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Audit & Accounting Alert - August 2020 (Issue 7)
 


AT-A-GLANCE 

 
Multiple ongoing efforts to enhance future financial reporting, while holding past shortcomings to account, reflect the vitality of the accounting profession, even amidst the pandemic. Recent issues of the Audit & Accounting Alert have highlighted steps taken to adapt reporting and auditing processes to work with the altered conditions dictated by COVID-19. Meanwhile, the profession’s standard setting and enforcement arms continue to move forward. 
For example, in light of COVID-19, the comment period for the major International Accounting Standards Board (IASB) proposal to replace International Accounting Standard 1 (IAS 1) has been extended to September 30, 2020. Responding this month, an American Institute of CPAs committee has raised concerns about certain aspects of the ambitious undertaking. Also, as investors seek more useful evaluation measures, non-financial ESG (environmental, social and governmental) factors are gaining in reporting importance and credibility. At the other end of the spectrum, fallout from recurring financial scandals, such as the Wirecard collapse, point out the need for creative new techniques. or just better audit performance, for ferreting out wrongdoing. 
These developments inform current activities that may determine the future usefulness and credibility of financial reports, as well as the qualification and reputation of CPA’s, as discussed in this issue.    
 Our Worldwide Update is again split into two sections. The first covers COVID-19 news from organizations across the globe, while the second covers other news.

Gerald Herter - Editor

Financial Reporting Beyond and Before the Pandemic


Charting the future while confronting the past

The impact of the pandemic has caused companies and investors alike to rethink their priorities and what information is pertinent to current and future success. Financial factors and presentation will always play a crucial role in reflecting current standing and trends in profitability. At the same time, increasingly, non-financial factors are central for the evaluation of the prospects for lasting survival and prosperity.
 
In December 2019, the IASB released an Exposure Draft, General Presentation and Disclosures, as a replacement for the monumental IAS 1, Presentation of Financial Statements, as well as amendments for several other IAS’s. The objective is to “to improve how information is communicated in the financial statements, with a focus on information about performance [in] the statement of profit or loss. The Board is proposing limited changes to the statement of cash flows and the statement of financial position.” Profit and Loss would have three new subtotals including ‘operating profit.’ ‘Non-GAAP’ management performance measures would need to be disclosed in a note that explains why they are useful, how they are calculated, and include a reconciliation to IFRS GAAP. Guidance on improved disaggregation of information would assist companies in providing data that is easier for users to evaluate. Also, a better analysis of operating expenses and explanations of unusual income and expenses would be required.
 
In a letter dated August 6, 2020, the Financial Reporting Executive Committee (FinREC) of the AICPA responded to the IASB proposal. While applauding the IASB’s attempt “to provide structure and guidance on reporting of financial performance in the statement of profit and loss,” FinRec “believe[s] a final standard needs more structure and guidance to ensure appropriate levels of (1) operability and consistency within a company’s reporting, and (2) comparability to other companies’ reporting,” as well as a more fuller consideration of financing activities.
 
Specifically, FinRec indicated that while the statement of profit and loss in the proposal would have operating, investing and financing categories, these could cause confusion, since they are defined differently than categories with the same names in the statement of cash flow. Furthermore, for the statement of cash flows to have all interest in the financing section is not considered appropriate. Also, proposed disclosure of unusual items and management performance measures in financial statements would be too subjective and are better dealt with elsewhere. In the case of integral and non-integral associates and joint ventures, while FinRec supports separating them for reporting purposes, a set of factors for determining them would be clearer and more useful, rather than having specific definitions. Finally, for purposes of general presentation and aggregation/disaggregation, immaterial items should be disregarded.
 
FinRec stated that they appreciated “why IASB did not attempt to include nonfinancial measures (such as key performance indicators) in the scope, yet many companies and users view nonfinancial measures as critical information and desire some level of assurance over such measures.” Over the past decade, a number of frameworks and sets of standards for non-financial information have been developed and issued for consideration. Currently, regulators only require consideration and disclosure of factors that can have a material impact on an entity. Non-financial factors fall under this overall umbrella. 
 
