In Brief

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It has been suggested that the recent introduction of Critical Audit Matters (CAM) to audit reports represents the most significant change to reporting in decades. This article revisits the authors’ earlier analysis of CAM reporting in the initial year of implementation, updating it for the second and third year of reporting. They look for continuity and changes in CAM reporting and try to answer the question of whether the first three years of CAM reporting have provided new and valuable information for users.


The PCAOB staff describes the inclusion of critical audit matters in audit reports as the most significant change in reporting in more than 70 years (PCAOB, Critical Audit Matters Spotlight, 2019, p. 1). That reporting became effective for fiscal years ending on or after June 30, 2019, for large accelerated filers and December 15, 2020, for most other registrants. Dennis McGown, senior director of professional practice at the Center for Audit Quality, points out that with the reporting of these critical audit matters (CAM), auditors are now providing more information and insights to investors about the audit procedures performed (“Ensuring Integrity: Critical Audit Matters,” The CPA Journal, February/March 2021, p. 24).

The authors’ earlier article on CAMs (described more fully below) provided a summary of first-year reporting (2019) for a sample of 12 large accelerated filers. In that article, we discuss that, although other sources provide much of the information included in CAMs (e.g., the financial statement notes and SEC critical accounting estimates), CAMs present the auditor’s overall perspective on the matters, particularly their description of the manner in which they addressed them in the audit. The auditor’s perspective is certainly beyond other information historically included in the financial statements; admittedly, its value is unproven at this point.

In this article, we update our prior analysis by adding the CAMs for the years 2020 and 2021 to our analysis of the first-year reporting by the companies surveyed. To the extent that information from the first year is supplemented by additional “new” subsequent-year CAMs, or differing details on first-year CAMs, the likelihood of continuing useful CAM information for stakeholders increases, as contrasted to a situation in which auditors simply repeat first-year CAM information. In the extreme, some might consider repeating identical CAM information for multiple years in audit reports to be little more than added “boilerplate” (i.e., standardized wording) to the audit report. Avoiding such boilerplate is what Jay Clayton, then SEC Chairman, suggests is a “challenge for auditors” (Russ Banham, “Critical Audit Matters Coming into Focus,” Journal of Accountancy, October 2018).

The Nature of Critical Audit Matters

The PCAOB’s AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, defines a CAM as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee, and one that—

  • relates to accounts or disclosures that are material to the financial statements, and
  • involves especially challenging, subjective, or complex auditor judgment.

Notice in the definition that a CAM involves communication to the audit committee, material financial statement accounts or disclosures, and especially challenging, subjective, or complex auditor judgment. Because the definition of a CAM requires that it apply to material financial statement accounts or disclosures, its disclosure is not the only source of information. Certainly, the financial statements will include such matters, generally with details in the note disclosures. In addition, SEC Release 33-8350 requires registrants to provide disclosure of “critical accounting estimates” in the management discussion and analysis (MD&A) section of the firm’s Form 10-K. Disclosure is appropriate when:

  • 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.

There is overlap between the above PCAOB requirements on CAMs and SEC Release 33-8350. The PCAOB acknowledges this overlap, but points out that the CAM concept is broader because it is not restricted to accounting estimates (PCAOB, Implementation of Critical Audit Matters: A Deeper Dive on the Determination of CAMs: Insights for Auditors, March 18, 2019, p. 6). Although the availability of other sources of similar information (such as accounting estimates) might somewhat limit the value of CAM disclosures, such disclosures may have value to financial statement users, particularly auditor descriptions of how the CAM was addressed in the audit, information not previously available. The emphasis in this article is on adding 2020 and 2021 CAMs to the 2019 data and analyzing this previously unavailable information.


In its analysis of audit reports issued under the subsequent first-year CAM reporting requirement, the Center for Audit Quality (Critical Audit Matters: A Year in Review, December 2020, p. 3), stated that:

The auditor’s reports we reviewed provide straightforward descriptions about those matters that involved especially challenging, subjective, or complex auditor judgment. Within the audit procedures listed in the CAM communications, auditors provided insights into the auditing of the matter that was a CAM and a description of the audit procedures performed to get comfortable with the matter. The result is an increase in the total mix of information available to investors.

