Changes in Audit Reports

Nicholas J Price
5 min read

In such a world of vast technological change, audit reports have undergone virtually little change over the last couple of decades. It’s a clear area where investors have expressed their displeasure. Investors are looking for new and innovative ways to assess the financial health of the companies that they want to do business with. Their wish is about to come true.

New changes will be coming this year that are designed to help investors get access to more insightful information from auditors so they can make better decisions about the types of companies they invest in.

Audit reports in the United States will soon be required to be long-form with the introduction of Critical Audit Matter, which is better known as CAM. Investors hope that the changes will bring them an opportunity for enhanced disclosures. Their hope is that the changes will give them a better way to benchmark companies against one another using the same parameters for each of them.

New Changes in Audit Reports in 2019

New changes are coming in audit reports in 2019. Financial experts are saying that these changes will mark the largest reform in the last several decades.

The Public Company Accounting Oversight Board adopted the changes because investors have been asking for information that’s informative, clear, comprehensive and understandable.

The changes will require companies to expand any audit reports they release after June 30, 2019. The premise behind the changes is to provide investors with more information about complex financial accounting statistics. The new requirements for reporting will also clarify the steps that auditors took to ensure the information is correct.

The Introduction of Critical Audit Matters

The first rules to standardize audit reports came during the 1940s. While the financial markets have undergone substantial change since then, the audit reports have continued to consist of little more than a long boilerplate in fine print and buried in an obscure location within the report. Critical Audit Matter is a game-changing requirement that significantly changes how auditors communicate with investors.

According to Deloitte’s Dave Sullivan, national managing partner for quality and professional practice, “It’s the first really big shift in how the auditor speaks with the investing public in 70 years.”

Other investors are equally hopeful about the potential impact of CAM. The hope is that enhanced transparency will promote trust between investors and auditors.

Cindy Fornelli, executive director for the Center for Audit Quality, asserts that CAM will retain the current pass-fail audit model and won’t change how auditors do their work. Fornelli continues by explaining that investors have appreciated that they could rely on past financial statements to be reliable, but they wanted more insight from what the auditors were actually seeing on their end.

What’s in CAM?

At its heart, CAM reports must meet three criteria that consist of the following:

  1. New audit reports should only detail critical audit matters that emerged from communications between the auditor and the audit committee.
  2. Audit reports must be particularly complex or unusual.
  3. Audit reports must be materially related to the financial statement.

According to Bloomberg, the early test runs for CAMs pertained to areas that involved subjective estimates and complex accounting procedures. Such areas included:

  • Goodwill impairment
  • Intangible-asset impairment
  • Business combinations
  • Revenue recognition
  • Fair value of financial instruments

In preparation for the changes, many audit firms have been running somewhat of a dress rehearsal for the last year to ensure that companies are prepared for the upcoming changes. The information in the new audit reports reflect things that investors would normally be speaking with audit committees about and which will be solidified in writing moving forward.

What Boards and Auditors Can Expect with CAM

The new and enhanced auditor reports will offer a slightly different view of what investors will see disclosed in the financial statements. Investors can expect several more pages in the audit report.

One of the concerns about the new reporting measures is that investors may take the information in CAM out of context or use it as a means for challenging issues legally. Investors should take into account that CAM is a new requirement that will likely evolve and change somewhat as it moves forward and attempts to prove its worth.

Some experts believe that the greatest difficulty will be in relating CAM to the rest of the financial statement. Auditors were greatly challenged by explaining the thousands of hours they spent testing in ways that give investors the comfort level that they’re seeking. In the end, auditors were tasked with beefing up disclosures to make them more meaningful and reviewing footnotes to ensure everything is in alignment.

Every once in a while, it’s a good idea to get back to basics. CAM will provide companies with an opportunity to review their critical accounting estimates and how they arrived at them. In reviewing their accounting practices and principles, it sets the stage for better communications with auditors for how they can work together to produce clear and useful information. Overall, CAM should ultimately improve transparency, which should yield additional insightful results about better audit quality and good corporate governance.

Using Modern Governance Tools in Anticipation of CAM

In anticipation of CAM, boards of directors will need to look at digital solutions that enable them to have secure communications and file-sharing processes that are also highly mobile for their board directors. Diligent Messenger and Diligent Boards are the primary tools that provide a confidential online workspace to ensure readiness for the new requirements that CAM entails. Diligent provides an additional suite of valuable governance solutions with Governance Cloud to manage every aspect of good corporate governance.

As with anything new, the jury is out as to how investors will ultimately view the results of the new audit report regulations. The initial expectations are that CAM will create a positive impact for investors and companies. Diligent Corporation keeps a pulse on audit practices and will continue to innovate enterprise governance solutions to support corporate boards and the financial community in response to today’s needs and those of the future.