Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter. As accolades go, an accounting honour might not quite have the glamour of the Academy Awards. But congratulations are in order to EY, PwC and KPMG for winning awards last week on a key part of the audit process.
The awards are bestowed by a US investor group on accounting firms that have provided especially useful work on assessments known as "critical audit matters". In the vast sea of boilerplate legalese that is US corporate reporting, the CAM section of the audit report is meant to be a spot where investors get pointers to some of the trickier accounting judgments that companies and their auditors wrestled with. They flag issues which are big enough where, if the internal debate had gone a different way, the financial results would look materially different.
The body behind the CAM awards is the investor advisory group of the Public Company Accounting Oversight Board, the US audit regulator, and the awards have a political motive. The group hopes to incentivise auditors to put more detail into CAMs and for the PCAOB to raise standards. EY's award-winning CAM in the audit report for Meta Platforms is a case in point, a timely assessment given investors' concerns about the spiralling cost of building AI infrastructure.
Hyperscalers are collectively on the hook for hundreds of billions of dollars of spending but much of it does not show up on corporate balance sheets. Meta's giant Hyperion data centre in Louisiana is not on the company's books because it is housed in a "variable interest entity" that it says it does not control and whose losses, if things go awry, it won't have to absorb. EY agreed with Meta's judgment after assessing provisions in the agreements between the company and its partners in Hyperion, according to the CAM.
The disclosure "exposes a consequential, identifiable judgment that investors can investigate and monitor", according to Gary Walsh, portfolio manager at Luther King Capital Management, one of two people who nominated it. But EY's CAM assessment on Meta might still leave some investors wanting more. Olga Usvyatsky, an accounting researcher, nominated EY for an award but still pointed out it did not go into detail on Hyperion's structure, meaning investors do not know the different roles that Meta and its financial partners play in decision-making or how those might change in different circumstances.
Those are the facts on which judgments about control and financial liability ultimately hang. Such shortfalls in CAMs are one reason why the investor advisory group makes the awards in the form it does, often highlighting the more illuminating assessments of other countries. The awards are actually for CAMs or their equivalent under international accounting standards, Key Audit Matters.
KAMs appear in the annual reports of foreign multinationals with a secondary listing in the US. Some jurisdictions prescribe more detail than others. A pattern has emerged from three years of awards ceremonies: UK companies have by far the most useful KAMs. Apart from EY's CAM at Meta, the other winners this year were PwC's key audit matter disclosures related to calculating expected credit losses at HSBC and KPMG for its description of work to assess British American Tobacco's tax liabilities.
While US CAMs require auditors to describe in general terms the processes they used to identify and tackle a particular accounting issue, UK KAMs require more information on the substance of the issue and the conclusions the auditor reached.
Source: Financial Times Companies · Summarized by HeadlinesBriefing