Critical Audit Matters Disclosure: A Practitioner's Walkthrough

If your company files with the SEC and is not an emerging growth company, your auditor's report already includes critical audit matters. The question is not whether you have them, it's whether they're doing any real work, or just filling space.

This guide is for CFOs, audit committee members, and financial reporting teams who want to move beyond minimum compliance: how to engage with your auditor early, what a well-written CAM actually looks like, and what the PCAOB and investors are watching for in 2026.

Key takeaway: The biggest CAM failure is not missing the threshold, it's producing boilerplate language that satisfies the letter of PCAOB AS 3101 while delivering nothing useful to investors.

What Is a Critical Audit Matter Under PCAOB AS 3101?

A critical audit matter (CAM) is any matter from the audit that was communicated (or required to be communicated) to the audit committee, relates to accounts or disclosures material to the financial statements, and involves especially challenging, subjective, or complex auditor judgment. All three conditions must be met simultaneously.

The PCAOB adopted AS 3101 in October 2017 after one of the most extensively deliberated standard-setting processes in its history. CAMs became effective for large accelerated filers for fiscal years ending on or after June 30, 2019, and extended to all other public companies (excluding emerging growth companies and registered brokers/dealers) for fiscal years ending on or after December 15, 2020.

EGCs are permanently exempt under the JOBS Act. If your company is an EGC approaching the end of that status, start preparing now, the CAM process requires auditor judgment, documentation, and audit committee engagement that takes at least one full audit cycle to get right.

For each CAM, the auditor must:

1. Identify the CAM clearly
2. Describe the principal considerations that led to the determination
3. Describe how the CAM was addressed in the audit
4. Reference the relevant financial statement accounts or disclosures

The standard also requires standardized introductory language prescribed by the PCAOB to appear before the individual CAM descriptions, that language is mandatory and not subject to auditor discretion.

Which Matters Typically Become CAMs?

The most common CAMs involve areas with high estimation uncertainty and significant management judgment. Based on early adoption data and PCAOB research, the average large accelerated filer carries between one and three CAMs per audit report. The most frequently cited categories are:

• Goodwill impairment testing (projected revenue growth rates, discount rates, terminal values)
• Revenue recognition for complex contracts (multiple performance obligations, variable consideration, long-term arrangements)
• Income tax uncertainties and uncertain tax positions
• Business combinations and purchase price allocation
• Fair value measurement of financial instruments

Industry-specific matters are also common: the allowance for loan losses in banking and liability reserves in insurance both involve high estimation and are typically very material, making them natural CAM candidates, as Deloitte noted in its 2019 guidance.

A CAM can relate to an entire material account, a component of one, or several accounts simultaneously. Auditors apply four key factors in the determination: risk of material misstatement, extent of audit effort (including use of specialists), nature of evidence obtained, and potential impact on the financial statements.

One important clarification: a CAM is not an error and does not indicate something is wrong. It signals where the auditor exercised the most judgment, not where the financial statements are misstated. This distinction matters enormously for how you communicate CAMs internally and to investors.

For a deeper look at goodwill impairment testing mechanics, one of the most common CAM subjects, see Finrep's practitioner walkthrough on ASC 350 goodwill impairment.

The Boilerplate Problem: What Bad CAM Disclosure Looks Like

Here is where most companies and their auditors fall short. The PCAOB standard permits, but does not require, auditors to disclose the outcome of audit procedures and key observations. In practice, almost none do.

Jeff Mahoney, General Counsel of the Council of Institutional Investors, put it plainly in June 2025: "To date, auditors' implementation of CAMs has failed to provide the information that many investors most wanted and that the standard explicitly permits: (1) an indication of the outcome of the audit procedures performed on the matter; and (2) key observations with respect to the matter."

A boilerplate CAM typically looks like this:

"The valuation of goodwill was identified as a critical audit matter due to the significant judgment required in the impairment analysis. We evaluated management's assumptions and involved valuation specialists."

