New July 11, 2019, PCAOB CAM Guidance For Audit Committees – Is A Matter A CAM (See Chart); And Responses To FAQs

On July 11, 2019, the PCAOB published additional guidance for audit committees about CAMs (Critical Audit Matters). I have provided a link below to the additional guidance. From the additional guidance, I am also providing immediately below a snapshot to the PCAOB’s chart to help determine whether a matter is a CAM, plus four of the PCAOB’s responses to frequently asked questions that I found interesting. This is my fourth relatively recent post in which I have commented about CAMs.

Immediately below is a snapshot to the PCAOB’s chart to determine whether a matter is a CAM:

The following are snapshots of four of the PCAOB’s responses to frequently asked questions that I found to be interesting. While the responses are useful and helpful, I don’t find that they simplify the matter. The response in the first snapshot below also could be confusing – I expect that audit committees will want to have a significant role in, or at least significant input in or comments about, CAMs and certain specific CAMs and proposed CAMs in particular. Whereas the auditor might have ultimate say about how a CAM is worded (because it is the auditor’s report), I expect that audit committees will be directly involved in and vocal about whether or not a matter is a CAM, and how the CAM is communicated. And I expect that in some circumstances there might be or will be disagreement, at which point the audit committee, or the board, or the company might be put the position of having to evaluate whether to communicate or respond further about the CAM, and the manner of doing so.

The following are snapshots of four of the PCAOB’s responses to frequently asked questions that I found to be interesting:

Click on the following link to be taken to the PCAOB’s page with the new July 11, 2019, PCAOB guidance for audit committees about CAMs:

https://pcaobus.org/Documents/Audit-Committee-Resource-CAMs.pdf

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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D&O Compass/ISS – Trends in Director Skill Sets – Starting to Include culture/HR, CSR or ESG . . . Non-Financial Skills

I found the following interesting from D&O Compass, as reported by Institutional Shareholder Services, Inc. – perhaps desired director skill sets are including or starting to include culture or HR, corporate social responsibility or ESG, and other non-financial skills and backgrounds.

But I am a bit curious about one of the comments: “. . . there is an ongoing director-level shift away from ‘traditional’ skills such as financial expertise, audit expertise, and CEO experience.” I would argue, however, that financial expertise, audit expertise, and CEO experience also can relate and be pertinent to culture or HR, corporate social responsibility, and ESG.

In fact, as you might know from my other posts and materials, it is not uncommon for the audit committee to be delegated initial risk management oversight (although in my view overall oversight of risk management remains as a board responsibility), and it has been my view that culture, corporate social responsibility and ESG, including governance, offer potential opportunities for internal audit and external audit to provide new and enhanced value-added services that could be helpful to management including executive management, the board, and audit or risk committees, and that those services could also benefit the organization as a whole and the shareholders. Please excuse the less-than-fantastic quality of the D&O Compass materials, as that was the best that could be done. Best to you, David Tate, Esq., San Francisco/California.

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Remember, every case and situation is different. It is important to obtain and evaluate all of the evidence that is available, and to apply that evidence to the applicable standards and laws. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

The following are other summary materials that you might find useful:

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

From a prior blog post which you can find at https://wp.me/p75iWX-dk if the below scan is too difficult to read:

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New PCAOB Guidance Re Auditor Communications With Audit Committee Concerning Independence – These Are Serious Discussions That Require Careful Analysis And Decision Making

On May 31, 2019, the PCAOB Staff issued Guidance entitled “Rule 3526(b) Communications with Audit Committees Concerning Independence.” The Guidance is written to help auditors with communications pertaining to the auditor’s independence or lack thereof; however, audit committee members also need to know what to expect and require from the organization’s auditor. The Staff also states that its Guidance might be useful to investors.

The following is a link to the Staff Guidance https://pcaobus.org/Standards/Documents/Staff-Guidance-Rule-3526(b)-Communications-Audit-Committee-Concerning-Independence.pdf, and the following is a link to the Staff Guidance with yellow and green highlights that I added plus two short comments Staff-Guidance-Rule-3526(b)-Communications-Audit-Committee-Concerning-Independence with Tate highlights-2. I added yellow highlights to the auditor’s primary responsibilities, which audit committee members also need to know and understand, and I added green highlights to certain provisions that pertain more to specific audit committee member requirements and matters that may also pertain to SEC or legal considerations.

As you know, the auditor’s independence is a key prerequisite underlying the audit. An audit committee oversees the appropriateness and engagement of the auditor and the performance of the audit. An audit committee member needs to know that the auditor is independent, and needs to know that prior to auditor engagement, during the audit planning, and throughout the audit. As the Guidance indicates, even if the Rule 3526 requirements are satisfied, that does not necessarily mean that the SEC or that the PCAOB or that a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the auditor was capable of exercising objective and impartial judgment on all issues encompassed within the auditor’s engagement. Thus, depending on the circumstances, also consider whether consultation with the SEC or PCAOB is appropriate.

