The Center for Audit Quality (CAQ) kicked off the 2013 AICPA National Conference by indicating public company audits are stronger and the severity of restatements is trending downward. The CAQ continues to focus on managing and anticipating risks by issuing alerts. In 2013, the CAQ analyzed "trends identified from inspections and assessments of internal quality controls processes," and it intends to issue an alert in 2014 which discusses such trends. The CAQ is also focusing on deterring and detecting fraud through its previously established Anti-Fraud Collaboration program, which utilizes educational programs, videos and case studies, all of which are available on the website, antifraudcollaboration.org. In addition, an effort is being made to enhance transparency by improving the quality of information made public, with the goal of increasing investor confidence. This calls for identifying specific audit quality indicators (AQI) which are important for audit committees in their oversight role. These AQI will link to the PCAOB's quality control standards. Finally, the CAQ is working towards enhancing global transparency, calling for rules and regulations that "work across borders".
Paul Beswick, Chief Accountant for the SEC, stated that there is a need for the Financial Accounting Standards Board (FASB) to simplify accounting standards, as investors indicate financial statements are too complex. He also said that valuation standards need to be improved as they are an integral component in financial reporting, and that there should be similar methodologies amongst professionals for all asset and liability classes. According to Mr. Beswick, audit committees should focus on audit quality when engaging an auditor and not simply choose the audit firm which proposes a lower fee. Mr. Beswick voiced concern over accounting firms expanding their consulting practices, and questioned how accounting firms can maintain independence while providing non-audit services to companies they audit.
The Division of Corporation Finance reviewed several specified areas of U.S. generally accepted accounting principles and reporting matters, some of which are outlined below:
- Tax rate reconciliations need to have clearly labeled components. A component which comprises 5% or more of the total reconciling items should be separately labeled, while less than 5% is permissible to be aggregated. The SEC questions whether certain adjustments in the rate reconciliations are really corrections of errors that are inappropriately characterized as changes in estimates. Also, disclosures in financial statements should be consistent with disclosures elsewhere in filed documents.
- Valuation allowance disclosures include too much boilerplate language.
- Where future repatriated earnings are likely, there should be proper deferred tax disclosures, consistent with any parent liquidity discussion.
Defined benefit pension plans and other post-retirement benefit plans
- Registrants need to provide clearer disclosures about accounting policies and elections.
- The SEC is concerned about situations where indicators change, but there is no impairment consideration.
- Registrants need to disclose in their MD&A if there are known material changes that may affect goodwill, and the reasons why no impairment is recorded.
- Registrants should provide the percentage by which the fair value exceeds the carrying value where risks of a potential impairment exist. Management also needs to discuss methods and key assumptions used for impairment analysis and potential events that could affect key assumptions.
- Disclosure is required when an impairment charge is recorded in a specific period and management should discuss what events caused the charge in that period versus another period.
Variable interest entities (VIEs), particularly related to China-based operations
- There should be adequate discussion relating to details of contractual arrangements and judgments that lead to consolidation. Provide both quantitative and qualitative information which may include assets, revenue, cash flows or other information to allow the reader to assess the operations of the VIEs.
- MD&A should disclose cash restrictions of transfers in and out of China, and the amount of cash held inside China, separately by equity-owned entities and VIEs.
Industry matters relating to real estate, oil and gas, retail and utilities.
A panel reviewed the following specific practice issues:
- Gross vs. net presentation continues to be a challenge
- Stand-alone value analysis in multiple-element arrangements
- Boilerplate disclosure is not sufficient
- Annual goodwill evaluation trends
- Push-down accounting
- Difficulty in obtaining fair value of all contributed businesses and asset groups to joint ventures
- Valuation allowances, application of the "more likely than not" principle
- Uncertain tax positions
Debt vs. equity classification
- Classification of noncontrolling interest when reporting entity sells or purchases in excess of 50%
- Fair value before and after any modification should be discussed in the MD&A
Robert Hirth Jr., Chairman of The Committee of Sponsoring Organizations of the Treadway Commission (COSO), spoke about the new 2013 framework. In transitioning from the 1992 framework to the 2013 framework, there is no change in Sarbanes Oxley (SOX) compliance requirements. If the 1992 framework has been appropriately applied to each of the five components of internal control, the transition should not result in significant changes or incremental efforts. It was suggested that an action plan should be completely assessed and developed by March 31, 2014, and related execution of the transition action plan should be completed by December 2014.
Martin Baumann, PCAOB Chief Auditor and Director of Professional Standards, discussed the following:
- Efforts to enhance the usefulness of the auditor's report are in progress, specifically related to
- Critical audit matters; and
- Identification of the engagement partner and other audit firms that participate in an audit
- Future adoption of an auditing standard pertaining to related party transactions.
- The PCAOB would like to work with the FASB on the going concern project, but will wait until the FASB completes its study.
- Later in 2014, the PCAOB plans to issue concept releases related to auditing estimates and fair value measurements, as well as quality control standards.
The Foreign Corrupt Practices Act (FCPA) was the final topic. The SEC reiterated that public companies need effective internal controls to avoid and/or mitigate financial statement fraud. Companies need to set the appropriate tone at the top, train employees, and focus on third party intermediaries. The Department of Justice released a guide addressing who is covered by the provisions of the FCPA.
To summarize, the conference's focus was on financial reporting quality, integrity, and investor confidence, with internal controls over financial reporting continuing to be at the forefront of the SEC's and the PCAOB's efforts, as well as audit quality. Although not mentioned above, there were the usual MD&A preparation discussions, with recommendations to keep the discussions meaningful, non-repetitive, concise, and pertinent.
If you have any questions about the content of this article, please contact Friedman LLP Partner Neil W. Ehrenkrantz at firstname.lastname@example.org or contact your engagement partner.