That tells an investor almost nothing they could not read in the footnotes. A company-specific CAM, by contrast, would name the reporting unit, identify the specific assumptions that were most sensitive (say, a 50-basis-point change in the discount rate), describe what the auditor's specialists actually tested, and note whether the assumptions fell within the auditor's independently developed range.

The PCAOB's November 2024 Audit Focus publication on CAMs confirmed that inspectors continue to identify a large number of deficiencies in CAM determination, communication, and documentation. Common inspection findings include:

• Failing to analyze all matters communicated to the audit committee against the CAM criteria
• Not performing any procedures to determine whether CAMs exist
• Omitting the description of principal considerations that led to the CAM determination
• Inaccurately describing how the CAM was addressed in the audit

The PCAOB also flagged a troubling trend: the average number of CAMs per audit report has been declining over time, which has triggered a formal research project to determine whether auditors are under-identifying CAMs or whether the standard needs amendment.

Why do auditors default to vague language? Liability exposure is a documented driver. Auditors face potential legal risk if CAM language is interpreted as a guarantee or prediction about the financial statements, so conservative, hedged language becomes the path of least resistance. The result is disclosures that protect the auditor but provide little signal to the investor.

CAM vs. KAM: What Multinational Companies Need to Know

If your company has cross-listed securities or subsidiaries audited under international standards, you will encounter both regimes.

The conceptual framework is the same, both standards ask auditors to surface the areas of greatest judgment complexity. But the scope, timing, and specific requirements differ. A multinational CFO whose US entity files a 10-K with CAMs and whose UK subsidiary's auditor issues KAMs under ISA 701 should expect some overlap in subject matter but should not assume the descriptions will be identical or interchangeable.

The Audit Committee's Practical Playbook

The audit committee's most important CAM work happens before the audit report is drafted, not after. Waiting until the auditor presents a draft CAM section at year-end is too late to influence either the identification or the quality of the language.

As Jennifer Burns of Deloitte & Touche put it: "Audit committees, in exercising their oversight role, should engage with the auditor throughout the audit, during planning, interim periods, and at year-end, to understand the CAMs and any issues that may arise that may change the ultimate conclusion regarding CAMs."

Here is a sequenced playbook:

1. Audit planning (Q3 or early Q4 for calendar-year filers)

• Ask the engagement partner which matters are likely candidates for CAM status this year
• Ask specifically: what changed from last year that might add or remove a CAM?
• Confirm that management's MD&A and footnote disclosures for anticipated CAM areas are sufficiently detailed, the auditor's CAM description will reference them

2. Interim audit (Q4)

• Revisit the CAM candidate list as the audit progresses
• If a significant unusual transaction occurred (an acquisition, a restructuring, a new accounting estimate), ask whether it meets the CAM threshold
• Align with the CFO on how investor relations will frame any new or changed CAMs

3. Year-end (before the report is signed)

• Review draft CAM language for company specificity: does it name the reporting unit, the key assumptions, the specialists used?
• Push back on language that merely restates the footnote, ask the auditor what they actually found and whether any of that can be disclosed
• Ask whether the auditor considered disclosing the outcome of procedures or key observations, and why they chose not to

4. Post-filing

• Benchmark your CAMs against peer company filings on EDGAR, search by SIC code and filter for 10-K filings
• Note any CAMs that peers disclose that you do not, and discuss with the auditor whether the difference reflects a genuine difference in audit complexity or inconsistent application

For a broader audit committee oversight framework, see Finrep's audit committee agenda priorities guide.

How Investors and Proxy Advisors Actually Use CAMs

CAMs are not just a compliance artifact. Institutional investors and proxy advisors have built them into their oversight frameworks.

The CII has been explicit: CAMs provide information useful for "determining how to vote on the election of audit committee chairs and members and the ratification of the external auditor." A CAM that is vague, boilerplate, or inconsistent with the company's disclosed risk factors can become a talking point in an engagement letter from a major asset manager.