The possible advantages of required CAM reporting do not come without possible costs. These costs may include audit firm costs to design and implement CAM procedures, costs that may—at least partially—be passed to their clients through increased audit fees. Additional costs could also include the time required to file audit reports.

The PCAOB (Staff White Paper, Stakeholder Outreach on the Initial Implementation of CAM requirements, PCAOB, October 2020, p. 8) uses CPA firm–submitted data to estimate costs incurred relating to CAMs. That Staff White Paper states that the Big Four averaged $6,500,000 each in costs to develop and support implementation of CAMs, while the next four largest firms averaged $1,045,000. Certainly, one would expect subsequent costs to be at a significantly lower level. Concerning specific annual audit costs, the PCAOB reports that engagement partners indicated that an average of 1% of total audit hours were spent identifying, developing, and communicating CAMs in the first year of implementation.

The PCAOB also surveyed engagement partners involved with CAMs and provided them with an opportunity to provide additional feedback. Of the 902 replies to the general questionnaire, 139 respondents provided such additional feedback; 74% of these responses were what the PCAOB characterized as “negative views of CAMs.” Comments (p. 10) included the following:

  • CAMs provide little value to investors because the information is already disclosed by the issuer or included in the audit report as “boilerplate” language.
  • The engagement team felt pressure to identify at least one CAM, even though they did not believe that any individual matter fully met the definition of a CAM.
  • Audit committees exhibited a strong preference to have CAMs similar to others in the same industry.

The PCAOB’s interview of 12 audit committee chairs (p. 13) reported almost uniformly that the costs for CAM implementation (e.g., management time, increase in audit fees) were minimal or immaterial. But they also reported that CAMs resulted in either no change or a slight increase in audit quality. No members reported having received direct investor feedback on CAMs.

The PCAOB’s Staff White Paper also addresses investor comments relating to CAMs (p. 12). Of 21 investors who said they had seen CAMs and who replied to an open-ended question, 8 would use CAMs in the future, 4 might use CAMs in the future, and 9 would not use CAMs in the future.

Of those who said they would not use CAMs, participants suggested that CAMs are not specific enough to provide useful information or do not provide additional value above and beyond what is already included in financial statements.

The optimism and worth of the PCAOB and the Center for Audit Quality’s expected benefits of CAM disclosure may also be questioned due to the results of its analysis of subsequent stock market returns. That analysis of CAM disclosures revealed no systematic evidence that investors respond to the information content of CAMs in the first year of implementation (PCAOB, Staff White Paper: Econometric Analysis on the Initial Implementation of CAM Requirements, October 2020, pp. 3-4). On the more positive side, that analysis found no evidence of delays in issuance of audit reports with initial CAM implementation.

Prior Results

In the authors’ prior article (“A Summary of Early Critical Audit Matter Reporting,” The CPA Journal, February/March 2021, pp. 44–51), we analyzed audit reports of 12 companies that included CAMs for 2019, the first year of the requirement. The 12 audit reports included 20 CAMs, for an average of 1.67 CAMs per report, a number which approximated that of a broader Audit Analytics study (“Serving Their Purpose? Insights on Critical + Key Audit Matters,” Audit Analytics, February 2021, p. 2).

For our 12 companies, both the largest and smallest six companies had totals of 10 CAMs included in their audit reports, although the CAM disclosures for the largest six were longer in terms of total words. The most frequent CAM topics were revenue recognition, goodwill and other intangible assets, and taxes. When compared with the SEC’s required MD&A reporting of critical accounting estimates (policies), CAM disclosures were shorter and less frequent. Yet, as we have indicated, the auditor’s perspective may have value in disclosing how the CAM was addressed.

In the following sections, we reexamine the companies from this earlier survey and compare the reporting of CAMs seen in 2020 and 2021, the second and third year of implementation. As we indicated earlier, our premise is that identical, or very similar, CAM disclosures as compared with the first year are likely to provide less information to stakeholders than new or continuing CAM disclosures with additional information.

