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Frequently Asked Questions
  Communicating Critical Audit Matter Disclosures to Investors
Identification Number 1698
Clearhouse
Communicating Critical Audit Matter Disclosures to Investors
Publication Date: July 09, 2019 

Julie Bell Lindsay is the Executive Director of the Center for Audit Quality (CAQ).

Starting this summer, auditors of large public companies will be required to communicate critical audit matters (CAMs) in their auditor’s reports. Investors with questions about CAMs may turn to a company’s investor relations (IR) group for answers.

To help inform IR professionals as they prepare for those conversations, the CAQ has developed this list of frequently asked questions about CAMs. While this list is not intended to be exhaustive, it may be especially helpful during the initial phase of CAM reporting. 

What is a CAM?

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. According to the applicable auditing standard, the matter must also be one that (1) relates to accounts or disclosures that are material to the financial statements, and (2) involved especially challenging, subjective, or complex auditor judgment.

Where will CAMs be communicated?

Auditors are required to communicate CAMs. Thus, CAMs will be communicated in the auditor’s report on the company’s audited financial statements. There is no prescriptive way to order the CAM communications within the CAM section of the auditor’s report; CAMs could be presented to align with the order of the financial statement presentation, the order of relative importance, or some other way.

Do CAMs reflect something positive or negative?

CAMs are additional information about the specific audit and are neither inherently positive nor negative. Investors should evaluate information communicated in CAMs in light of all information available from the company regarding the company's business and should keep in mind that CAMs are reported in the context of the auditor’s overall opinion on the current-year financial statements. The communication of CAMs does not alter in any way the auditor’s opinion on the consolidated financial statements, taken as a whole. Likewise, the auditor is not, by communicating the CAMs, providing separate opinions on the CAMs or on the accounts or disclosures to which they relate.

Will CAMs be consistent from company to company?

Not necessarily, for several reasons:

  • The requirements for determining CAMs are principles based, not prescriptive. Thus, the requirements will be applied in the context of the facts and circumstances of each specific audit.
  • The auditor’s judgment and the extent of audit procedures performed in each specific audit will influence the determination of CAMs.
  • The determination of CAMs is made each year in connection with the current-period audit. Some CAMs may occur annually, while others may appear in a single period or intermittently.

Because each audit is unique, variation may occur in the matters that are CAMs at companies within and across industries and year to year. Thus, it is inadvisable for investors or others to make assumptions as to why a company has a different number and/or type of CAM than another company.

How many matters likely will be CAMs?

The number of matters that are communicated as CAMs will depend on factors such as the complexity of the company’s financial reporting and the company’s business activities. While the standard contemplates circumstances in which the auditor may not identify any CAMs, it is expected that, in most audits, the auditor would determine at least one matter is a CAM.

Will there be a CAM for every critical accounting estimate disclosed by management?

This will depend on the facts and circumstances of each audit. Not every critical accounting estimate necessarily involves especially challenging, subjective, or complex auditor judgment. The source of CAMs is also broader than just critical accounting estimates; therefore, the auditor may identify CAMs in areas that are not disclosed by management as critical accounting estimates. For example, significant or nonrecurring transactions may often be CAMs.

What types of matters likely will be CAMs?

The more common CAMs likely will be in those areas involving high degrees of estimation uncertainty and that require significant management judgment. Such matters, in turn, usually involve especially challenging, subjective, or complex auditor judgment. Examples of the latter include auditing the following:

  • Goodwill impairment
  • Intangible asset impairment
  • Business combinations
  • Aspects of revenue recognition
  • Income taxes
  • Legal contingencies
  • Hard-to-fair-value financial instruments

How will investors use CAMs?

CAMs represent an opportunity for investors to gain insights about areas of the audit that involved especially challenging, subjective, or complex auditor judgment. As the PCAOB has stated, “In the view of some investors, CAMs will add to the total mix of information, providing insights relevant in analyzing and pricing risks in capital valuation and allocation, and contributing to their ability to make investment decisions.”

What other steps should I, as an IR professional, be taking on CAMs?

Communication is the key to preparing for the communication of CAMs in auditor’s reports. Coordinate early and often internally within your company—and externally with your auditors—to understand the matters that may be CAMs, the reason such matters may be CAMs, and how CAMs are addressed in the audit. Understanding the CAMs requirements and undertaking close coordination should help prepare you for potential questions from investors.

Where can I find more information?

Please refer to the Center for Audit Quality’s collection of resources for more information on CAMs. Additionally, see the PCAOB’s new auditor’s report implementation page for resources on CAM requirements.

The Center for Audit Quality (CAQ) is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high-quality performance by public company auditors; convenes and collaborates with other stakeholders to advance the discussion of critical issues that require action and intervention; and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs.

