Internal and external audit teams alike have entered a brave new world in the last year or so, as critical audit matters (CAMs) arrived as items to be included in the external auditor's report. Now comes a crucial question: Will CAMs be an asteroid that slams into the annual audit process--or just a meteor shower that breaks up in the atmosphere?
CAMs are disclosures audit firms make in their audit report, to tell investors what the audit firm deems the most important accounting issues at the company. CAMs involve line items material to the business, and typically their issues will fall into one of two categories. Either the CAM will have weak controls that need attention; or it will be an item that involves subjective, complex judgment no matter how good or bad the controls are.
So far, only large accelerated filers have implemented CAMs, starting with companies whose fiscal years ended on or after June 30, 2019. All other companies will implement CAMs starting at the end of this year.
One school of thought is that despite all the angst that surrounded the development of CAM requirements in the 2010s, the inclusion of CAMs in the audit report won't do much more than memorialize the same conversations that audit firms and internal audit functions have had for years. But will the process to reach those decisions be substantively different?
"No, not at all," says Brian Tremblay, until recently the head of internal audit at Acacia Communications in suburban Boston. Critical audit matters, he says, are simply where audit firms devote most of their time and attention during the audit. That won't change just because those issues are now written into the audit report.
Tremblay's observation gets at a subtle but important point: what the word "critical" really means here. It does not mean that some accounting process is deeply amiss, like a patient in the critical care unit. It only means that the accounting issue is important, in the way that a solid foundation is critical to a whole house.
Now, can that foundation be a rickety mess that threatens the whole structure? Sure. So conversations ensue about how to repair the foundation as necessary. Conversations with audit firms about significant deficiencies or material weaknesses are no different.
"If we were not discussing those things before, we would have been incompetent in our jobs," says Jan Babiak, chair of the audit committee at Walgreens Boots Alliance. She has served on boards where CAMs...