PCAOB Expectations over Time

PCAOB Staff Guidance (Implementation of Critical Audit Matters: A Deeper Dive on the Determination of CAMS, March 2019, p. 4) addresses the issue of CAMs over time when it states that:

The determination and communication of CAMs is done every year in connection with the current period audit. Depending on the circumstances, some matters may be CAMs each year, while others may be CAMs in a single period or intermittently.

Some matters may arise every year, and may always require especially challenging, subjective, or complex auditor judgment. Such matters may be determined to be CAMs every year. On the other hand, matters that require especially challenging, subjective, or complex auditor judgment in a given year may be CAMs in only that year. For example, implementation of a new accounting standard or accounting for a significant unusual transaction may require especially challenging, subjective, or complex auditor judgment in the year in which they occur but not thereafter.

CAMs may also recur intermittently. For example, the audit of deferred tax assets accounts and disclosures may involve especially challenging, subjective, or complex auditor judgment in years when additional auditor judgment and effort is necessary to assess the company’s ability to utilize net operating loss carryfor-wards.


Consistently, in its guidance for investors (Investor Resource: Critical Audit Matters, 2019, p. 3), the PCAOB indicates that there is no expectation that CAMs be the same each year, although some might recur.


Exhibit 1 presents the 2021 CAMs for 11 companies, with one company in our original 12 omitted. (That company, Zayo Group Holdings, Inc., was acquired in 2020 and has not presented its own 10-K subsequently.) The 11 audit reports examined include 18 and 16 CAMs from 2020 and 2021, respectively. Each of these audit reports for 2020 and 2021 included at least one CAM. One company’s 2020 audit report included three CAMs (Palo Alto Networks), whereas the others included either one or two CAMs. The average number of CAMs included in audit reports was 1.64 and 1.45 for 2020 and 2021, respectively. This is similar to the PCAOB overall numerical analysis because 85% of the companies had either one or two CAMs; it also approximates our 2019 results.

Exhibit 1


Company; Name of CAM Aspen Technology, Inc. (KPMG); Determination of Stand-alone Selling Prices for Term License and Maintenance Performance Obligations Automatic Data Processing, Inc. (DT); Goodwill—Employer Services Reportable Segment Client Fund Obligations Brady Corporation (DT); Taxes—Valuation Allowances Cisco Systems, Inc. (PwC); Revenue Recognition—Identification of Contractual Terms in Certain Customer Arrangements Intuit, Inc. (EY); Determination of Distinct Performance Obligations in Revenue Contracts (New in 2021) Accounting for Acquisition of Credit Karma KLA Corporation (PwC); Uncertain Tax Positions Related to the Ongoing Israeli Tax Authority Matter Microsoft Corporation (DT); Revenue Recognition Income Taxes—Uncertain Tax Positions Open Text Corporation (KPMG); Evaluation of the Determination Of Stand-alone Selling Prices Of Revenue Performance Obligations for Customer Contracts with a Software License Assessment of Uncertain Tax Positions Palo Alto Networks, Inc. (EY); Revenue Recognition Business Combinations Paylocity Holding Corporation (KPMG); Capitalized Internal-Use Software Development Costs Procter & Gamble (DT); Goodwill and Intangible Assets—Shave Care Goodwill and Gillette Indefinite Lived Intangible Asset

Exhibit 2A provides an overview of the three years’ CAMs broken down by topic. It is important to note that some of the topics are quite broad. For example, goodwill and other intangible assets include both original valuation of goodwill for an acquisition and subsequent possible impairment of goodwill, as well as other intangible assets. In some cases, a single CAM may overlap into two or more areas.

Exhibit 2A

Topics of Critical Audit Matters*

Topic; 2019*; 2020; 2021 Revenue recognition; 8; 7; 6 Goodwill and other intangible assets; 5; 4; 4 Taxes; 4; 4; 4 Capitalization of software development costs; 1; 1; 1 Client fund obligations liability; 1; 1; 1 Valuation of convertible notes; 1 Total; 19; 18; 16 *In order to make 2019 and 2020 columns comparable, table omits the 2019 Zayo Group Holdings, Inc. critical audit matter. Zayo was acquired by another company in 2020 and did not file a Form 10-K for 2020. Zayo's only CAM in 2019 was on the capi talization of internal direct labor costs.