Year-over-year changes in CAMs are particularly scrutinized:

• A new CAM signals that a new area of complexity has emerged, investors will look for the corresponding disclosure in MD&A or the footnotes
• A dropped CAM may signal that the underlying risk has been resolved, but it can also raise questions about whether the auditor has become less rigorous
• Significantly reworded CAM language often signals a change in audit approach or a response to PCAOB inspection feedback

A 2021 study in The Accounting Review found that CAM disclosures are associated with increased investor attention to the disclosed risk areas, though the effect on investment decisions is modest and varies by investor sophistication. Academic research has produced mixed results overall on whether CAMs provide incremental information beyond what is already in the footnotes and MD&A, which is precisely why the quality of the language matters so much.

What the PCAOB Is Watching in 2026

The PCAOB's 2024 inspection priorities explicitly included evaluation of CAM quality, with inspectors assessing whether descriptions were sufficiently specific and whether auditors properly applied the standard's identification factors. Deficiencies in CAM identification and description have appeared in PCAOB inspection reports across firms of all sizes.

As of mid-2026, the PCAOB's standard-setting agenda includes an active research project on CAM communication, examining the declining average number of CAMs and whether amendments to AS 3101 are needed. No formal proposal has been issued, but the direction of travel is clear: either auditors improve CAM quality voluntarily, or the PCAOB will mandate more specificity through a standard amendment.

Mahoney of the CII framed the stakes directly: "As the practice of CAMs evolves, either the disclosures will become more meaningful as intended by the standard, or there will be more calls for amendments to the CAMs standard that result in more meaningful disclosures to solidify their effectiveness."

For CFOs and audit committees, the practical implication is straightforward: do not wait for a standard amendment to push for better CAM language. The PCAOB's inspection program is already evaluating quality, and investor scrutiny is already real.

For the broader context of what the PCAOB is prioritizing this year, see Finrep's 2026 PCAOB inspection guide and the PCAOB inspection findings analysis for preparers.

FAQ

Are emerging growth companies required to include CAMs? No. EGCs are permanently exempt from the CAM requirement under the JOBS Act. When an EGC loses that status, typically by exceeding the revenue, public float, or time thresholds, it becomes subject to AS 3101 for the first full fiscal year after losing EGC status. Plan for at least one audit cycle of preparation.

What is the difference between a CAM and a Key Audit Matter? CAMs are required under PCAOB AS 3101 for US public companies audited by PCAOB-registered firms. KAMs are required under IAASB ISA 701 for listed entities audited under international standards. The conceptual definition is nearly identical, but the scope, effective dates, and specific requirements differ. See the comparison table above.

Can a CAM signal that the financial statements are wrong? No. A CAM identifies where the auditor exercised the most judgment, not where the statements are misstated. The auditor's unqualified opinion still covers the entire financial statements. Communicating this distinction clearly to your board and investor relations team before the filing is released will prevent unnecessary alarm.

What happens if the auditor fails to identify a matter that should have been a CAM? PCAOB inspectors evaluate CAM identification as part of their inspection procedures. Failure to analyze all matters communicated to the audit committee, or failure to apply the required factors, is a documented inspection deficiency. Repeated deficiencies can affect an audit firm's inspection rating and trigger remediation requirements.

How should management disclosures align with anticipated CAMs? If you know goodwill impairment is likely to be a CAM, the corresponding footnote and MD&A disclosures should be detailed enough to support the auditor's description. Thin management disclosures in a CAM area create a mismatch that both investors and PCAOB inspectors will notice. Align your disclosure drafting calendar with the auditor's CAM identification timeline.

Could climate-related estimates become CAMs? Potentially, yes. As climate-related assumptions become more material to financial statements, asset impairments driven by transition risk, insurance reserves tied to physical risk, deferred tax assets dependent on carbon pricing, they may meet the CAM threshold. Companies already working through IFRS S2 climate scenario analysis should flag this possibility with their auditors now. See Finrep's IFRS S2 practitioner walkthrough for context on how climate estimates are being built into financial reporting.