revenues. While this is a startling proportion, it is partially due to the 64% decline in revenues – but the absolute R&D expense still rose 47%. Is auditing such a large number really that simple – is there no judgment involved as to what constitutes valid R&D expense? It would seem to be a candidate for being a critical audit matter.”
The PCAOB wrote the CAMs requirement in 2017 in response to investor demand to make the audit report more useful. At the time, this represented a major change to the brief pass-fail auditor reports that had been in place for decades.
A CAM is “any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment.”
Similarly, KAMs, as defined by the International Auditing and Assurance Standards Board, are “matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.”
The U.S. audit regulatory board added CAMs to its research agenda in November 2023 following push by the IAG, and the panel wants the PCAOB to move on the project as quickly as possible.
“The project seeks to understand why there continues to be a decrease in the average number of critical audit matters (CAM) reported in the auditor’s report over time and whether there is a need for guidance, changes to PCAOB standards, or other regulatory action to improve such reporting, including the information that is provided as part of the CAM reporting. The staff continues to conduct research, including taking into account recent insights shared by the Investor Advisory Group,” the PCAOB states on its agenda.
The board’s plan is not to have a project on its research agenda for more than 12 months before advancing it to its standard-setting agenda; however, the PCAOB still has yet to move this project to the standard-setting bucket.
At this juncture, the fate of the project is unclear because of the coming change in leadership at the SEC, which oversees the PCAOB.
SEC Chair nominee Paul Atkins has not been a fan of the board, and he is expected to take a lighter touch to regulation.
When the PCAOB wrote CAMs, there was fierce lobbying by auditors and public companies, and the final standard got watered down from what reform advocates really wanted: auditor’s discussion and analysis (AD&A), similar to management’s discussion and analysis (MD&A).
CAMs was a compromise; yet, many auditors still today question their value. Investors, however, say that they need more information from auditors since they know much more about the financial conditions of the companies, and if CAMs disclosures were meatier, they would be much more decision-useful today.
In particular, Mahoney believes that two of the seven recommendations—tweaks in certain language of the standard—would be especially beneficial.
[Thomson Reuters]
