CAM Reporting for Material M&A Transactions: Evidence from the First Year of AS 3101
Keywords:
critical audit matters, mergers and acquisitions, auditor judgmentAbstract
PCAOB Auditing Standard 3101 requires auditors to disclose critical audit matters (CAMs) involving especially challenging, subjective, or complex auditor judgment. We examine reporting patterns for this judgment-based requirement in the context of mergers and acquisitions (M&As) during the first year of CAM implementation. Using a hand-collected sample of 627 large accelerated filers that disclosed at least one material acquisition in their annual report in fiscal years 2019-2020, we link disclosed M&A transactions to CAM disclosures in auditors’ reports. Despite management’s determination that the transaction was material and the complexity of acquisition accounting, only 46.4 percent of these disclosed M&A transactions received an M&A-related CAM. Analyses show that deal size is the only factor consistently associated with CAM reporting, while auditor independence, M&A expertise, and other M&A complexity measures are not. These findings provide descriptive evidence and indicate that quantitative transaction magnitude was the primary observable factor associated with early M&A-related CAM reporting, providing a benchmark for evaluating how CAM reporting for disclosed M&A transactions evolves as practices mature.
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