AICPA SEC and PCAOB Conference Highlights
Representatives from CCH 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.
PCAOB Standard Setting
Barbara Vanich, Acting Director of the Office of the Chief Auditor, provided an update on PCAOB standard setting. As mentioned earlier in the conference, the PCAOB is re-evaluating the PCAOB standard setting agenda and will announce changes in 2019.
Vanich provided an updated on PCAOB completed projects. Regarding the improving transparency on information about audit partners, stakeholders are looking at this information. Regarding CAMs, the PCAOB is engaging with stakeholders in firm “dry runs.” Vanich suggested companies reach out to their auditors to discuss the CAM process. For audit firms, start to consider CAMs now through education and implementation efforts.
The PCAOB approved its 2018-2022 Strategic Plan and fiscal year 2019 budget in an open meeting in November 2018. The strategic plan serves as the foundation for the budget and guides the PCAOB’s programs and operations. The PCAOB’s 2018-2022 strategic plan reflects five new values and five core strategies that the PCAOB will advance in the coming years to effectively fulfill its mission. Those values and strategies seek to implement the PCAOB’s vision to be a trusted leader that promotes high quality auditing through forward-looking, responsive, and innovative oversight. The 2019 budget includes core investments in personnel, processes, and technology, and will provide the Board with the resources necessary to make progress toward implementing its strategic vision.
The PCAOB will hold an open meeting on December 20, 2018, to consider the adoption of enhanced requirements for auditing accounting estimates, including fair value measurements. The PCAOB is also expected to consider amendments to its standards to strengthen requirements for an auditor’s use of the work of specialists. Auditing accounting estimates is one of the most challenging aspects of any audit engagement. The PCAOB’s inspections have identified significant deficiencies in auditing accounting estimates. Regarding the work of specialists, the PCAOB’s proposal would strengthen the oversight and evaluation by auditors of the work of specialists.
Vanich indicated that the PCAOB has a project to consider whether PCAOB standards are impediments to the use of emerging technology in audits. The scope of this project is significant given the broad range of types of technologies and that it is continually changing. The PCAOB has reached out to a broad range of individuals, including in the accounting and audit professions. A task force has been organized to lead the efforts of this project and includes individuals from academics, business, and audit firms. The task force’s initial findings indicate that as of today, we are in the early days of using advanced technologies (e.g. Artificial Intelligence) both in accounting and audit professions. The task force also believes that PCAOB standards do not currently impede the use of these emerging technologies, but may not encourage their use either. More work in the future is expected.
A panel of audit professionals discussed current auditor developments, including the new auditor’s reporting manual. One benefit from the requirement to report CAMs is the encouragement of a dialogue between company management and the auditors. This should consider revisiting critical accounting estimates to understanding the risks associated with these and how they are calculated. Panelists cautioned against boilerplate language CAMs. CAMs should be specific to the individual company and should be plain-English so that the general public can understand. Corporate representatives indicated that many of the issues identified as CAMs are those already on the radar of management and auditors. The more substantive benefit is a discussion on how auditors are responding to these areas and how they are becoming comfortable with these. There was concern among the panel that given the variation in understanding of accounting principles among investors and analysts, whether CAMs will be misunderstood. Discussions with the investor community about CAMs would be beneficial. From the investor viewpoint, CAMs can be viewed as a “peek behind the curtain” to see how auditors actually deal with some of the risky or subjective areas. This should provide additional assurance or confidence to investors.
Dry runs have not identified surprises and largely reflect issues that would be expected. These did provide an avenue to discuss critical accounting policies and revalidating. PCAOB inspectors are gearing up to ensure compliance with the CAM requirements. The PCAOB has no expectation on the average number of CAMs for each engagement, but the release in indicated that it would expect at least one.
Russell Golden, FASB Chair
Russell Golden indicated that the FASB is focused on laying the groundwork now for successful financial reporting in the future. This includes a full agenda of short-term, mid-term, and long-term projects focused on key financial reporting issues.
In the short term, the FASB is enhancing its educational resources for stakeholders so that they can successfully transition to new standards, from next year and beyond. This includes guidance on lease accounting and credit losses. Golden cited the FASB’s work on developing education tools, including roundtables and webcasts on important accounting standards.
In the midterm, the FASB is immersed in proactive, extended outreach on key projects that will lead to more successful standards to be issued in the next three to five years. To develop the right accounting solutions, the FASB must first identify the right accounting issues and that is why it continues to seek feedback from both the financial statement preparer and user groups. As outreach examples, Golden discussed the outreach efforts by the FASB on their projects on financial performance and segment reporting. On segment reporting, the FASB asked preparer companies how they currently use the aggregation criteria and how two potential alternative approaches would affect their segment reporting:
- Reordering the current process for determining reportable segments, moving the quantitative thresholds earlier in the process; and
- Removing the aggregation criteria so that each operating segment is reportable until a practical limit is reached.
