Can COVID-19 be a Critical Audit Matter?

By: Matt Sickmiller, Senior Manager, Professional Practice

Starting in the summer of 2019 auditors began adding critical audit matters (CAM) to their audit reports for large accelerated filers. Since the finalization of the new requirements the PCAOB, audit firms, and we at the Center for Audit Quality (CAQ) have prepared numerous publications about what CAMs are, who will be required to phase CAMs in, and how a CAM is defined. As a quick refresher, in order to be a CAM, a matter must be communicated or required to be communicated to the audit committee, relate specifically to accounts or disclosures that are material to the financial statements, and involve especially challenging, subjective, or complex auditor judgment.

Along came 2020 and the COVID-19 pandemic. Given the pervasive economic impact of dealing with the pandemic, audit committees and other stakeholders have been asking a common question; can COVID-19 be considered a CAM? The short answer in “no,” but that doesn’t mean COVID-19 hasn’t and won’t pop up in CAM communications.

While COVID-19 in and of itself, would not necessarily meet the definition of a CAM, the pandemic could increase the subjectivity and complexity of a specific account or disclosure such that it is a principal consideration for a matter being a CAM. In addition, the impact of COVID-19 also could result in CAMs that were previously identified and communicated in the auditor’s report to have new principal considerations for why a matter was especially challenging or complex.

At the CAQ, we recently released an analysis of CAMs communicated by the auditors of the S&P 100 in the resource, Critical Audit Matters: A Year in Review. To explore the COVID-19 impact we expanded our initial analysis of the S&P 100 to include COVID-19 considerations. To do this, we scanned the annual financial statements and auditor’s reports (we specifically narrowed our search to Item 8. Financial Statements and Supplementary Data of SEC Form 10-K) of S&P 100 companies that were issued after the World Health Organization declared COVID-19 a pandemic in March.

• To date, we observed that approximately 11 S&P 100 companies mentioned COVID-19 somewhere in the notes to the financial statements.
• Additionally, we found that there were two companies in the S&P 100 where the auditor’s report mentioned COVID-19 in describing principal considerations for why a matter was a CAM. In each case, the CAM related to goodwill and intangible assets, and the auditors described the impact of the economic environment and COVID-19 as principal considerations.

Expanding our search beyond S&P 100 companies, we identified only a handful of auditor’s reports that mention COVID-19 in their CAM communications. Two related to goodwill balances, two related to credit loss estimates, and one pertains to a going concern disclosure.

Looking ahead to calendar year end company reporting we would expect these trends to continue. The pandemic will potentially impact certain company accounts and disclosures, which could in turn impact the auditor's description of the principal considerations for a matter being a CAM.

Dennis McGowan and Catherine Ide of the CAQ contributed to this publication