PCAOB Advisers Say Auditors May not be Fully Complying with Expanded Reporting Rule

During a public meeting last week, some Public Company Accounting Oversight Board (PCAOB) advisers said they are concerned that auditors may not be fully complying with the critical audit matter (CAM) reporting requirement.

They are worried because the PCAOB adopted the rules in response to investor demand to make the audit report more useful, and many CAM disclosures have not been as informative. The language used in CAMs is at times generic or boilerplate, among other problems.

When the PCAOB adopted the rules in 2017, it represented a major change to the brief pass-fail auditor reports that had been in place for decades. And many investors had said the addition of more information to the report might be one of the most important things the board can do for them. Auditors know many details about a public company client’s financial condition, but the old reporting model from the 1940s provided no opportunity for auditors to offer insight to investors. In the aftermath of the 2008 financial crisis, some regulators and investors observed that external auditors said nothing in their reports about companies that soon failed.

The PCAOB defines CAMs as issues that are 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. When the rule was adopted almost six years ago, the board also said that the expanded report was needed to aid investors given the significant increase in the business world’s complexity over time.

To better explain his concern about insufficient CAM reporting, Jeffrey Mahoney, general counsel of the Council of Institutional Investors (CII), pointed to specific provisions in Auditing Standard (AS) 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which requires CAM reporting.

He cited paragraph .14c which has a note: In describing how the CAM was addressed, “the auditor may describe: (1) the auditor’s response or approach that was most relevant to the matter; (2) a brief overview of the audit procedures performed; (3) an indication of the outcome of the audit procedures; and (4) key observations with respect to the matter, or some combination of these elements.”

In particular he noted items (3) and (4) because they “are consistent with the types of disclosures that many investors requested that CAMs provide in connection with the development of the standard.”CII’s Mahoney shared his views during a meeting of the PCAOB’s Standards and Emerging Issues Advisory Group on March 30, 2023.

Mahoney looked at more than 100 CAMs. While only a small portion of all CAMs, he did not find any disclosures that are responsive to items (3) and (4). “So, I just question, isn’t it evidence of a significant unintended consequence if two of the disclosures that many investors wanted to see in CAMs do not appear to be provided by the CAMs?”

He was questioning the conclusion that the “staff has not found evidence of significant unintended consequences from auditors’ implementation” in an interim post-implementation review (PIR) published in December 2022.

PCAOB Advisers Say Auditors May not be Fully Complying with Expanded Reporting Rule

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