As discussed above, the PCAOB expects that CAMs may vary from one year to the next. It provides examples of the implementation of a new accounting standard or the accounting for a significant unusual transaction, both of which may require especially challenging, subjective, or complex auditor judgment in the year they occur—but generally not thereafter. Exhibit 2B derives 2020 and 2021 CAM totals from the 2019 totals.

Exhibit 2B

Derivation of 2020 and 2021 Critical Audit Matters

2020; 2021 CAMs; 19; 18 CAMs deleted from Prior Year; –3; –3 Continuing CAMs from Prior Year**; 16; 15 New CAMs added; +2; +1 CAMs in Year-End Audit Report; 18; 16 **Breakdown of modifications of CAMs from Prior Year:   Worded identically, very similarly or shortened; 11; 15   Modified more significantly; +5; +0 16; 15

CAMs deleted in 2020 and 2021.

CAMs deleted in 2020 included two related to goodwill calculation issues (KLA Corporation and Procter & Gamble) and one on a revenue recognition issue (Palo Alto Networks). In 2021, the CAMs deleted in 2020 related to Goodwill (KLA Corporation), revenue recognition (Aspen Technology), and convertible notes (Palo Alto Networks).

Continuing CAMs in 2020 and 2021.

As shown on Exhibit 2B, 16 of the 18 CAMs in 2020 were continuing from the prior year. Of those 16, we subjectively evaluate 11 as worded identically, very similarly, or shortened (with essentially similar general information) compared with 2019. In the other, 5 were categorized as being modified more significantly in that they included information that could be incremental to that presented in 2019. For the 2021 audit reports, all of the 15 continuing CAMs were worded identically, similarly, or shortened compared with 2020.

Three examples, presented in Exhibits 35, illustrate the details of CAM disclosures and how they have changed (or stayed the same) over time. Exhibit 3 illustrates a CAM on uncertain tax positions that is included with identical wording in Microsoft’s audit reports for 2019 through 2021. Each of those reports also included a CAM on revenue recognition (not presented here) that was worded similarly (although not identically) in 2019 and 2020, and identically in 2020 and 2021.

Exhibit 3

Microsoft, Uncertain Tax Positions CAM—2019, 2020, 2021

Income Taxes–Uncertain Tax Positions–Refer to Note 12 to the Financial Statements Critical Audit Matter Description The Company's long-term income taxes liability includes uncertain tax positions related to transfer pricing issues that remain unresolved with the Internal Revenue Service (“IRS”). The Company remains under IRS audit, or subject to IRS audit, for tax years subsequent to 2003. While the Company has settled a portion of the IRS audits, resolution of the remaining matters could have a material impact on the Company's financial statements. Conclusions on recognizing and measuring uncertain tax positions involve significant estimates and management judgment and include complex considerations of the Internal Revenue Code, related regulations, tax case laws, and prior-year audit settlements. Given the complexity and the subjective nature of the transfer pricing issues that remain unresolved with the IRS, evaluating management's estimates relating to their determination of uncertain tax positions required extensive audit effort and a high degree of auditor judgment, including involvement of our tax specialists. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures to evaluate management's estimates of uncertain tax positions related to unresolved transfer pricing issues included the following: • We evaluated the appropriateness and consistency of management's methods and assumptions used in the identification, recognition, measurement, and disclosure of uncertain tax positions, which included testing the effectiveness of the related internal controls. • We read and evaluated management's documentation, including relevant accounting policies and information obtained by management from outside tax specialists, that detailed the basis of the uncertain tax positions. • We tested the reasonableness of management's judgments regarding the future resolution of the uncertain tax positions, including an evaluation of the technical merits of the uncertain tax positions • For those uncertain tax positions that had not been effectively settled, we evaluated whether management had appropriately considered new information that could significantly change the recognition, measurement or disclosure of the uncertain tax positions. • We evaluated the reasonableness of management's estimates by considering how tax law, including statutes, regulations and case law, impacted management's judgments.

