February 4, 2020

CAMs vs. Critical Accounting Estimates: What’s the Difference?

This memo from the Journal of Accountancy gives me LSAT flashbacks. Based on remarks from an SEC Professional Accounting Fellow, it explains that while critical audit matters tend to be a subset of critical accounting estimates, some CAMs have not been reported as critical accounting estimates by management. Here’s an excerpt:

For example, one auditor reported that evaluation of the identification of related parties and related-party transactions was a critical audit matter, but there wasn’t a critical accounting estimate related to that topic.

Sometimes, Collins said, an auditor identifies a critical audit matter that is a component of a related critical accounting estimate. For example, one critical audit matter related to a goodwill impairment analysis for a specific reporting unit that was considered at risk for impairment. Management’s critical accounting estimate, meanwhile, related to goodwill impairment more broadly.

The memo also quotes SEC Deputy Chief Accountant Marc Panucci as urging auditors and companies to approach critical audit matters as a blank sheet of paper each year. Often, they might end up being the same from year to year, but auditors won’t know that until they’ve considered the facts & circumstances of each each individual audit.

Disclosure Reform: Are ESG Risks “Material”?

Over the past couple of years, the SEC has taken a few small steps toward “disclosure reform” – with its 2018 “Disclosure Update & Simplification” and 2019 “Fast Act Modernization” amendments – as well as with its more recent proposal to modernize Items 101, 103 and 105 of Reg S-K. Although the most recent proposal drew thousands of comments – including from Big Yoga! – none of the recent or anticipated rule changes would overhaul ESG risk disclosure in the way that some investors say they want.

One of the main objections to even considering rules on this topic is that the info wouldn’t be material. To get a sense of who shares that view, a recent study published in the Villanova Law Review takes a closer look at the comment letters submitted in response to the SEC’s 2016 Concept Release – apparently there were 25,000 comments but only 375 “unique” responses. Here’s an excerpt:

The findings here confirm that concerns about investors’ disclosure overload are overblown and indeed, outdated. While many investors support some streamlining of risk-related disclosure, most investor comments focus on the under-disclosure of material information, not the reverse.

The empirical results discussed in Part III below confirm that respondents’ support for, or opposition to, ESG disclosure reform has less to do with ESG and more to do with their underlying views on materiality, the value of prescriptive disclosure, and how satisfied they are with the current state of reporting.

At the same time, this study also finds a surprising level of agreement among respondents on a number of the SEC’s proposals to simplify risk-related disclosures, particularly with regard to market risk disclosures and MD&A.

What I found refreshing was that the study confirmed the SEC, investors and business community all agreed that risk disclosures are extensive but frequently generic and boilerplate – and there was general agreement for more principles-based disclosure. The study provides another entry point for conversations about ESG risk disclosure – e.g., consideration needs to be given to not only increased compliance costs that companies would incur with expanded disclosure but also costs to investors of under-disclosing material ESG information.

Tomorrow’s Webcast: “Conflict Minerals – Tackling Your Next Form SD”

Join us tomorrow for the webcast – “Conflict Minerals: Tackling Your Next Form SD” – to hear our own Dave Lynn of Morrison & Foerster, Ropes & Gray’s Michael Littenberg, Lawrence Heim of the Responsible Minerals Initiative and Deloitte’s Christine Robinson discuss what you should now be considering as you prepare this year’s Form SD.

Lynn Jokela