***

The views and opinions expressed herein are the views and opinions of the authors at the time of publication and may not be updated. They do not necessarily reflect those of Nasdaq, Inc. The content does not attempt to examine all the facts and circumstances which may be relevant to any particular company, industry or security mentioned herein and nothing contained herein should be construed as legal or investment advice. 
Publication Date*: 7/9/2019 Mailto Link Identification Number: 1698
Frequently Asked Questions
  Enhancing Transparency in Regulation
Identification Number 1480
Clearhouse
Enhancing Transparency in Regulation
Publication Date: January 10, 2018 

At Nasdaq, we believe transparency of our Listing Rules, policies and procedures results in fairer and more effective regulation. To this end, in 2012, Nasdaq created the Listing Center's Reference Library, which today houses more than 400 frequently asked questions about listing matters, 100 anonymized versions of appellate listing decisions and 350 written Staff interpretations of the Listing Rules. To reinforce the critical role transparency plays in our regulatory program, we continue to develop and enhance the utility of our Listing Center's Reference Library website and expand the information available through this free web portal.

It is with this in mind that Nasdaq Staff, in conjunction with the Nasdaq Listing Hearing and Review Council, developed the Listing Qualifications Transparency Report. This report includes anonymized information regarding the facts and circumstances that prompted Listing Qualifications Staff and Hearings Panels to exercise the discretion afforded by the Listing Rules to impose additional or more stringent criteria or to shorten time frames otherwise available to companies. It also describes instances when, following Listing Qualifications Staff review of certain share issuances, listed companies made significant changes to their transactions. We believe that sharing this information helps companies better understand how Nasdaq applies its listing rules, which helps companies and their advisors better comply with those rules. It is our expectation that we will prepare this report annually. We look forward to your comments, which can be emailed to us at staffinterpretations@nasdaq.com.

View the Transparency Report Here >>
Publication Date*: 1/10/2018 Mailto Link Identification Number: 1480
Frequently Asked Questions
  It’s Time for Companies to Improve Board Diversity Disclosure
Identification Number 1304
It’s Time for Companies to Improve Board Diversity Disclosure
Publication Date: January 12, 2017

In this post on the National Association of Corporate Directors’ Board Leader’s Blog, Nasdaq highlights its research, which indicates that many companies have a compelling story to tell about their board composition and diversity of age, gender, race, and skill sets. As companies prepare for the upcoming proxy season, Nasdaq encourages them to consider some simple disclosure enhancements that will increase the transparency around their diversity, including disclosing not only a board member’s gender and age, but also their ethnicity, skills, and experience.

Read More >>
Publication Date*: 1/12/2017 Mailto Link Identification Number: 1304
Frequently Asked Questions
  Hidden Director Conflicts Should Be Disclosed to Investors by Edward Knight
Identification Number 1214
Clearhouse
Hidden Director Conflicts Should Be Disclosed to Investors by Edward Knight
Publication Date: June 16, 2016

This article was originally published by Institutional Investor on June 16, 2016.
 
Shareholder campaigns aimed at radically reshaping corporate policy and governance — and extracting short-term profits at the expense of long-term value creation — are once again in the news. Many think they are a recent phenomenon. But that’s not the case.

In 1986 vaunted management consultant Peter Drucker lambasted short-termism in an editorial in the Wall Street Journal, declaring, “Everyone who has worked with American managements can testify that the need to satisfy the pension fund manager’s quest for higher earnings next quarter, together with the panicky fear of the raider, constantly pushes top managements toward decisions they know to be costly, if not suicidal, mistakes.”

And the evidence today — the intense focus on quarterly earnings, diminishing capital investment by U.S. corporations, shrinking CEO tenure and, according to Ana Avramovic, director of trading strategy at Credit Suisse in New York, falling average holding period for shareholders to 17 weeks, among other things — continues to demonstrate a push toward decisions that can be costly for shareholders.

This situation is potentially calamitous. Short-termism, often driven by activists, can have grave implications for corporations, for our economy and sometimes for society overall. Innovation, discovery and hiring are curtailed when R&D projects are put on hold or canceled because of short-term pressures. Halted development undermines long-term U.S. competitiveness, to say nothing of potentially postponing lifesaving medicines or cutting-edge technologies from reaching the public. Short-termism also leads to mispricing, misallocation of assets and a lack of reliable information about long-term prospects. But because activists are shareholders, this dynamic puts corporate leadership in a bind. Nobody will disagree that a diverse pool of investors is a goal of any business and that none should be turned away.

Some activist groups today do claim they are in it for the long haul, bringing ideas, questions and concerns to the attention of corporate boards and management, which is an essential part of any healthy relationship between a company and its shareholders. Beyond this engagement by some, however, a movement is afoot in which some board members are paid directly by activist investors, often based on benchmarks such as an increase in share price over a fixed term.

This relation is the case with two directors on Dow Chemical Co.’s board who have a special compensation arrangement with hedge fund firm Third Point, which agreed to pay them stock appreciation rights that increase in value as Dow stock increases in price. At the very least, it is unclear how this director incentive-compensation arrangement does not establish an explicit obligation to Third Point at the expense of other shareholders, lead to conflicts on the board that skew the alignment of interests with shareholders and undercut the fundamental board responsibility to oversee management in the best interests of all shareholders. The question also arises as to whether these payments incentivize risky behavior by the very body that is responsible for ensuring that executive compensation does not do so.

