Initial Observations of Critical Audit Matters
Auditors of large public companies this year have begun including critical audit matters (CAM) in their audit reports as required by the PCAOB, and the board has published the staff’s initial observations about how some auditors of those companies have implemented CAMs. “Critical Audit Matters: Spotlight,” published on December 10, provides a summary of what the staff found in 12 audits selected for inspection of CAM adoption. The document emphasizes that it is not staff guidance. At an accounting conference, both PCAOB member James Kaiser and George Botic, director of the PCAOB’s Division of Registration and Inspections, emphasized consistency in CAMs and the audit work done. “What I would like to emphasize … is auditors should make sure that there isn’t a gap between what the CAM says and what’s documented in audit workpapers,” Kaiser said at the AICPA’s 2019 Conference on Current SEC and PCAOB Developments on December 9 in Washington, D.C. “The two should align very closely.” As of November 30, the PCAOB said there were 189 auditor’s reports that contained CAMs, 1.7 CAMs reported per company on average, and a range of one to four CAMs per company. The most frequently communicated CAMs related to goodwill and other intangible assets, revenue recognition, taxes, and business combinations.
Proposal to Overhaul Primary Financial Statements Could Prove Controversial
A forthcoming IASB proposal that will be issued by year-end to revise traditional financial statements would push at accounting norms to bring investors information that better reflect items they consider when making investment decisions, according to remarks by Sue Lloyd, the board’s vice chair. The proposal might prove controversial, however, as it would bring onto the income statement sums typically found in non-GAAP metrics, alternate figures that can paint a rosy picture of earnings results. The board also aims to standardize subtotals in a manner consistent with investment analysis, efforts it said would ensure comparability. “We already know that there are differences of opinion on whether bringing management performance measures into the ‘official financial statements’ is a good idea,” Lloyd told the AICPA’s Conference on Current SEC and PCAOB Developments on December 9 in Washington, D.C. “Some are concerned that it might give these management metrics inappropriate elevation and tacit endorsement.” In July, the board said it would release the proposal with a 180-day comment period.
Work to Revise Income Statement Suspended after Research Reaches Stalemate
On December 11, FASB voted to suspend work on financial performance reporting, a project to revise the income statement to require accountants to provide more detailed information about consolidated expenses that could affect future cash flows. The rule changes could be operationally costly and impede comparability between companies, and much of the information is already in management’s discussion and analysis (MD&A), footnotes, and earnings releases, according to the board’s discussions. The board decided, by a 5-to-2 vote, to pause working on the project (while keeping it on its technical agenda) and monitor the outcomes of both FASB’s segment reporting project and IASB’s primary financial statements project. “It’s difficult for me to have a definitive conclusion on performance reporting until we’re further along in segments,” said FASB Chairman Russell Golden. “And so I would like to keep this on the active agenda, but direct the staff and the board’s attention to researching segments, providing that research to the IASB as part of the agenda consultation, and hopefully convince them to put that back on their active agenda and then monitor their progression on performance reporting before actually having a determination.”