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  • Writer's pictureDaniel Goelzer

More Audit Reports Contain CAMs, But There are Fewer CAMs Overall

Ideagen Audit Analytics (IAA) has released Critical Audit Matters: A 3-Year Review 2020-2022, a study of critical audit matters (CAMs) that appeared in the more than 22,000 audit reports filed by SEC-registered companies since 2020.  IAA finds that about two-thirds of all FY2022 audit reports (65 percent) contained at least one CAM, up from 62 percent in 2020, the first year of CAM reporting.  However, for audit opinions that contained at least one CAM, the average number of CAMs per opinion has fallen from 1.51 in 2020 to 1.34 in 2022.  While these numbers do not seem to suggest a dramatic change in the level of CAM reporting, the PCAOB has commenced a research project to determine “why there continues to be a decrease in the average number of critical audit matters reported in the auditor’s report over time and whether there is a need for guidance.”  See PCAOB Updates its Agendas and Adds a CAMs Review, November-December 2023 Update.

 

Background

 

As described in earlier Updates (see, e.g., The CAQ Summarizes CAM Reporting, January-February 2021 Update and More PCAOB Advice for Audit Committees on CAMs, July, 2019 Update), a CAM is defined as any matter arising from the audit of the financial statements that was (1) communicated or required to be communicated to the audit committee, (2) relates to accounts or disclosures that are material to the financial statements, and (3) involved especially challenging, subjective, or complex auditor judgment. The auditor’s report must identify each CAM, describe the main considerations that led the auditor to determine that the matter was a CAM, describe how the auditor addressed the CAM in the audit, and refer to the financial statement accounts or disclosures related to the CAM.  The requirement that public company auditor’s reports include a discussion of CAMs was phased in beginning with reports filed by large accelerated filers (companies with public float of $700 million or more) for fiscal years ending on or after June 30, 2019.   (For IAA’s analysis of large accelerated filer first year CAM disclosures, see Audit Analytics Provides an Update on CAM Disclosures, June 2020 Update.)  

 

IAA Review Findings

 

Highlights of the IAA review include the following:

 

  • More audit opinions contain CAMs.  As noted above, IAA finds that, in FY2022, 65 percent of audit opinions contained at least on CAM, up from 64 percent in 2021 and 62 percent in 2020. 

 

  • The total number of CAMS declined.  In FY 2022, 6,654 CAMs were disclosed, while in 2021 there were 6,995 CAMs, and in 2020 there were 6,769 CAMs.  Of course, during these years the total number of audit reports filed with the SEC also fluctuated.  In 2022, there were about .88 CAMs per opinion (based on a total of 7,586 total audit reports filed).   In 2021, there were also .88 CAMs per report (7,945 total audit reports), while in 2020 there were .94 CAMs per report (7,180 total audit reports).   Looking only at the subset of audit reports that contained at least one CAM suggests a slight decrease in CAM frequency:  In 2022, there were 1.34 CAMs per opinion for opinions that contained at least one CAM.  The comparable figures in 2021 and 2020 were, respectively, 1.38 and 1.51.

 

  • Most audit reports only contain one CAM.  In each of the three years IAA studied, most opinions that contained CAMs had only one CAM, and the frequency of one-CAM opinions is increasing.  In FY2022, 73 percent of opinions with CAMs had only one CAM, while in 2021 and 2020, the percentages of one-CAM opinions were 70 percent and 61 percent, respectively. Conversely, the percentage of opinions with two CAMs fell from 29 percent in 2020 to 22 percent in 2022, while the percentage with three or more CAMs dropped from slightly over 10 percent in 2020 to slightly over 5 percent in FY2022.  As the share of one-CAM opinions increases, the average number of CAMs per opinion (for opinions that contain at least one CAM) necessarily falls.  As noted in the prior bullet, in 2022, that average was 1.34 CAMs per opinion.

 

  • Going concern qualifications are frequently accompanied by CAMs.  When an audit opinion expresses substantial doubt about the entity’s ability to continue in business, it is also likely to contain a CAM.  In these circumstances, the most common CAM topics over the three-year study period were Other Debt (in 20 percent of CAMs), Going Concern (in 18 percent of CAMs), and Revenue from Customer Contracts (in 14 percent of CAMs).

 

  • The larger the company, the more likely it is to have a CAM.  During the three years studied, 98 percent of large accelerated filer audit opinions contained at least one CAM, compared to 71 percent of accelerated filer opinions and 43 percent of non-accelerated filer opinions.  IAA observes that the “complexity of large accelerated filer audits also leads them to have the largest average number of CAMs per opinion of any filer status.  On average, large accelerated filer opinions have 10% more CAMs per opinion than both accelerated and non-accelerated filers.”  In 2022, large accelerated filers averaged 1.38 CAMs per opinion; accelerated filers averaged 1.28, and non-accelerated filers averaged 1.31. 

 

  • Revenue tops the list of CAM topics.  For the three years IAA studied, the most common CAM topic was Revenue from Customer Contracts, which was discussed in 13 percent of CAMs.  Business Combinations and Goodwill each appeared in 9 percent of CAMs.  Allowance for Credit Losses was in 7 percent of CAMs.  Other Contingent Liabilities, Inventory, and Other Investments each appeared in 4 percent of CAMs.  The top five CAM topics in FY2022 were the same as the top five during the entire three-year period, except that Inventory replaced Allowance for Credit Losses in fifth place.

 

  • CAM topics by industry.  Revenue from Customer Contracts was the most common CAM topic in three industries: Construction (appearing as a topic in 52 percent of opinions with at least one CAM), Services (in 42 percent of opinions with at least one CAM) and Manufacturing (in 20 percent of opinions with at least one CAM). The most common CAM topic in other industries were Finance – Allowance for Credit Losses (in 40 percent of opinions with at least one CAM); Mining -- Proven and Unproven Reserves (in 40 percent of opinions with at least one CAM); Transportation, Communications and Utilities – Regulatory Assets and Liabilities (in 29 percent of opinions with at least one CAM); Wholesale Trade—Goodwill (in 25 percent of opinions with at least one CAM); Agriculture – Inventory (in 18 percent of opinions with at least one CAM); and Retail Trade – Long-Lived Assets (in 17 percent of opinions with at least one CAM).

 

Comments:  Audit committees might find the IAA study useful as a tool for comparing the number and nature of their company’s CAMs with the study’s overall findings.  At minimum, committees of companies that have no CAMs – or more than 2 CAMs – should explore the reasons why their company differs from the broad averages. The PCAOB has provided guidance concerning the types of questions audit committees should raise with their auditor concerning CAMs. See More PCAOB Advice for Audit Committees on CAMs, July 2019 Update.  

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