So, in view of such an arrangement, how do we help ensure the healthy functioning of boards without compromising the role of shareholders?

We believe one way is to require transparency around these special compensation arrangements. Full disclosure would shed light on the conflicts of interest generated by these arrangements, steer the focus away from short-term results and benefit investors by providing information useful for their investment and voting decisions.

That’s why, earlier this year, Nasdaq filed a proposal with the Securities and Exchange Commission that calls for Nasdaq-listed companies to disclose “all agreements and arrangements between any director or nominee and any person or entity ... that provide for compensation or other payment in connection with that person’s candidacy or service as a director.” Where disclosure is required, the public company would need to identify the parties and material terms of the agreement or arrangement. This proposal is simple to enact, practical and in the best interests of shareholders and corporations alike.

Activist investors have woven themselves into the fabric of corporate dynamics, with mixed results. They do have a positive and important role to play. Boards and management must be challenged by shareholders so they can continue to develop better companies. Drucker recognized this dynamic when he wrote that the manager’s job is to “keep his nose to the grindstone while lifting his eyes to the hills.”

One way to strengthen the healthy symbiosis of checks and balances between corporate leadership and shareholders is to disclose third-party payments to board members. This openness would have a mutually beneficial long-term focus. If these hidden conflicts of interest are brought into the light, we can keep our eyes on the hills and write a chapter in our capitalist story that takes a positive turn.
Publication Date*: 6/16/2016 Mailto Link Identification Number: 1214
Frequently Asked Questions
  Building Investors' Trust through Transparency
Identification Number 1157
Clearhouse
Building Investors' Trust through Transparency
Publication Date: March 29, 2016 

Transparency around the composition and qualifications of a board builds trust, as it helps investors evaluate the board’s independence and potential effectiveness.  With this in mind, Nasdaq took a close look at the board composition disclosure in our recently filed 2016 Proxy Statement to ensure that our presentation reflected important emerging trends in disclosure and could serve as a roadmap for our listed companies as they drafted their proxies.  It is in this spirit that we expanded our board disclosure to include:  

  • A board skills matrix, identifying the skills, knowledge, experience and capabilities of each director most relevant to help the board meet both current and future challenges.
  • A director qualifications analysis, detailing the tenure, age and skills of board members and illustrating the cognitive diversity of the board, with a range of experience, knowledge and perspectives.
Nasdaq also provided enhanced discussion of board, committee and individual performance assessments throughout the proxy, explaining the mechanics of how the board evaluation process is conducted and utilized. 
Publication Date*: 3/29/2016 Mailto Link Identification Number: 1157
Frequently Asked Questions
  Why CEO Succession Planning Disclosure Matters
Identification Number 1158
Clearhouse
Why CEO Succession Planning Disclosure Matters
Publication Date: March 9, 2016

CEO succession planning is one of the most important responsibilities of a corporate board. Institutional investors--BlackRock, CalPERs, and CalSTRs among them--are calling for robust disclosure of CEO succession planning in their corporate governance policies. Shareholders submit proxy proposals on the issue. But does CEO succession planning disclosure make a difference in the success or failure of a company in transitioning to a new CEO?

According to Does CEO Succession Planning Disclosure Matter, a new study by the Investor Responsibility Research Center Institute, it does. Companies that successfully execute CEO transitions are far more likely to have disclosed CEO transition plans to shareholders. On the other hand, 63% of companies that did not execute a successful transition provided little or no disclosure. The report also reveals that while such disclosure is increasing, it is overall lacking among the majority of companies surveyed.

Among the key findings of the report were the following:

  • 24%of the issuers surveyed provided no disclosure regarding succession planning in the two year period prior to the CEO change.
  • When disclosure was provided, it was relatively poor: just over half the issuers surveyed disclosed who had responsibility for the succession planning, 10%disclosed how often the board reviewed succession planning, and 2% of issuers described the board’s process for identifying CEO candidates.
  • Less than one in ten companies surveyed mentioned the existence of an emergency plan for replacing a CEO, for example in the event of death or incapacitation.
Also of interest was that 20% of companies executing transitions had to replace the new CEO within a two year period. Of those companies, 48% of the CEOs resigned.

 Read more >>
Publication Date*: 4/20/2016 Mailto Link Identification Number: 1158
Frequently Asked Questions
  Nasdaq Companies Recognized for Outstanding Proxy Disclosure
Identification Number 1159
Spotlight Promo
Nasdaq Companies Recognized for Outstanding Proxy Disclosure
Publication Date: July 30, 2015

TheCorporateCounsel.net just announced the results of its first annual Proxy Disclosure Awards and a number of Nasdaq issuers were among those recognized. These proxy statements help illustrate that innovation in content and formatting can certainly improve readability for stockholders. Use this list to get some great ideas for your next proxy!




See a list of all the winners by category here >
Publication Date*: 7/30/2015 Mailto Link Identification Number: 1159
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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