AICPA SEC and PCAOB Conference Highlights
Representatives from Accounting Research Manager are attending the annual “AICPA Conference on Current SEC and PCAOB Developments.” This conference is being held Monday-Wednesday, December 10-12, 2018, in Washington, D.C. The following are some highlights from conference speeches or presentations.
Keynote: Discussion with the PCAOB
All five new members of the PCAOB held a panel discussion. The members indicated a “clean sheet” approach to rethinking inspections and other important areas of the PCAOB. As part of this process, the PCAOB has undertaken unprecedented public outreach to various stakeholders, including audit firms, public companies, and internal PCAOB staff. Board members indicated a focus on engagement with audit committees. In fact, the PCAOB indicated that it plans to reach out to audit committees of all companies whose audits it selects for auditor inspection. The PCAOB is creating certain liaison positions for reaching out to stakeholders.
The PCAOB indicated a commitment to audit firm quality control systems with a focus on detection and prevention of future control deficiencies. This focus on quality control should inform inspection areas and further development of Audit Quality Indicators. The PCAOB indicated that their quality control standards will be considered as part of their future agenda.
The PCAOB is committed to making the rollout of the Critical Audit Matters (CAMs) work. There is significant information already published regarding Form AP and CAMs, including a public database for Form APs. The PCAOB will issue additional guidance if needed as they monitor the rollout. PCAOB members indicated that there will be a post implementation review as well. PCAOB members cautioned against the use of boilerplate language and emphasized that CAMs should be company specific.
The PCAOB is studying its current enforcement program for possible improvements. Board member DesParte indicated that the objective of the inspections is not to count the number of deficiencies, but to raise audit quality. The PCAOB is also examining current reporting framework to potentially streamline internal processes to get inspection reports out faster.
PCAOB members addressed questions on the use of technology in audits, including how far a firm can go in implementing new technology. The PCAOB is asking for feedback on this issue and if individuals or firms believe the PCAOB standards or inspections are impeding use of new technology, they should let the PCAOB know. The current feedback the PCAOB has received is that current PCAOB standards are not impeding the use of technology.
The PCAOB remains engaged internationally through bi-lateral arrangements and other efforts. The PCAOB continues to perform inspections in other jurisdictions.
PCAOB members indicated that the standards-setting agenda is under review and will have more to announce in 2019.
Division of Corporation Finance Update
A panel discussion of members of the Division of Corporation Finance (Corp Fin) discussed the efforts of the division over the past year. Director Bill Hinman indicated that the primary focus of Corp Fin remains on capital formation, including making changes to the regulatory environment or requirements for public company reporting to be less onerous. Hinman discussed the broad scope of changes made to Regulation S-K and S-X to eliminate outdated or redundant disclosure requirements.
Hinman indicated that Corp Fin will put out a proposal on quarterly reporting to obtain views on this process. Corp Fin also expects to issue a proposal on Rule 3-05, Rule 3-14 and Article 11, which generally covers financial statements of businesses acquired or to be acquired. Hinman indicated that, as directed by SEC Chairman Jay Clayton, Corp Fin is revisiting the attestation requirement under Sarbanes-Oxley Section 404(b). Corp Fin expects to issue something on this in 2019.
Corp Fin discussed its review of Brexit disclosures, indicating that the level of disclosure varies widely. Hinman indicated that they would be reviewing disclosures on Brexit more closely and looking for disclosures that go beyond simply a bullet point in risk factors for those entities that this issue is material.
Cybersecurity disclosures will also be closely examined given the publication of guidance last February. Corp Fin has seen a “mixed bag” of compliance and would like to see a more tailored approach and not boilerplate language. Disclosure may be appropriate on how a company’s board of directors oversees cybersecurity or cyber breaches.
Corp Fin recognizes that the use of non-GAAP measures are an important way to communicate with investors. Companies should have adequate controls and procedures around the use of non-GAAP measures to make sure they are being consistently presented. These procedures should address how any errors or mistakes in previously stated non-GAAP measures are addressed. Hinman indicated that disclosure of why these non-GAAP measures are being presented is important. If it is to view a company measure how management views it, this may be appropriate. Simply showing an adjusted number that “looks better” than the GAAP number would not be appropriate. The SEC staff may look to evidence of how these non-GAAP numbers are being accessed by the board of directors or management. Hinman believes companies are doing better with the prominence factor.
Corp Fin staff indicated that the Division of Corporation Finance’s Financial Reporting Manual will be updated shortly. Hinman indicated that the staff has been updating guidance in Compliance and Disclosure Interpretations and making format changes to allow users to better navigate thru the content.
Corp Fin indicated that they have reviewed a limited number of filings for companies that have adopted ASC Topic 606. Areas of focus on staff comments focused on:
- Disclosures related to significant judgments used in recognizing revenue, including which judgments apply to what revenue stream;
- Performance obligations and what significant judgments are used;
- Timing of revenue recognition and whether revenue is recognized at a certain point or over time;
- Principal vs. agent classification; and
- Disaggregated revenue.
Corp Fin discussed the accounting and disclosure considerations for companies doing business in Argentina. Argentina’s economy is now classified as “highly-inflationary” for accounting purposes. Disclosures should be tailored to the specific company circumstances, which may include disclosures of risk factors discussing important business and financial risks of doing business in Argentina. Companies should also consider disclosures in Management’s Discussion and Analysis (MD&A) to highlight financial statement impacts and trends associated with this highly inflationary economy.
