The Public Company Accounting Oversight Boards’s (PCAOB) Investor Advisory Group (IAG) will meet on September 26, 2024, to discuss four topics: audit committees’ engagement with investors; audit ownership structures and funding arrangements; cyber risk on audits; and critical audit matters (CAMs).
CAMs
The IAG’s discussion on CAMs is not new.
The audit regulatory board added CAMs to its research agenda in November last year following a push by the IAG.
During Thursday’s meeting, IAG member Jeffrey Mahoney, general counsel of the Council of Institutional Investors, will provide a presentation of the most decision-useful CAMs or key audit matters under international standards reported in auditor’s reports in 2023.
The selection will based on the public’s nominations that the IAG sought earlier in the year.
The disclosures are intended to provide more insight into what accountants found while auditing public companies.
The request for best CAMs comes as investor advocates say that disclosures have not been valuable because of largely boilerplate language used as well as the shrinking number of matters disclosed over the years. However, some said KAMs were more useful.
It is unclear which CAMs or KAMs will be presented during the IAG meeting, but former IAG member Jack Ciesielski, president and portfolio manager of R.G. Associates, said he looked at CAMs with his University of Nebraska colleague Burch Kealey, and submitted two nominations: Moderna, Inc. and Berkshire Hathaway, Inc.
He said Moderna was selected because COVID-19 was no longer a pandemic. The pharmaceutical company’s revenues would have gone down because of a declining need for their vaccines.
“Revenues were directly affected by the reserve for returns of unused products. Another issue was the realizability of inventory on hand. Both of these issues were troubling for investors of all stripes last year, and they should have had an impact on the auditor’s plans for gathering sufficient, competent evidence that the financial statements were fairly stated,” Ciesielski wrote in his Weekly Reader. “Not only did the auditors EY identify these issues, they explained clearly the subjectivity involved in the estimates and the limited experience of the company with such matters. The auditors also explained their testing of the involved accounts in a way that was fairly extensive, and much more than mere boilerplate.”
He said Berkshire Hathaway was nominated because of issues related to insurance: unpaid losses and loss adjustment expenses – short duration contracts and unpaid losses and loss adjustment expenses – retroactive reinsurance contracts.
“An investor in the insurance sector would surely be concerned with the quality of the estimates involved in those liability accounts, and it is reassuring that the auditor, Deloitte, did not sidestep the issues,” Ciesielski wrote.
Deloitte also identified goodwill and indefinite-lived intangible assets as a CAM, which is related to the Precision Castparts Corp. reporting unit.
“Again, an investor in Berkshire Hathaway stock would likely be aware of the problems Berkshire Hathaway has had with this acquisition and would naturally be concerned about the recoverability of the investment,” he said. “Deloitte identified these issues and explained clearly their significance and the judgment involved in auditing them,” he added. “The auditors also explained their testing of the involved accounts in a way that was fairly extensive, and more than simple boilerplate.”
However, he said that there were only three CAMs, and for a company this size and reach, investors would have expected many more.
“Practically every corner of U.S. business has a Berkshire Hathaway presence in it. For instance, Berkshire Hathaway’s energy subsidiaries comprise about 14% of total assets at year end, and are on a par with other utilities whose auditors disclose CAMs, yet there are none noted by the B-H auditors,” he said. “The same is true for manufacturing, another 13% of total year-end assets. The list could go on, but the point should be clear by now.”
Moreover, he said the CAMs for both companies contained no surprises for investors. These were matters that investors would have expected.
Standard-Setting Update
During the meeting, the board’s staff will provide an update on the standard-setting agenda.
Of note is the PCAOB’s plans to revise the auditing standard on company management’s noncompliance with laws and regulations (NOCLAR) in the near-term.
When the standard-setting agenda was updated in May, the board’s plan was to adopt it this year. But it is unclear if the PCAOB will delay adoption or do another round of proposals because this project has been heavily criticized by the auditing profession and business groups.
The audit regulatory board issued the proposal in June 2023 to strengthen its standard and require public company auditors to more proactively identify, evaluate, and communicate instances of a company’s NOCLAR.
But critics say that it would likely put auditors in a legal compliance role outside their purview. Business organizations banded together to also write a joint comment letter saying that the proposal would drive new liability concerns among auditors that would drive audit costs even higher. (See PCAOB Plans to Adopt Audit Standard on Noncompliance With Laws and Regs in 2024, Updates Other Projects.)
During a recent face-to-face interview, Tom Quaadman, an executive vice president at the U.S. Chamber of Commerce, said the PCAOB should leave the existing NOCLAR standard in place because the disclosure of violation is based on materiality.
“So, using the materiality definition and screen to determine whether or not something should be disclosed,” he said. “This now changes to any violation of any rule or regulation in any jurisdiction.”
He gave an example to better illustrate the problem.
“If I run a delivery service in New York City, how much do you think I pay in parking tickets a year? It could be tens of millions of dollars. Those are violations of law,” Quaadman said. “Is that an audit issue? It’s called frankly cost of doing business.”
This article originally appeared in the September 24, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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