Exploring Goodwill Impairment in Relation to Covid-19 and Critical Audit Matters


  • Linda Johnson


In 2019, Auditing Standard 3101 began requiring Critical Audit Matters (CAM) to be included in Auditors Reports. A CAM is any matter arising from the audit of the financial statements that has been communicated or is required to be communicated to the audit committee, and that relates to accounts or disclosures that are material to the financial statements, and that involves especially challenging, subjective, or complex auditor judgments. Goodwill impairment was identified as a CAM for many companies in 2019 and 2020. I examined the auditor's reports for 36 public companies that reported goodwill impairment for the period impacted by the Covid-19 pandemic, from March 2020 to December 2020. Within this sample, Auditors issued 45 CAMs total, including 19 CAMs for goodwill. I examined the footnotes to determine whether restrictions and/or lockdowns imposed due to the pandemic were mentioned as causes of the impairment. A majority of them cited a decline in demand for their products/services and/or a decline in market capitalization as factors that led to testing goodwill for impairment. I examined the determining factors for inclusion in the Auditor's Report as a CAM. My analysis suggests that a CAM for goodwill impairment is more likely when the size of the impairment relative to goodwill is large and when the company is audited by a Big 4 accounting firm. Regression analysis indicates that CAMs are less likely for companies with international segments.