Major investments from auditors smoothed CAMs launch

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Audit firms made “significant investments” in preparing for the initial implementation of the new critical audit matters requirements, according to a new study by the Public Company Accounting Oversight Board, and the rollout has been free of major unintended consequences — though not many investors have actually seen any CAMs yet.

Auditors began communicating CAMs — which are meant to inform investors and other stakeholders about issues in an audit that “required especially challenging, subjective or complex audit judgment,” and the auditor’s response to those — for large accelerated filers in June 2019, and are due to begin reporting them for all other eligible companies later this year.

The board’s interim analysis of the first year of CAMs involved extensive surveys and interviews of auditors, engagement partners, investors and audit committee members. It found CAM communications included in a total of 2,420 audit reports, with an average of 1.7 CAMs per report.

By far the most commonly communicated CAM involved revenue recognition, with goodwill coming in second.

In a June survey of the eight audit firms that have at least 15 large accelerated filers, they reported making “significant upfront investments” in pilot and dry-run programs, developing tools and guidance and more.

Among other things, the Big Four reported spending an average of approximately 23,000 hours creating processes and procedures around CAM implementation, with a further 14,600 hours devoted to staff training in the area. The other four firms, which all had much smaller portfolios of large accelerated-filer clients, dedicated an average of 3,700 hours to processes and procedures, and 3,100 to personnel training. That time amounted to roughly $6.5 million in implementation costs for the Big Four, according to PCAOB staff estimates, and $1 million each for the other four firms.

The PCAOB staff analysis suggests that the extra time and effort involved in developing and reporting CAMs did not boost engagement fees (largely because the audit firms did not pass the costs on to their clients) or increase the amount of time needed to issue audit reports.

At the same time, a staff analysis of stock market data found no indication that investors responded to the inaugural CAMs, and a survey of investors found that less than a third had ever seen one.

“The full benefits of CAM communications to investors may take more time to materialize,” the report noted.

Engagement partners were less sanguine; in a survey, more than half said they thought CAMs provided little value.

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CAMs PCAOB Audits Audit preparation Audit standards