Most Investors Want Critical Asset Matters

Federal rulemakers are requiring more transparency and detail in companies’ audits. Turns out all that extra detail is exactly what investors want.

Ninety-three percent of investors want to analyze critical asset matters (CAMs) before potentially investing, according to a survey conducted by KRC Research on behalf of the Center for Audit Quality. (Caveat: Just 100 venture capitalists were surveyed.)

CAMs are essentially the “cutting room floor” minutiae that didn’t make their way into audits — until the Public Company Accounting Oversight Board (PCAOB) required them for certain audits beginning in 2020. The overly broad definition is “matters arising from an audit of financial statements that was communicated or required to be communicated to the audit committee, and involved especially challenging, subjective or complex auditor judgment.”

The top five examples of when CAMs impacted investors’ decisions were:

1. valuation of assets/goodwill appraisal/intangible assets evaluation
2. financial statement/occurrence of financial misstatements
3. revenue recognition
4. compliance issues/fraud, and
5. management estimates/judgement.

Critical Asset Matters Rank High for Investors

Investors would prefer to see CAMs expanded rather than reduced. About half of respondents say that “either increasing the number of CAMs or increasing the detail provided in CAMs would be beneficial for their investment decisions.”

Some investors are complaining to PCAOB that CAM disclosures often aren’t useful. CAM disclosures “are full of boilerplate language as if auditors treat the reporting as another compliance exercise,” according to Thomson Reuters. The board put the complaints on its research agenda last fall and should address the matter (bad pun intended) soon.

Bottom line: Organizations in search of funding need to open their books wide. Audits that don’t provide relevant info on how decisions are made may not be worth the time and money put into producing them if they make investors wary.

In related news: The Securities & Exchange Commission just approved PCAOB guidelines for auditors. Accounting firms will soon have just 14 days to report after concluding an audit instead of the current deadline of 45 days. And employees of accounting firms can be held liable if they “negligently, directly and substantially contribute to [SEC reporting] violations.”