If you’ve ever skimmed through an auditor’s report for a public company, you might have stumbled upon a section labeled "Critical Audit Matters" (CAMs). At first glance, it sounds like alarm bells should be ringing. But before you worry that something has gone wrong, it’s important to understand what this term actually means.
CAMs aren't necessarily signs of trouble. Instead, they highlight the complex, high-judgment areas of a business's finances—the parts that require the most brainpower to get right. Whether you run a public corporation or a private entity eyeing future growth, understanding these audit risks is a strategic move. It helps you prepare for mergers, attract investment, and simply understand where your financial reporting risks lie.
Let’s break down the basics of CAMs and why they matter to your bottom line.
The Public Company Accounting Oversight Board (PCAOB) introduced these requirements under Auditing Standard (AS) 3101. In plain English, a Critical Audit Matter is any issue arising from the audit of financial statements that meets three specific criteria:
Think of CAMs as the "hard parts" of the audit. They highlight areas where the numbers weren't just black and white, but required estimates, assumptions, or sophisticated accounting treatments.
Crucially, CAMs are not errors, red flags, or signs of wrongdoing. They don't mean the financial statements are incorrect. They simply provide transparency, showing investors and stakeholders which areas of the financial report required significant professional judgment to verify.
While the guidance doesn't give a strict list of what must be a CAM, certain areas of accounting frequently pop up because they naturally involve more estimation and complexity.
Auditors must identify the CAM, explain why they selected it, and back it up with relevant financial data. Common issues include:
Technically, CAMs are a requirement for public company audits, not private ones. Public auditors began reporting these in 2019 to give shareholders more insight than the traditional pass/fail audit opinion.
However, just because you’re private doesn’t mean you should ignore the concept.
The underlying risks that create CAMs—like complex revenue models or hard-to-value assets—exist in private companies too. Your auditor is likely already evaluating these risks, even if they aren't slapping a "CAM" label on them in the final report.
Under standards set by the American Institute of Certified Public Accountants (AICPA), auditors still communicate significant risks and judgment-heavy areas to private business owners. You might hear about them in planning meetings or find them in management letters as recommendations for better internal controls.
Understanding CAMs is particularly vital if you have ambitious plans for your business. If you are considering:
...then CAM-type issues will almost certainly come up. Sophisticated investors and public partners will want to know about your high-judgment financial areas. Being proactive about these risks shows you have a handle on your financial strategy.
Ultimately, CAMs serve as a roadmap. They point out the twists and turns in your financial reporting where processes might need extra attention. This is especially true during periods of economic uncertainty or major business transactions.
At SD Mayer & Associates, we believe in looking beyond the spreadsheet. We don't just identify risks; we help you manage them so you can focus on growth. If you want to understand how these auditing concepts apply to your specific business model, or if you're preparing for a major transition, we’re here to help.
Don't let complex accounting standards slow down your growth. Contact us today to explore the risk management issues affecting your business—and how you can stay ahead of them.