In 2017, the PCAOB adopted a new auditor reporting standard: AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. The standard aims to improve the relevance of the auditor report by requiring auditors to identify and address critical auditor matters (CAM) that arise from the current period’s audit of financial statements. The new standard has received wide support from the investor and analyst communities and is generally supported by large accounting firms. Some observers consider it the most meaningful and significant change to the auditor’s report since the 1940s, when the Revision in Short-Form Accountant’s Report or Certificate was adopted by the American Institute of Accountants. Auditors are required to report CAMs for audits of large accelerated filers whose fiscal year ends on or after June 30, 2019; for audits of all other applicable entities (i.e., other accelerated filers and smaller reporting companies), the effective date is December 15, 2020.

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A CAM is defined as a matter that was communicated or required to be communicated to the audit committee and that: 1) relates to accounts or disclosures that are material to the financial statements and 2) involved especially challenging, subjective, or complex auditor judgment. An auditor considers multiple key factors in determining whether a matter involved challenging, subjective, or complex auditor judgment. These factors include, but are not limited to: the auditor’s assessment of the risk of material misstatement; the degree of judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management; the extent of audit effort and judgment related to significant unusual transactions; the degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures; the nature and extent of audit effort required to address the matter; and the nature of audit evidence obtained regarding the matter.

CAMs from S&P 500 Companies

The authors reviewed the first auditor’s reports with CAMs filed by 457 firms included in the S&P 500 index as of March 31, 2020. These companies collectively reported 814 CAMs, with an average of 1.8 CAMs per audit report. As shown in Exhibit 1, the most common CAMs are related to the valuation of goodwill and other intangible assets (20.4%). Income taxes (15.1%) and revenues (13.1%) were also prominently reported. Approximately 10% of the CAMs are related to fair value measurement and financial instruments.

Exhibit 1

Most Common CAM Topics

Account/Disclosure; Number of CAMs; Percentage Goodwill and other intangibles; 166; 20.4% Income taxes; 123; 15.1% Revenues; 107; 13.1% Fair value and financial instruments; 82; 10.1% Other liabilities; 64; 7.9% Long-lived tangible assets; 58; 7.1% Other; 57; 7.0% Business combinations; 48; 5.9% Contingencies; 33; 4.1% Other assets; 25; 3.1% Lease; 24; 2.9% Inventory; 20; 2.5% Expenses; 7; 0.9% Total; 814; 100.0% CAM=Critical Audit Matters

Big Four Auditors’ CAM Disclosure Behavior

The determination of CAMs is principles-based, and AS 3101 does not specify any items that would always constitute a CAM. There might be cross-sectional variation in the quantity and content of CAMs disclosed by Big Four audit firms that reflects differences in auditors’ expertise and effort. Exhibit 2 and Exhibit 3 dive deeper into the number and type of CAMs reported by the international auditing firms. Any significant departures from the expected values of CAMs may invite further analysis.

Exhibit 2

CAMs Reported by International Firms

Mean CAMs; Median CAMs; Audit Reports; CAMs Deloitte; 1.8; 2.0; 94; 167 EY; 1.9; 2.0; 139; 261 GT; 2.3; 2.0; 4 9 KPMG; 1.8; 2.0; 76; 137 PwC; 1.7; 2.0; 143; 240 BDO; 2.0; 2.0; 1; 2 Total; 457; 817 EY=Ernst & Young; GT=Grant Thornton; PwC=PricewaterhouseCoopers

Exhibit 3

Most Common CAM Topics by International Firms

Account/Disclosure; Deloitte; EY; KPMG; PwC; GT; BDO Goodwill and other intangibles; 17.1%; 18.7%; 13.0%; 28.8%; 12.5% Inventory; 3.7%; 3.1%; 1.4%; 1.7% Fair value and financial instruments; 10.4%; 6.1%; 12.3%; 13.3% Long-lived tangible assets; 3.7%; 7.6%; 10.9%; 6.3%; 25% Other assets; 5.5%; 2.7%; 2.2%; 2.5% Contingencies; 4.3%; 4.2%; 3.6%; 4.2% Other liabilities; 9.1%; 10.7%; 8.0%; 3.8%; 12.5% Income taxes; 7.9%; 15.3%; 22.5%; 15.8%; 50% R;evenues 13.4%; 13.7%; 15.2%; 11.7% Expenses; 0.6%; 1.5%; 1.4%; 0.0% Business combinations; 7.3%; 8.8%; 0.7%; 3.8%; 12.5%; 50% Lease; 2.4%; 4.2%; 2.9%; 0.8%; 37.5% Other; 14.6%; 3.4%; 5.8%; 7.5% Total; 100.0%; 100.0%; 100.0%; 100.0%; 100.0%; 100.0%

Exhibit 2 summarizes the CAMs disclosed by Big Four auditors. PricewaterhouseCoopers filed 143 audit reports and disclosed 240 CAMs; Ernst & Young filed 139 reports and 261 CAMs; Deloitte filed 94 reports and 167 CAMs; and KPMG filed 76 reports and 137 CAMs. The remaining 5 S&P 500 companies are audited by Grant Thornton (4) and BDO (1). Among the Big Four, Ernst & Young reported 1.9 CAMs per audit report, higher than the mean of 1.7 CAMs reported by PricewaterhouseCoopers; this difference is statistically significant. The mean CAMs per audit report disclosed by other Big Four firms is qualitatively similar.