Exhibit 4

Automatic Data Processing, Goodwill CAM—2019 vs. 2020

Goodwill—Employer Services Reportable Segment Description of the Matter [Description of goodwill and the high degree of auditor judgment involved in estimat ing fair value.] How We Addressed the Matter in Our Audit   Our audit procedures related to the determination of forecasts of future revenue and operating margin and the selection of the weighted cost of capital used by management to estimate the fair value contributed by the next-gen platform included the following, among others: • We tested the effectiveness of controls over management's goodwill impairment evaluation, including those over the determination of the fair value of the reporting units within the Employer Services reportable segment, such as controls related to management's determination of forecasts of future revenue and operating margin and the selection of the weighted cost of capital. • With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation models, methodology, and significant assumptions used by the company, specifically the weighted cost of capital including testing the mathematical accuracy of the calculation.: • Testing the mathematical accuracy of the Company's calculation of the weighted cost of capital. • Developing a range of independent estimates and compared to the average cost of capital selected by management. • Evaluating management's selection of the company-specific risk premium by comparing to the revenue growth and operating margins of peer companies. • We evaluated management's ability to accurately forecast future revenue and operating margin by comparing actual results to management's historical forecasts. Due to the limited historical data for the next-gen platform, we evaluated the reasonableness of management's revenue and operating margin forecasts by comparing the forecasts to (1) the historical operating results of the Company's similar existing platforms, (2) the limited operating results to date of the next-gen platform, (3) internal communications to management and the board of directors, and (4) external communications made by management to analysts and investors, and (5) industry reports containing analyses of the Company's and its competitor's platforms. [A final section addresses the possible effects of COVID-19.] Note: Bold Italics is a 2020 insert into 2019 CAM; Strikethrough is a 2020 omission from 2019 CAM

Exhibit 5

Aspen Technology, Inc., Audit Procedures Performed on Modified Contracts CAM

2019: Evaluation of historical customer contract modifications as a result of the adoption of Topic 606; 2020: Sufficiency of audit evidence over incomplete revenue contracts at the adoption date of Topic 606 that were modified prior to the adoption date of Topic 606 The primary procedures we performed to address this critical audit matter included the following. We selected a sample of contracts to determine whether contract modifications were properly identified by the Company. For a sample of customer contracts and the related modifications, we obtained and read source documents to evaluate the significant terms of the contracts, and evaluated the Company's determination of recasted revenue recognition and the related balance sheet accounts under Topic 606.; The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over incomplete revenue contracts at the adoption date of Topic 606 that were modified prior to the adoption of Topic 606. We performed procedures to test the completeness and accuracy of the population of incomplete contracts that were modified prior to the adoption of Topic 606. Specifically, we agreed information from certain underlying contracts to reports used in management's analysis of contract assets and tested the reconciliation of those contract assets to future revenues and billings. For a selection of contracts modified prior to the adoption of Topic 606 from management's analysis, we inspected the related revenue contract and supporting documentation and compared the related contract asset balance to future contractual billings and future revenue amounts to be recognized under the customer arrangement. For each item selected, we also assessed the (1) current year revenue, (2) historical revenue, (3) contract asset, and (4) deferred revenue balance. Additionally, to ensure the customer invoices related to our selections were accounted for with the appropriate contract, we inspected the related invoicing data and revenue contracts and greed them to the calculations underlying the amounts recorded by the Company. For a sample of current year revenue transactions, contract asset balances, and deferred revenue balances, we obtained and inspected the related revenue contracts and supporting documents and compared them to the revenue, contract asset balances, and deferred revenue balances that were recorded as of and for the fiscal year ended June 30, 2020. In addition, we evaluated the overall sufficiency of audit evidence obtained over incomplete revenue contracts at the adoption date of Topic 606 that were modified prior to the adoption date of Topic 606 by assessing the results of the procedures performed.

Exhibit 4 illustrates a portion of the CAM that describes how a goodwill matter was addressed by the auditors for Automatic Data Processing. This is a 2020 CAM that was significantly modified from the prior year. The bold italic represents new wording in 2020, while strikethrough indicates words omitted from the 2019 version. The CAM provides an illustration of maintaining the overall framework from the prior year, yet expanding it to include additional information. Notice that the descriptions of some procedures are expanded and additional procedures are provided.