Hans Hoogervorst, IASB Chairman
Citing rising level of outstanding debt around the world, Hans Hoogervorst challenged conference participants on whether we are ready for the next financial crisis. Specifically, Hoogervorst examined whether current accounting standards are appropriate. Both the IASB and the FASB reacted to the financial crisis by replacing the incurred loss model for loan losses with an expected loss model. Hoogervorst noted that during the financial crisis, “it became clear that the incurred loss model gave too much leeway for banks to postpone recognizing inevitable loan losses for too long. The IFRS 9 expected loss model is different from the FASB’s CECL model, but both models have in common that they will lead to much quicker loss recognition than was the case in 2008.”
Hoogervorst indicated that some in the financial industry are now worried that IFRS 9 might exacerbate procyclicality. Since economic expectations might be overly pessimistic during a recession, they fear IFRS 9 will lead to overreaction. According to these critics, the requirement that full lifetime expected losses will have to be recognized as soon as a loan has become significantly riskier, may strengthen the downward turn of the economic cycle. Hoogervorst does not believe these fears are justified given that:
- IFRS 9 leads to a much quicker crystallization of loan losses should have a preventative effect.
- Timely loan loss recognition should contribute to limiting imprudent dividend distribution and remuneration policies.
- Quick loan loss recognition should lead to timely clean-up of banks’ balance sheets, which in turn will contribute to much quicker restoration of credit flows to healthy companies.
There can be no doubt that the capitalization of the banking system has increased significantly since the crisis. Hoogervorst provided that given the “explosion of debt outside the banking system, it remains to be seen whether the strengthening of bank capital is enough. The fact that some bank regulators are nervous about the impact of IFRS 9 indicates that this may not be the case everywhere.”
Hoogervorst also discussed the insurance industry. Given the long-term nature of the insurance liability, the insurance industry is much less prone to sudden liquidity crises than the banks. This is exactly the reason why the IASB issued IFRS 17, the new Standard for insurance contracts. Hoogervorst believes “that IFRS 17 brings a very important contribution to financial stability in the insurance industry.” IFRS 17:
- Ensures the insurance liability, including the costs of options and guarantees, will be properly measured and regularly updated, giving much better information.
- Ends up-front profit taking. Revenue will only be recognized as the service is provided.
- Will result in much better information about profitability trends by making an end to unfettered averaging of different generations of contracts.
Finally, Hoogervorst discussed the accounting for goodwill. The IASB has been discussing the issue of goodwill in the context of the post-implementation review of IFRS 3, the business combinations standard. Hoogervorst indicated that the IASB’s review demonstrated clearly how impairment is almost bound to be “too little, too late.” The IASB staff showed how acquired goodwill tends to be shielded by the internally generated goodwill within the acquiring company.
The IASB has decided to publish a discussion paper in which it presents some new approaches to goodwill to their stakeholders. One of the things the IASB is looking at is whether it will be possible to improve disclosures which will help investors to judge whether an acquisition has been successful or not. Hoogervorst indicated that the IASB “could also consider a disclosure that shows what a company’s balance sheet will look like without goodwill. This might serve as a wake-up call for those investors who do not closely monitor the success of acquisitions.”
The IASB has also decided to include a discussion on the reintroduction of amortization of goodwill. However, it is a far from foregone conclusion that this discussion paper will lead to a reintroduction of amortization. Whatever the outcome of this exercise will be, Hoogervorst indicated that the discussion paper “should serve to make our stakeholders better aware of the shortcomings of the impairment-only approach. It may be that there is no better alternative, but in that case we should accept the current shortcomings of IFRS 3 with our eyes wide open. Should the discussion paper lead to better awareness of the possible pitfalls of current accounting for goodwill, this would in itself be a positive development.”
Division of Enforcement Panel
Stephanie Avakian, Co-Director of the SEC’s Division of Enforcement, discussed the division’s priorities. Avakian noted that the division has taken steps to continue to focus on protecting retail investors and has made cyber security a top priority. Avakian emphasized the importance of reliable and transparent reporting. Avakian emphasized the Enforcement Division’s commitment to protecting investors by holding gatekeepers, such as accountants and auditors, accountable.
Avakian was joined by the new Chief Accountant in the Enforcement Division, Matthew Jacques, who discussed areas of focus in respect to financial reporting and audit matters. Enforcement actions brought over the past year against auditors or audit firms have focused on:
- Lack of adequate professional skepticism;
- Overreliance on management;
- Lack of evidence to support audit findings;
- Poor or missing audit documentation;
- Manipulation of audit workpapers (such as back-dating documents);
- Auditor independence violations; and
- Breakdowns in audit quality control.
SEC Staff Comment Letter Panel
A discussion panel discussed insights into SEC staff comment letters. Frequent areas of comment remained consistent with prior years and include:
- Non-GAAP financial measures;
- Revenue recognition;
- Fair value measurement; and
- Intangible assets and goodwill.
Areas of focus going forward include cybersecurity disclosures and MD&A. The SEC staff will likely ask questions on material impairment charges taken where there were no previous disclosures indicating a possible problem.
The SEC staff indicated that in some cases they will telephone a registrant for certain clarification on a response to a comment letter instead of going thru the processing of issuing another letter and waiting for a response. Typically these inquiries are minor clarifications.
The panel noted that generally the number of comment letters on public company filings is down. This is from a combination of reasons, including more rigorous processes within financial reporting departments and changes in SEC staff processes. Companies can be proactive when preparing disclosure documents by looking at comment letters issued to other registrants.
Disclosure Trends Panel
A panel discussion on disclosure trends was held. The panel discussed the SEC’s rule changes to the definition of a “Smaller Reporting Company.” The new definition broadens the number of companies that qualify as a smaller reporting company and can use scaled disclosure. Some of the most significant streamlined disclosures permitted for smaller reporting companies applies to compensation disclosures, including no requirement to provide a Compensation Disclosure and Analysis.
The panel does not expect any significant, broad changes to disclosures from the FASB in the near future. The FASB is expected to look at specific areas that could impact disclosures on a limited basis, including inventory.
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