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US Securities and Exchange Commission

SEC Official Shares Observations on Critical Audit Matter Disclosures, COVID-19 Related CAMs

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

A senior SEC official at a conference urged auditors of smaller public companies to continue with their “dry runs”—or test runs—before implementing the PCAOB’s critical audit matter (CAM) requirements.

Diana Stoltzfus, a deputy chief accountant in the agency’s Office of the Chief Accountant (OCA), also discussed what the staff expects on CAM disclosures, including COVID-19 challenges. The SEC oversees the PCAOB.

In response to investor demand to make the audit report more useful, the PCAOB in June 2017 issued the requirement for CAMs in Release No. 2017-001The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards. The rule represented a major change to the brief pass-fail auditor reports that have been in place for decades. The PCAOB defines critical matters as issues that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially difficult judgment from the auditor.

The standard became effective for audits of large accelerated filers last year. For smaller companies, it is effective for fiscal years ending on or after December 15, 2020.

Dry Runs for Audits of Smaller Public Companies

Large accelerated filers, according to the SEC rules, are companies with public floats of more than $700 million, and their auditors first tested out CAMs with dry runs well ahead of the adoption date. This has generally resulted in smooth implementation, and the PCAOB, in its recent interim analysis, found that investors who read CAMs found the information useful. The board also found that there were no significant unintended consequences.

“I want to reiterate the benefits to date, encourage others to keep up the momentum,” Stoltzfus said during Corporate Financial Reporting Insights (CFRI) Conference hosted virtually by the Financial Executives International (FEI) on November 11, 2020. “To do so, we encourage the dry runs to continue on audit engagements with the later adoption date. And if there are any implementation questions not addressed already, to continue discussing those with the PCAOB and us to consider any additional guidance that could be evaluated.”


The SEC staff has been reviewing CAM disclosures so far, and Stoltzfus said there has been instances in which COVID-19 might have been a principal consideration in a CAM.

However, “COVID-19 itself is not a CAM because CAMs are specific to a material account or disclosure, but it could be how COVID impacted the firm,” she said. “For example, it could be … the current environment triggered additional impairment analysis. Maybe that impairment analysis was particularly challenging or complex or you know very subjective. And so, we’ve seen in the current environment, it’s kind of may be impacted certain accounts or disclosures and so there’s been some discussions of COVID in that regard. But the COVID itself is not a CAM.”

Other SEC Staff Views and Observations of CAMs to Date

In the meantime, Stoltzfus, who heads up OCA’s Professional Practice Group (PPG), emphasized CAMs should provide insight about audit matters that were especially challenging, complex, or subjective.

“Many of us… in the financial reporting process… know that financial statements contain challenging, subjective, and complex judgments,” she said. But “it does not necessarily mean there’s an issue with the company’s financial statement” when a CAM is disclosed.

Moreover, she said CAM readers should understand that the absence or abundance of CAMs does not mean there is a change in the auditor’s opinion.

“Auditors still need to obtain sufficient, appropriate audit evidence, and the auditor is not providing a separate opinion on the CAM,” she explained.

The SEC staff sometimes gets asked whether CAMs should be the same year-over-year or similar between companies and industries, she said.

“CAMs are engagement-specific and specific to the year of the audit,” she explained. “There is no expectation that they would be the same year over year, but they could be. Also, an industry or peer company to peer company could have similar CAMs, but they could also be different. It is really going to depend on whether something is especially challenging, subjective, or complex related to that audit in that current year.”

This article originally appeared in the November 18, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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