The FASB staff will present complete results of the study at next week’s public FASB meeting.
In the long term, the FASB is preparing for the potential impact of technology on financial reporting to ensure standards can stand the test of time. Golden discussed the importance of technology and how it is changing how financial information is collected, distributed, and consumed. New technologies are already affecting what information is useful, who consumes financial information, and how that information is consumed. They also could affect future financial reporting requirements, including disclosure and standards for structuring data (or electronically tagging business and financial reports). Understanding and adapting to future technological advances will be critical to the FASB’s ability to ensure accounting standards evolve to meet the changing needs of investors. Golden indicated that the FASB will be doing further outreach on how emerging technologies will impact financial reporting and accounting standards.
Golden was asked whether the FASB is currently developing accounting guidance on cryptocurrencies. Golden indicated that currently the FASB does not have an active project on cryptocurrency accounting and is instead acting as an observer of the work of others, including with the work being done by AICPA working groups and SEC on guidance on cryptocurrency.
Golden assured conference participants that it is well aware of the full-implementation overload that companies are dealing with given the significant new accounting standards that have been issued by the FASB. Golden does not expect the FASB to add to this full-implementation plate in the near future given that it will take significant time to complete current FASB agenda projects.
Golden indicated that the FASB is not considering a delay in the effective date for ASC Topic 842. The FASB staff noted that it is considering how implementation guidance could be incorporated into the formal FASB Accounting Standards Codification® (Codification). For example, the detailed guidance previously issued by the FASB on the Tax Cuts and Jobs Act could be referenced in the Codification with a link to the guidance outside the Codification. No decisions have been made on integrating this guidance with the Codification but the FASB and its staff continues to look at this.
Current Accounting and Reporting Issues Panel
A panel of corporate reporting professionals discussed current accounting and reporting issues. Topics discussed included the implementation of the new revenue recognition standard. All the participants experienced significant efforts adopting ASC Topic 606, including pulling in various departments to assist in this process. In many cases, the overall impact to the financials were not as large as expected. In some cases, new technology was implemented to capture required data and improve process flow. Lessons learned from the implementation of a new standard included involve your auditors in the process, get the right people involved, and start early on implementation efforts. Even though implementation of ASC Topic 606 has occurred, companies must still ensure that their process captures changing business processes or operations.
Participants also discussed cybersecurity disclosures and issues. The panel recommended reading the SEC’s Investigative Report, Public Companies Should Consider Cyber Threats When Implementing Internal Accounting Controls. This report recommends that public companies consider cyber threats when implementing internal accounting controls. The report is based on the SEC Enforcement Division’s investigations of nine public companies that fell victim to cyber fraud, losing millions of dollars in the process. Participants have used the findings in this report to make changes in company awareness of cyber threats, processes around cybersecurity, and to certain internal processes or controls. While each company is unique, the report provides broad based considerations for countering cyber threats faced by all companies.
Non-GAAP measures were used or considered by each of the company’s represented on the panel. In some cases, before using a new non-GAAP measure the financial reporting team would consider if the same information could be provided using GAAP amounts. If a non-GAAP measure was used, clearly indicating in disclosures of why the measure was being used and how management uses it is essential. Great care should be given to the requirements the SEC places on companies when using non-GAAP measures.
Lease Accounting Panel
A panel of professionals discussed implementation of the new lease standards in ASC Topic 842. Public business entities are required to apply the leasing standard for annual reporting periods (including interim periods therein) beginning after December 15, 2018. The panel indicated that many companies are leaning towards using the recently issued additional transition method which allows entities to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, rather than the earliest period presented. This election would result in two different bases of accounting for the comparative periods included in the financial statements: (1) ASC Topic 842 in the year of adoption; and (2) ASC Topic 840 in the comparable prior periods.
The panel discussed key challenges encountered with implementation, including:
- Embedded lease identification and completeness;
- Global and other challenges of capturing known leases, including foreign currency issues);
- Software solutions and other manual workarounds;
- Determining the appropriate incremental borrowing rate (including for subsidiaries and how often these should be revisited); and
- Internal controls over financial reporting and operations (including over software solutions).
