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Over five years into the requirement to communicate Critical Audit Matters (CAMs) in audit reports (where has the time gone?!?), the Center for Audit Quality sought to better understand how institutional investors use CAMs and how well they understand them. Dan Goelzer’s Audit Update blog on this topic gives this explanation of CAMs as a reminder:

Under the PCAOB’s auditing standards, a CAM is any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: relates to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective, or complex auditor judgment.  The audit report must include a description of any CAMs and how the auditor addressed them in the audit.

CAQ engaged KRC Research to run an online survey in July of 100 US institutional investors. All survey respondents were at the director level or higher with at least 5 years of experience and employed at companies with a minimum of $500M in assets under management. The feedback was resoundingly positive.

– Nearly all (93%) investors surveyed indicated that they read the CAMs section in 10-Ks of companies they invest in or are researching, and 78% indicated that they do so often.
– 92% of respondents indicated that they use CAMs in their investment decision-making process.
– 93% said that, considering all the sources of information available to them, CAMs play a very important (53%) or somewhat important (40%) role in their analysis of potential investments.
– Additionally, nine in ten investors stated that they are very satisfied (48%) or somewhat satisfied (42%) with the quality and clarity of CAMs disclosed in most audit reports, with only 2% of respondents expressing dissatisfaction.

The few critics focused on the quality and clarity of CAMs — specifically that the language used to describe CAMs could be clearer. Despite the generally positive feedback, respondents did identify a number of other areas that could be improved:

– More than half (58%) of investors surveyed indicated that they prefer to see more CAMs identified in an auditor’s report; and when asked what changes to CAMs would benefit their investment decisions, approximately half of respondents shared that both increasing the number of CAMs (52%) and increasing the detail provided in CAMs (51%) would be beneficial.
– Twenty-five percent of respondents also felt that requiring CAMs related to specific audit areas would be advantageous, but there was no consensus regarding the specific areas in which required subject matter specific CAMs were desired.

– Meredith Ervine