The Public Company Accounting Oversight Board’s (PCAOB) Investor Advisory Group (IAG) is formally seeking the public’s nominations for the “most decision-useful” critical audit matters (CAMs) or key audit matters (KAMs) that were disclosed in the auditor’s report in 2023.
Domestic public company auditors disclose CAMs while auditors that follow international standards disclose KAMs. These disclosures are intended to provide more insight into what accountants found while auditing public companies.
IAG member Jeffrey Mahoney, general counsel of the Council of Institutional Investors, is spearheading the effort, and he announced the request to the public during a virtual meeting of the advisory panel on April 24, 2024.
The request comes as investor advocates 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. KAMs were more useful.
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.
The IAG is seeking nominations of the best auditor disclosures in 2023 Form 10-Ks and Form 20-Fs—the latter is filed by foreign private issuers.
The advisory panel will accept nominations until June 30. Following review of the nominated CAMs and KAMs, the IAG will select the top three decision-useful ones. Then the panel will identify and discuss those three in an IAG-approved report to be issued later this year, Mahoney said.
He said the IAG plans to do this annually.
“The objective of this initiative… is to encourage auditors to voluntary improve the quality of information communicated to investors,” he said.
During the April 24 meeting, IAG member Lynn Turner, a former SEC chief accountant, said he wanted to see nominations for both CAMs and KAMs because the best ones are typically KAMs disclosures.
“Also, we should ask for instances where there wasn’t a CAM the public thought there should have been a CAM,” Turner said.
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.”
The audit regulatory board added CAMs to its research agenda in November 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 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 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. If the PCAOB decides to move the project, it is unclear whether it will be put on its mid-term or short-term agenda, given a post-implementation review of CAMs is also underway.
For information about how and where to submit best CAMs or KAMs to the IAG, click here.
This article originally appeared in the April 26, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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