Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments
Louis J. Collins
Professional Accounting Fellow, Office of the Chief Accountant
Dec. 9, 2019
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.
Good morning. It’s an honor to be here today.
Today I’d like to share some observations related to the implementation of the auditor’s reporting model, specifically in regards to communication of critical audit matters (“CAMs”).
Stakeholders have a role to play in the implementation of a new standard in order to achieve its objectives. As a result, the role of the standard-setter does not end upon the approval of a standard. Regulators should also remain engaged and be appropriately responsive in the post-issuance period.
CAM Implementation – Current State
Investors and other financial statement users look to auditors to play a prominent role in enhancing confidence in the quality and reliability of financial statements. The auditor’s report is the primary mechanism for auditors to communicate to investors and other financial statement users. CAMs will provide audit-specific insights not previously communicated regarding matters that required especially challenging, subjective or complex auditor judgment related to accounts or disclosures that are material to the financial statements.
The phased effective dates for these communication requirements provide an opportunity for reflection, analysis, and communication on what we have observed thus far and allow us to share some observations that may be helpful as we look forward to the next implementation milestones. First, I’d like to thank those stakeholders who have participated in the implementation – including auditors, management, and audit committees – for the significant progress that has been made to-date. I’d also like to acknowledge the PCAOB for their efforts in providing resources and tools for implementation, including staff guidance. Collectively, these efforts are critical to implementation and should benefit investors and other financial statement users.
Representatives of the SEC and PCAOB have encouraged “dry-runs” as a means for auditors, management, and audit committees to engage in productive dialogue around the meaningful information specific to the audit that will be included in the audit report. We frequently hear about the benefits of this process and encourage stakeholders to continue this momentum and remain engaged, particularly those for which the CAMs requirements are not yet effective.
CAM Implementation – Initial Observations
While we’re still in the early period of CAM implementation, I can certainly provide a few initial thematic observations.
CAMs and critical accounting estimates
We observe some connection between CAMs identified by the auditor and critical accounting estimates disclosed in management’s discussion and analysis but it is not a one-to-one relationship. This is consistent with our expectations, as, despite some similarities between CAMs and critical accounting estimates, their objectives differ.
While we observe CAMs tend to be a subset of critical accounting estimates, we have also seen instances where a CAM was not concluded by management to represent a critical accounting estimate. In one example, an auditor identified the evaluation of the identification of related parties and related party transactions as a CAM, where presumably there was not a corresponding subjective estimate or assumption made by management; therefore, the matter was not included as a critical accounting estimate. Other examples include certain significant non-recurring transactions.
We also observe instances where an identified CAM was a component of the related critical accounting estimate. An example is where a CAM related to a goodwill impairment analysis for a specific reporting unit that was considered at risk for impairment, whereas management’s critical accounting estimate related to goodwill impairment more broadly. In another example, revenue recognition for an individual revenue stream was identified as a CAM, whereas management’s critical accounting estimate related to revenue recognition was broader.
The communication of audit-specific information and insights has the potential to make the auditor’s report more relevant and useful to investors and other financial statement users. While the auditor’s communication of company information not previously disclosed by the company should be limited to rare circumstances, the auditor is required to articulate the principal considerations that led to the determination of a matter as a CAM and how the matter was addressed in the audit. Communications that are tailored to the specific facts and circumstances of the audit are likely to be more meaningful to investors and other financial statement users.
For example, in describing principal considerations related to the determination of a goodwill impairment analysis as a CAM, we’ve seen description of considerations related to specific inputs and assumptions underlying the assessment.
In describing how CAMs were addressed in the audit, we have observed auditors generally provide a brief overview of the audit procedures performed, including discussing the related internal control testing. When using that approach, we remind auditors that the information is more meaningful if they avoid general language regarding audit procedures performed, including the related control testing, and instead describe the specific procedures performed that were responsive to the principal considerations that led the matter to be identified as a CAM.
CAM Implementation – Comparability
Many investors and other financial statement users may look to draw comparisons in the number, and nature, of CAMs between companies that are otherwise deemed comparable. Furthermore, audit committee members and management are naturally aware of the financial disclosures of their peer companies.
Within an industry, among peer companies, or even year-over-year for an individual company there may or may not be similar CAMs. Ultimately, this will depend on the facts and circumstances of each individual audit and whether matters involved especially challenging, subjective, or complex auditor judgment related to accounts or disclosures that are material to the financial statements in the year under audit. It’s important to remember that CAMs are not intended to be inherently positive or negative, so quantitative comparisons involving the number of CAMs across companies may not be meaningful. The number of CAMs communicated does not have a bearing on the nature of the opinion included in the audit report.
Even if the number and nature of CAMs were similar among companies compared, we expect the principal considerations that led to the determination of a matter as a CAM and how the matter was addressed in the audit to be unique to each individual audit. Thus, we encourage investors and other financial statement users to focus on this information rather than drawing comparisons among companies, which may not necessarily lead to accurate conclusions.
Thank you very much for your attention.
 Public Company Accounting Oversight Board (“PCAOB”); Order Granting Approval of Proposed Rules on the Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and Departures from Unqualified Opinions and Other Reporting Circumstances, and Related Amendments to Auditing Standards, Release No. 34-81916 (October 23, 2017) [82 FR 49886], available at https://www.sec.gov/rules/pcaob/2017/34-81916.pdf.
 See Todling, Jennifer L., Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2016 AICPA National Conference on Current SEC and PCAOB Developments (December 5, 2016), available at https://www.sec.gov/news/speech/todling-2016-aicpa.html.
 The first phase of CAM implementation is effective for audits of large accelerated filers for fiscal years ending on or after June 30, 2019. The second phase, which impacts audits of all other companies to which the requirements apply, is effective for fiscal years ending on or after December 15, 2020.
 PCAOB resources and tools for implementation are available at https://pcaobus.org/Standards/Implementation-PCAOB-Standards-rules/Pages/new-auditors-report.aspx#resources.
 SEC guidance provides that companies should prepare disclosure for estimates and assumptions where the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and the impact of the estimates and assumptions on financial condition or operating performance is material. https://www.sec.gov/rules/interp/33-8350.htm
 See note 1 above.
 In accordance with PCAOB Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, paragraph 14c, 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.