March 20, 2019

CAMs: PCAOB Staff Releases New Guidance

CAMs, CAMs, CAMs, CAMs, Lovely CAMs, Wonderful CAMs!” That was John’s “Monty Python” reaction to this trio of guidance documents released on Monday by the PCAOB Staff:

CAM Basics – a high-level overview of the required “CAM language” that will be added to auditors’ reports, and the quality review & documentation requirements for CAMs

Determination of CAMs – FAQs on how to identify CAMs, e.g. how they differ from the company’s critical accounting estimates

Review of Audit Methodologies – observations based on a review of audit firms’ “dry run” CAM methodologies, training materials & practice aids

The guidance is based on the PCAOB’s discussions with audit firms that collectively audit 85% of large accelerated filers, as well as other outreach efforts. All three documents emphasize the company-specific nature of CAMs and related reporting, the broad scope of information that auditors will look at to identify and address CAMs, and the role of the auditor versus the audit committee & management. Here’s a few nuggets:

– CAMs are drawn from matters required to be communicated to the audit committee — even if not actually communicated — and matters actually communicated — even if not required. The standard does not exclude any required audit committee communications from the source of CAMs.

– When identifying CAMs, AS 3101 requires auditors to consider the six factors in the standard as well as other factors specific to the audit

– Descriptions of CAMs – and how they were addressed – are required to be specific to the circumstances – i.e. auditors can’t just restate that they identified “a matter involving especially challenging, subjective or complex auditor judgment,” or generically say they tested internal controls to address the CAM

– Auditors aren’t expected to provide non-public information in their report unless it’s “necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM or how the matter was addressed in the audit” – and “public information” includes press releases, etc. – not just financials

– Although audit committees are entitled to a draft of the auditor’s report and a dialogue about CAMs (and any sensitive information) is expected, CAMs are the responsibility of the auditor, not the audit committee

Auditor Ratification: Tenure Not a Factor for ISS?

This memo from EY/Tapestry Networks summarizes a meeting among audit committee chairs & ISS to discuss potential changes to the factors considered by the proxy advisor for its voting recommendations on auditor committee matters, including auditor ratification. While ISS isn’t making immediate policy changes, it’s trying to understand whether financial reporting shortcomings share red flags that signal a relationship should be reconsidered. Audit chairs cautioned against a more formulaic approach. On the topic of tenure, this dialogue occurred:

While audit firm tenure is one possible factor in evaluating auditor independence, members were cautious about proxy advisory firms using this metric as well. Several members noted that auditor tenure is an ineffective data point that further limits competition and a company’s ability to select the best firm. Others emphasized the difficulty of changing audit firms: “There’s turmoil when you change auditors; these are massive projects.” On the issue of partner tenure, members generally agreed that the current five-year rotation requirement in the United States should make this a non-issue.

Mr. Goldstein agreed on both auditor and partner tenure: “We don’t expect to use tenure in our guidelines. Partner rotation already exists.” Mr. Goldstein sought to reassure the audit chairs by describing the factors ISS considered in making a recommendation against the ratification of KPMG as GE’s external auditor. “Long tenure as GE’s auditor was not a reason for our recommendation,” said Mr. Goldstein. “KPMG had given GE a clean bill of health for many years, and then there was a surprising large write-off related to their legacy long-term care insurance business, followed by an SEC investigation. There were other concerns and enough questions for us to take what, for us, was a radical position.” Mr. Goldstein elaborated that part of ISS’s concerns in the GE case stemmed from the criticism of KPMG’s work as the auditor of Carillion. Members again cautioned that ISS be careful before connecting a firm’s performance on one audit in a particular country with its work on another audit in another country.

Transcript: “How to Use Cryptocurrency as Compensation”

We’ve posted the transcript for the recent webcast: “How to Use Cryptocurrency as Compensation.” The agenda included:

1. Defining “Cryptocurrency”
2. Securities Implications
3. Tax Implications
4. Accounting Implications
5. Other Applicable Regulations
6. Why Digital Assets Are Attractive To Entrepreneurs
7. Types of Crypto Compensation Structures
8. Drafting Issues For Plans & Awards
9. Token Plan Administration
10. When Using Crypto Doesn’t Make Sense

Liz Dunshee