PCAOB continues focus on critical audit matters
John Means 
Date published: Jan 17, 25
Our critical audit matters (CAMs) report for 2023 filings is out now and results show that while 68% of the registrants’ opinions contain CAMs; the average number of CAMs in those opinions continues to decline. This has the attention of the Center for Audit Quality (CAQ) and PCAOB as they continue to validate the existence of CAMs.
Investors
A recent CAQ survey of 100 US institutional investors revealed that 92% use CAMs in their investment decision-making process, with valuation of assets, goodwill and intangibles topping the list of example CAMs. 93% of investors say that CAMs play an important role in their analysis of potential investments with 78% staying they read CAMs either always or often. Half of investors say that either increasing the number of CAMs, or increasing the detail provided in CAMs, would be beneficial.
PCAOB
In the recent PCAOB publication Audit Focus they stated that they continue “... to identify a large number of deficiencies related to the auditor’s determination, communication and documentation of critical audit matters (CAMs)”. They also have a project seeking to understand why there “... continues to be a decrease in the average number of CAMs reported by audit firms of all sizes in their auditor’s reports over time and whether there is a need for additional 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 Investor Advisory Group (IAG) meeting on September 26, 2024, included a lively discussion about critical audit matters. They had previously solicited the accounting and business community to submit nominations for the most decision-useful critical audit matter (CAM) or key audit matter (KAM) contained in public company audit reports included in the 2023 Form 10-Ks and Form 20-Fs. The group presented the top three CAMs as voted by the IAG to include the most complete decision-useful information. The winners by vote were:
- Goodwill and indefinite lived intangible by D&T for Berkshire Hathaway
- Unpaid losses and loss adjustment expenses by D&T for Berkshire Hathaway
- Raw material inventory writedowns by E&Y for Moderna
Jack Ciesielski, industry commentator and President of RG Associates, who submitted all of the winning entries, explained to the IAG that he likes to use the critical matters to confirm his thoughts on risk areas, as well as to expand his knowledge of a company.
Critical audit matter scrutiny
There must be some reason why CAMs have met resistance. There is speculation that one issue with the CAMs is the definition. The purported issue is the use of the word “especially”. From the definition of CAM, in part, “…involved especially challenging, subjective or complex auditor judgment.” To illustrate, let’s take revenue recognition. Perhaps the auditor thinks, since revenue recognition is often a challenging, complex subjective issue, that the bar is high for it to be “especially” challenging. Mostly I suspect there is a general reluctance from both auditors and management to share details of audit complexities, inviting criticism of how they mitigated risk or performed audit procedures. There are always differing perspectives and sharing is risky, with investors, or potential litigants as it may be.
There were multiple instances of critical audit matters in the 2024 PCAOB inspection reports. These examples were cited as a failure to comply with AS 3101: The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. A common finding from the PCAOB inspection reports is an item that was included for discussion with the audit committee and was material to the company’s financial statements, but was not included in the procedures to determine whether it was a critical audit matter. Another issue that the PCAOB commonly cites is that the language to describe the critical audit matter is inconsistent with the information that is in the firm’s audit documentation.
With the support of the investment community, the continued focus of PCAOB inspection reports in 2025 and the PCAOB research project, the spotlight on critical audit matters is not likely to fade anytime soon.