An audit committee member needs to discuss the auditor’s independence with the auditor, evaluate the auditor’s independence, and satisfy herself or himself that the auditor is appropriately independent (consider also, e.g., the business judgment rule). If an audit committee member has any concerns, uncertainties or unknowns, red flags, or doubts about the auditor’s independence, the committee member should consider seeking professional including legal help, advice and representation. Ultimately, the issue is whether under the circumstances it is appropriate to engage the auditor or to continue engaging the auditor, or to engage a new auditor.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

The following are copies of the tables of contents of three of the more formal materials that I have written over the years about accounting/auditing, audit committees, and related legal topics – Accounting and Its Legal Implications was my first formal effort, which resulted in a published book that had more of an accounting and auditing focus; Chapter 5A, Audit Committee Functions and Responsibilities, for the California Continuing Education of the Bar has a more legal focus; and the most recent Tate’s Excellent Audit Committee Guide (February 2017) also has a more legal focus:

Accounting and Its Legal Implications

Chapter 5A, Audit Committee Functions and Responsibilities, CEB Advising and Defending Corporate Directors and Officers

Tate’s Excellent Audit Committee Guide

 

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

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A Few Comments About Going Concern Uncertainties, CAMs, Etc.

I don’t hear or see much in the news about disclosures about an entity’s going concern, but I have a feeling that this is going to become a bigger issue for certain public companies, their boards and audit committees, and their auditors. Evaluating going concern is a complicated topic – thus, in this post I am highlighting one aspect, but an important aspect. See, FASB ASU No. 2014-15, and subsequent materials relating thereto. I suspect that most people would conclude that evaluating a potential issue relating to going concern involves, or depending on the circumstances could involve, especially challenging, subjective, or complex auditor judgment – thus, potentially raising critical audit matters or CAMs. Click on the following link  https://wp.me/p75iWX-fr for a prior summary post about CAMs. I digress here for one comment: in regard to CAMs, one might ask, for example, “When are the circumstances of an auditor’s judgment simply ‘challenging’ v. ‘especially challenging’”?

Going concern can generally be defined as an evaluation of the entity’s expected ability to continue as an ongoing viable going concern business entity within one year after the date that its financial statements are issued (or within one year after the date that the financial statements are available to be issued, when applicable). Thus, for example, obviously for some business entities it can become a question of liquidity or liquid assets v. rate of cash burn. For the purpose of this post, I am looking at this issue only from an accounting/auditing viewpoint. Many other issues can arise, such as, for example, possible shareholder, investor, and creditor rights, and possible officer, director, and shareholder or majority shareholder liability relating thereto.

Now to the single point of this post, ASU No. 2014-15 provides that when evaluating conditions and events as to whether there is substantial doubt about an entity’s ability to continue as a going concern, the “initial” evaluation does not take into consideration the potential effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, the initial evaluation might not take into consideration plans to raise capital, borrow money, restructure debt, or dispose of an asset, that have been approved but that have not been fully implemented as of the date that the financial statements are issued). Again, I digress for one comment: in the above discussion, consider, for example, how to evaluate when a matter is “approved” v. “fully implemented.”

Importantly, I note, however, that later in the going concern evaluation process, mitigating factors should be taken into consideration including, for example, the probability that management’s plans will be effectively implemented within one year after the date that the financial statements are issued, and the probability that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Thus, in the evaluation process there is a timing aspect to considering possible mitigating factors: first they are not considered, but subsequently they are considered including their probability of implementation and success. Obviously, the going concern evaluation can be or can become complicated.

With the development of CAMs, I am sensing that issues such as these will be discussed more in public and investor view.

Onward.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

I am also the new Chair of the Business Law Section of the Bar Association of San Francisco.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

 

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

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PCAOB – Implementation of Critical Audit Matters Deeper Dive

As I discussed in a prior post re critical audit matters (Click Here), external auditors are required to include a discussion of critical audit matters in their audit opinion reports for large accelerated filers for audits of fiscal years ending on or after June 30, 2019, and for other public companies for audits of fiscal years ending on or after December 31, 2020. I expect that CAMs and the wording of CAMs will in some instances present or cause contentions between the external auditor on the one hand, and the audit committee, board, and executive officers on the other hand.

A Critical Audit Matter or CAM is defined as:

Any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee: and that:

  1. Relates to accounts or disclosures that are material to the financial statements; and
  2. Involved especially challenging, subjective, or complex auditor judgment.

Thus, based on the above definition, simply determining whether a matter is a CAM could be a challenging issue.

