A new report finds that companies are making changes to financial disclosures, conducting audit “dry runs,” and even improving and adding new controls ahead of a new regulation that will require audit firms to disclose financial reporting issues that cause concern for auditors, known as “critical audit matters” or CAMs.
The report, published by Intelligize Inc., a compliance data company, found that 43 percent of respondents from large companies (large accelerated filers) said the audit committees at their companies identified different types of controls that required implementations after meeting with their auditor to discuss CAMs. Another 19 percent said they were considering implementing new controls due to the rule change.
“Some of the most common issues that have come up during the dry runs include accounting topics du jour,” wrote Marc Butler, director of product marketing & domain knowledge at Intelligize and one of the authors of the report. “Fifty-seven percent of large accelerated filers said auditors have identified CAMs related to income tax, while 49 percent cited revenue recognition and 38 percent said lease accounting issues are popping up.”
Time for Action is Now
Auditors of large accelerated filers started reporting CAMs for fiscal years ending on or after June 30 of this year, while the CAM requirements will take effect for audits at all other applicable companies for fiscal years ending on or after Dec. 15, 2020. Emerging growth companies, notably, are exempt from the rule, however some auditors of such companies say they may adopt CAM requirements early or apply them voluntarily.
CAMs have been defined by the Public Company Accounting Oversight Board (PCAOB), which adopted the rule, as “any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:
- Relates to accounts or disclosures that are material to the financial statements; and
- Involved especially challenging, subjective, or complex auditor judgment.”
The PCAOB issued staff guidance on identifying and disclosing CAMs in March of this year.
Conducting ‘Dry Runs’
Some of the other findings of the Intelligize report, which analyzes data from a survey of 171 corporate compliance officials conducted by SourceMedia Research and Accounting Today, are:
- 54 percent of large accelerated filers have conducted dry runs with their auditor to gauge the impact of the regulation before the CAMs are required to be disclosed.
- 51 percent of companies that will see CAMs disclosed after December 2020 have conducted or planned dry runs and another 31 percent are considering them.
- 52 percent of large accelerated filers are considering updates to their financial statement disclosure based on the CAMs requirement.
- Only 20 percent said the regulation will have no effect on any of their regulatory disclosures.
“Companies interested in doing dry runs that have yet to start them may want to hurry up,” noted Butler in his analysis of the report. “More than 60 percent of large accelerated filers reported holding between three and six meetings with their auditors during dry runs, and over 60 percent of large accelerated filers said the entire process lasted four months or longer.”
The Intelligize report also includes an appendix with several CAM disclosure examples. 
Joseph McCafferty is editor & publisher of Internal Audit 360°