Exhibit 5 presents another of the five CAMs categorized as providing incremental information. Much more information is presented in Aspen Technology, Inc.’s 2020 CAM as compared with 2019, although the value of this information to users is still open to debate. It must be noted that one could argue that the scope of differences between 2019 and 2020 mean this is a “new” CAM.

As noted above, we categorized all the 15 continuing 2021 CAMs as worded identically, very similarly, or shortened (with essentially the same information). One of the “shortened” CAMs may be of particular interest. The 2019 and 2020 audit reports of KLA Corporation included a similarly worded sentence in its tax-related CAM stating: “Professionals with specialized skill and knowledge were used to assist in the evaluation of the completeness and measurement of the liability for uncertain tax positions,” whereas the 2021 audit report omitted this sentence. Thus, the reader is left with uncertainty whether in 2021, either 1) the professionals did not provide assistance, or 2) they did provide assistance, but a decision was made to not include them in the CAM description.

New CAMs in 2020 and 2021.

In 2020, two new CAMs were included (KLA Corporation, Quantitative Goodwill and Palo Alto Networks, Convertible Notes). The KLA Corporation goodwill impairment calculation is related to a 2019 KLA Corporation CAM on the previously discussed acquisition of Orbotech, Ltd. Although the 2019 CAM was on the original valuation of intangible assets, the 2020 CAM is on the year’s goodwill impairment assessment. Orbotech is the only company name explicitly mentioned in KLA’s 2020 financial statement note relating to the goodwill impairment calculation. Thus, in essence, not only are 16 of the 18 2020 CAMs continuing in 2020 from 2019; a 17th is closely related. The other 2020 new CAM was for Palo Alto’s issuance of convertible notes. There was one new CAM in the 2021 audit reports, for Intel’s acquisition of Credit Karma.

Of the original 19 CAMS reported in our 2021 article, 15 are included in the 2021 audit reports, some with limited modification. This might add credence to the fear that CAM presentations have become boilerplate. Yet, there was re-wording and some modifications of coverage in a number of the continuing CAMs. This represents a difficult situation for auditors. First, the greatest potential for enhanced overall communication seems to be the section of the CAM presenting information on the audit procedures performed. Yet, one would expect that in many situations, the procedures performed in the two years would certainly contain a high degree of overlap with one another, both in terms of performing audit procedures and in reporting on those procedures.

Do Users Want More?

As noted above, there were relatively few “new” CAMs in 2020 (two) and 2021 (one), with one of the 2020 CAMs related to a previous year’s CAM. The presentation of the audit procedures performed with respect to the CAMs continues to be quite general. Also, as noted, PCAOB research finds no market price reaction to CAM disclosure, and limited investor interest, in an admittedly very small sample of investors.

As was the case in 2019, none of the CAMs analyzed in the latter two years included an explicit description of the outcomes of the related audit procedures performed. Such a description is allowed by the reporting standard, but not required. Given this lack of descriptive outcomes, perhaps financial statement users should realize that the auditor’s procedures led to a conclusion that the estimate (or other type of CAM) is reasonably stated, otherwise the auditor would have modified the audit opinion. Yet one wonders whether, for example, a more complete summary of the auditor’s findings relating to the degree of uncertainty of an estimate or a potential interval might result in a more valuable product. In addition, more detailed information on findings related to internal control might be desirable. Consistent with the possibility of providing a description of outcomes is the Council of Institutional Investors Report (Jeff Mahoney, Critical Audit Matters Reporting: A First Look, December 2019), which suggests that many investors will be disappointed by the lack of information on outcomes.

The public accounting profession has traditionally been very hesitant to provide information beyond what is included in those financial statements. There may well be liability implications related to such expanded disclosure. Nonetheless, the authors’ results and those in the PCAOB white papers suggest that what the PCAOB describes as the most significant change to the standard auditor’s report in more than 70 years may be accurate so far as changes to the report itself, but not so much in terms of significance to stakeholders.

Jian Zhang, PhD is a professor in the department of accounting and finance at the College of Business, San Jose State University, San Jose, Calif.
Kurt Pany, PhD is an emeritus professor in the school of accountancy at the W.P. Carey School of Business, Arizona State University, Tempe, Ariz.