Companies using software solutions to account for leases should consider internal controls over these programs. This should include making sure how amounts are captured, calculated, and reported. The panel suggested the following:
- Understand how specific lease-related amounts from third-party software is calculated to ensure accuracy;
- As company circumstances require, have manual or other automated systems in place to calculate lease-related amounts as a back-up;
- If using spreadsheets or other similar tools to calculate lease-related amounts, ensure proper processes are in place to keep these calculations up-to-date;
- Develop appropriate SOX flow-charts and documentation to support the lease accounting calculations and disclosures, including identifying the reliance on third-party software;
- Software implementation does not stop on the effective date but must updated as changes in accounting and company operations occur in the future;
- Access to these systems should follow the company’s overall IT security protocol to ensure access is appropriate; and
- Obtain SOC1 reports for third-party software vendors to determine adequacy of controls at vendor or possible deficiencies.
The panel did indicate that no “one-size-fits-all” lease software product exists today. Accordingly, companies will have to use caution when selecting a software product and may need internal tools to manipulate data from these systems to meet the requirements of ASC Topic 842. Adequate controls should be in place over these internal tools as well.
In addition, it is important that companies have processes in place for both the adoption and for post-implementation procedures going forward. One suggestion provided was education or training for various departments or locations throughout the company to indicate what information is needed to properly account for leases under ASC Topic 842. Post implementation efforts should also:
- Stabilize the “new normal” for accounting for leases;
- Identify changes to lease accounting that could impact a company’s accounting;
- Manage the identification and accounting for new leases; and
- Consider impairment testing for leases.
Panel on Data Analytics
A panel discussion on the use of data analytics in audits was held. The presenters indicated areas changing in audits related to data include:
- The volume of new data and information is remarkable and continues to grow;
- The speed at which data can be processed is unprecedented;
- Sophistication of the tools, including algorithms available, is like no other time and gives auditors significant tools; and
- Symbiotic Artificial Intelligence tools are able to communicate and be shared across applications.
The panel indicated that auditors can now analyze 100% of populations and automate all of the analytical procedures, as well as many of the manual tasks performed in the audit engagement. This results in remarkable audit capabilities, including identifying unusual journal entries to gather audit evidence on. The panel noted that analyzing 100% of the population is not testing 100% of the population. The audit still only provides reasonable assurance.
Audit standards are not currently impeding the use of technology on audits. However, current audit standards are not encouraging the use of emerging technologies. This is consistent with what an earlier panel of PCAOB staff had found also. New standards need to have the perspective of the use of data analytics and the use of automated technologies in the future. In addition, the panel would like to see more practical guidance in order to understand how emerging techniques can be used in the framework of the current auditing standards. The AICPA indicated that it is looking at audit standards to make sure they are being modernized and responsive to the world in which we live. This does not mean scrapping the fundamentals of auditing, but rather could involve refreshing current audit standards for the current environment.
The AICPA is looking at AU-C 500, Audit Evidence, to consider creating a multidimensional framework perspective. This could involve the examination of whatever evidence that can be obtained during an audit regardless of the procedures used, and then looking at relevance and reliability, source, quality, and nature of the evidence itself. Data analytics moves between risk assessment and tests of details. This is part of what will be addressed in this project on potential modernization of AU-C 500. Having a clean data set and making sure the data is complete is a fundamental challenge that must be addressed. The AICPA is also looking at creating a new service area of attestation to aid companies is generating complete and clean data.
Panel on Emerging Technologies
A panel discussion was held on the use of emerging technologies in financial reporting and auditing. The panel discussed the use of Blockchain. Blockchain, or a distributed ledger, permits transactions to be recorded and confirmed without a trusted third-party. Transactions are shared and updated in real-time between many parties.
Practical benefits from Blockchain identified by the panel included:
- Decentralization. Reduces the need and costs of centralized governance and associated risks.
- Consensus. Enables automated realization of consensus, streamlining reconciliation and processing.
- Transparency. Provides greater information visibility across parties, improving compliance, and auditability.
- Immutability. Improves quality of record keeping and traceability of chain of ownership, enhancing resilience
Panelists indicated that given that Blockchain is in the early stages, it will take significant time for more wide-spread adoption or use.
Panel on Capital Markets
A panel discussion was held on the state of U.S. capital markets. The capital markets have seen an increase in companies going public. Some of this is the result of regulatory efforts to ease the burden on public companies which has been a focus for the SEC.
For companies going public, areas of focus by the SEC staff include:
- The use of non-GAAP measures;
- Disclosures of trends and uncertainties in Management’s Disclosure and Analysis;
- The use of equity instruments incentives in connection with an IPO; and
- Product descriptions.
Generally the capital markets perform well under a divided government, so panelists believe this will be the case with the pending changes in Congress. Regarding the ongoing trade wars, the panelists urged companies to monitor developments but have not seen specific significant impact so far. Consideration should of possible disclosures regarding the risks associated with trade wars.
Not a subscriber? Sign up for a Free Trial