For example, in any given audit situation consider:

-What matters were communicated, or were required to be communicated to the audit committee;

-Relating to accounts or disclosures that are material to the financial statements; and

-Involved especially challenging, subjective, or complex auditor judgment?

The PCAOB has issued a more detailed and worthwhile discussion about critical audit matters and the reporting requirements that is entitled Implementation of Critical Audit Matters Deeper Dive. To view the paper, Click Here

In some circumstances critical audit matters will now become important topics for discussion. The Implementation of Critical Audit Matters Deeper Dive paper also identifies many uncertainties that are yet to be resolved relating to CAMs. Indeed, CAMs are principles based, and likely will vary from auditor to auditor based in part on the auditor’s objective, or subjective, evaluation and judgment. I note that the PCAOB’s paper provides a worthwhile discussion and many examples that should be studied. And the PCAOB also notes twice in the paper that they expect that most audits will include at least one or more CAM. And it should also be noted that the existence of a CAM should not automatically be thought of as a negative or detrimental item – it all depends on the nature of the CAM and how it is worded, as not all CAMs are equal.

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

 

OVERVIEW OF A RISK MANAGEMENT PROCESS THAT YOU CAN USE 03162018

Audit Committee 5 Lines of Success, Diligence, and Defense - David Tate, Esq, 05052018

COSO Enterprise Risk Management Framework ERM Components and Principles

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Tate – Business Judgment Rule Slides

The business judgment rule provides a director with a defense to personal liability, holding that as a general principle of law, a director, including a director who serves as a member of a board committee, who satisfies the business judgment rule has satisfied his or her duties, standard of care, or responsibilities. Thus, the business judgment rule provides one standard of care, although other standards may very well also apply to specific tasks and responsibilities, or in different circumstances. The business judgment rule provides a standard, and a good overall approach, for directors and audit committee members to follow, although the rule is somewhat lacking in specific detail. In some states the business judgment rule is codified by statute while in other states the rule is established by case law (see, i.e., Cal. Corp. Code §309 for California corporations, Del. Gen. Corp. Law §141 for Delaware corporations, in addition to relevant case law). The rule also applies to directors as board committee members. The business judgment rule also simply makes sense.

Also note that in California the business judgment rule is separately codified at Cal. Corp. Code §5231 for nonprofit public benefit corporations, and at Cal. Corp. Code §7231 for nonprofit mutual benefit corporations, and although those sections are in many respects similar to Cal. Corp. Code §309, the differences can be important.

Click on the following link for my Business Judgment Rule Slides (presented in pdf format): The Business Judgment Rule Slides. The slides are presented in two parts – the first part is focused on the business judgment rule from a mostly legal perspective (slides 1-14), whereas the second part is focused on a non-legal less formal perspective (slides 15-23).

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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New April 2019, DOJ Evaluation of Corporate Compliance Programs – the word risk is used 49 times, the board 11 times, and the audit committee 2 times

I have provided below a link to the new 19-page, April 2019, DOJ Evaluation of Corporate Compliance Programs guidance. Obviously a tremendous number of law firms will be discussing and advising about this new guidance. I note that the term risk management is used only once in the document but the word risk or words associated with risk are used 49 times, board or board of directors are used 11 times, and audit committee is used twice. With respect to boards or boards of directors, and audit committees, the guidance is looking for oversight by a source that is autonomous from management, and for there to be a means to allow (or encourage) reporting to a source that is autonomous from management. But in that regard I note that autonomy from management can be a complicated issue as some board members might be involved in management, and other board members, although independent from management, might have conflicts or might not truly be independent such as because of relationships, or perceived alliances, influences, or pressures, or other possible situations.

Click on the following link for the Evaluation of Corporate Compliance Programs guidance: DOJ – Evaluation of Corporate Compliance Programs April 2019, 

Every case and situation is different. You do need to consult with an attorney and other professionals about your particular situation. This post is not a solicitation for legal or other services inside of or outside of California, and, of course, this post only is a summary of information that changes from time to time, and does not apply to any particular situation or to your specific situation. So . . . you cannot rely on this post for your situation or as legal or other professional advice or representation.

Thank you for reading this website. I ask that you also pass it along to other people who would be interested as it is through collaboration that great things and success occur more quickly.

Best to you, David Tate, Esq. (and inactive California CPA) – practicing in California only.

Blogs: Trust, estate/probate, power of attorney, conservatorship, elder and dependent adult abuse, nursing home and care, disability, discrimination, personal injury, responsibilities and rights, and other related litigation, and contentious administrations http://californiaestatetrust.com; Business, D&O, board, director, audit committee, shareholder, founder, owner, and investor litigation, governance, responsibilities and rights, compliance, investigations, and risk management  http://auditcommitteeupdate.com

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