Exhibit 3 provides a detailed view of CAMs disclosed by the international CPA firms that audit the S&P 500. Deloitte’s top three CAMs are related to goodwill and other intangibles, revenues, and financial instruments and fair value; the most common CAM disclosures from Ernst & Young are goodwill and other intangibles, income taxes, and revenues. KPMG’s CAMs are concentrated in income taxes, revenues, goodwill and other intangibles, and long-lived tangible assets. PricewaterhouseCoopers’s CAMs are clustered in goodwill and other intangibles, income taxes, financial instruments and fair value, and revenues.

Factors Behind Auditors’ CAM Decisions

To assist auditors, paragraphs 12 and 14 of AS 3101 state that for each CAM communicated in the auditor’s report, the auditor must describe the principal factors that led to the auditor’s decision. The authors randomly selected 50 audit reports to analyze the factors behind auditors’ decisions to identify and communicate CAMs related to particular accounts. As shown in Exhibit 4, the 50 audit reports released by Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers contained 89 CAMs and 149 factors. Among the CAM disclosures, 52% mention that “the degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management” is a key factor driving their decision to identify an area as a CAM. In addition, 19% of CAM disclosures identify “the degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures” as a leading factor. Another 26% of CAM disclosures reveal that the auditor’s identification decision is based on “the nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter.” Five CAM disclosures (3%) view “the nature of audit evidence obtained regarding the matter” as an important factor behind the auditor’s disclosure decision.

Exhibit 4

CAM Decision Factors


On March 23, 2020, Deloitte released Best Buy’s 2019 fiscal year audit report. Deloitte issued an unqualified opinion and disclosed “vendor allowances” as a critical audit matter. The audit report reveals the factors behind Deloitte’s CAM-disclosure decision:

The Company receives vendor allowances from certain merchandise vendors through a variety of programs intended to offset the invoice cost of inventory and for promoting and selling merchandise inventory. … Given the significance of vendor allowances to the financial statements and volume and diversity of the individual vendor agreements, auditing vendor allowances was complex and subjective due to the extent of effort required to evaluate whether the vendor allowances were recorded in accordance with the terms of the vendor agreements and that the allowances deferred as an offset to inventory were complete and accurate. (Best Buy 2019 Annual Report)


Deloitte also identifies “Goodwill—Best Buy Health Reporting Unit” as the second critical audit matter:

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The goodwill balance was $984 million as of February 1, 2020, of which $541 million was related to the Best Buy Health reporting unit.


The audit report further reveals that Deloitte’s CAM decision was driven by multiple factors:

Given the significant judgments made by management to estimate the fair value of the Best Buy Health reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future revenue of the Best Buy Health reporting unit, specifically for new products and services, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.


Interestingly, in the authors’ small sample, there were no CAM disclosures that mentioned the following two factors (AS 3101 para. 12): Factor A—the auditor’s assessment of the risks of material misstatement, including significant risks; Factor C—the nature and timing of significant unusual transactions and the extent of audit effort and judgment related to these transactions. Investors could assert legal claims against auditors based on statements made in CAM disclosures. The lack of factor A may reflect auditors’ concerns about potential legal liability; the lack of factor C may result from the low incidence of such underlying transactions.

Costs, Benefits, and Future Work

The intended benefits are clear: CAM disclosures make auditor’s reports more informative about financial statement risk and audit risk; they help investors make informed investment decisions. For example, CAM disclosures highlight areas of financial statements that require especially challenging, subjective, or complex auditor judgment, areas that can change investors’ risk assessment and share price estimation. Many stake-holders are concerned about the costs associated with CAM disclosures. Auditors will incur substantial costs to adjust internal quality assurance mechanisms and determine the exact CAM disclosures on each audit. Auditors’ communication of CAMs may substantially expand the scope of auditor liability in private security litigation. Shareholders will bear significant additional costs given the extra time and resources required to meet the CAM requirements.

The extra time and resources required to implement CAM disclosures may increase the audit report lag (i.e., the length of time from a company’s fiscal year-end to the audit report date), a concern shared by some commenters. The authors evaluated the lag conjecture and found no supporting evidence. On the contrary, we found that the average audit report lag was two days shorter in the implementation year than in the year before. Out of the 50 companies reviewed, 33 companies completed their audits timelier in the CAM implementation year than in the prior year. These figures suggest that auditors, corporate management, and audit committees were prepared for the CAM implementation process.

An experimental study developed by Louis-Philippe Sirois, Jean Bedard, and Palash Bera, “The Informational Value of Key Audit Matters in the Auditor’s Report: Evidence from an Eye-tracking Study” (Accounting Horizons, June 2018, vol. 32, no. 2, pp. 141–162), finds that CAMs have attention-directing impact: participants access CAM-related disclosures more rapidly and pay relatively more attention to them when CAMs are communicated in the auditor’s report. To provide further evidence of the benefits of CAMs, future research might examine investors’ reaction to the release of CAM disclosures (i.e., stock returns surrounding the release of audit reports). The PCAOB, which is conducting a postimplementation analysis, should be interested in a robust economic analysis of the costs, benefits, and quality of CAM implementation.

Brent Lao, PhD, is an assistant professor in the department of accounting at Illinois State University, Normal, Ill.
Tina Wang, PhD, was a CPA and on the faculty of California State University, University of Houston–Downtown, and the University of California Santa Cruz.