A July 2020 study released by the United States Governmental Accountability Office found that nonfinancial issues are being reported to some extent, but that the overall coverage is inadequate, and that coverage of specific topics is inconsistent and not widespread. According to the study, the European Union as early as 2014 issued a directive for companies to report on ESG management using existing frameworks. (ESG stands for the broad spectrum of non-financial environmental, social and governmental issues). However, several updates have been required as well as voluntary guidelines, which have still been criticized as lacking standardization and specificity. The American Securities and Exchange Commission allows companies to determine which and how to disclose ESG issues using a principles-based approach, which relies on current law and enforcement measures to impel compliance. The study also noted that the Tokyo and Johannesburg stock exchanges have included ESG disclosures in their listing requirements.
 
The next needed step may be to create consensus around a universally accepted framework under which to report ESG issues. This approach has been used in the past, such as when the COSO framework was adopted to standardize internal control framework reporting. The frameworks most widely acknowledged are from the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). That task alone may take much time and deliberation. (On July 13, 2020, the SASB and GRI announced a collaboration to work together). But once accomplished, specific guidelines, such as those developed by the SASB for 77 distinct industries should be pursued to attain closer comparability. The attainment of these goals will go far to improving comparable, investor useful information. But the cost companies will incur determining and incorporating such information is another factor that makes the process more difficult to accomplish. When the consequences of not addressing the non-financial issues becomes greater that the cost of accounting and disclosure, the way forward will become clear.
 
The drive toward transformation to an ESG-centric approach is widely held. A report from the World Economic Forum, New Nature Economy Report II: The Future of Nature and Business, published July 24, 2020, states that “COVID-19 is a stark reminder of how ignoring biophysical risks can have catastrophic health and economic impacts at the global scale.” According to the report, “over half of the global GDP, $44 trillion, is potentially threatened by nature loss.” The threat is analyzed through the broad impact on three socio-economic systems:  1) food, land and ocean use; 2) infrastructure and the built environment; and 3) energy and extractives. The good news is that the report’s recommendations could generate $10 trillion in business opportunities and 395 million jobs by 2030, through transitions detailed out in 15 economic areas, such as livestock farming and ranching, roads and railroads, and mining and quarrying.
 
Another thought leader, The Good Governance Academy, on July 15, 2020, published Integrated Thinking and Doing an Integrated Report, a report furthering the case for marrying financial and non-financial data using a format such as established by the International Integrated Reporting Council. Though planned before COVID-19 struck, the report notes that the current environment amplifies the need for expanding reporting criteria in this direction. 
 
Incorporating companies into the ESG process, the Institute of Management Accountants on June 18, 2020, released a C-suite report, Finance Function Partnering for the Integration of Sustainability in Business, that “provides a practical framework for finance and accounting professionals to serve as active business collaborators in sustainability initiatives.” The report accompanies a separate white paper, CFO as Value Creator: Corporate Finance and Accounting Leadership in Sustainable Business and the Integrated Enterprise, that “provides the basic insights about the finance professional's role in sustainable business.”
 
Rounding out the analysis of the ESG playing field, the AICPA’s Center for Audit Quality published The Role of Auditors in Company-Prepared ESG Information: Present and Future, a July 2020 report that describes how “auditors can serve in engagements to enhance the reliability of ESG information.” The report also includes considerations and questions for company boards of directors and investors.
 
While new refinements in reporting continue to develop, the guard against fraudulent reporting must not be neglected. Despite improvements in protections, scandalous financial activities still cast questions on the profession and the audit watchdogs. Wirecard AG, until recently a rapidly rising internet payment processing services phenomenon, is now becoming known as Germany’s Enron, following its June 2020 collapse. Just as Enron in America and Carillion in Great Britain led to the reformation of audit standards and the creation of new independent watchdogs in those countries, Germany is now facing a rude awakening to the shortcomings of audit firms, standards, and regulators charged with overseeing the audit profession.
 
Wirecard had been the subject of questionable practices for a number of years. As far back as April 2015, the Financial Times had challenged certain financial and accounting aspects of Wirecard’s operations. But even when more pointed accusations were made by the paper in February 2019, Germany’s Federal Financial Supervisory Authority (BaFin) initially went after the Financial Times for their reporting, instead of Wirecard. Though other investigations of the company ensued, not until the Spring of 2020 did the news of missing cash totaling some $2 billion lead to the total implosion of Wirecard and the arrest of top executives.
 
Whether the missing cash was not detected by the auditors, Ernst & Young, due to the elaborate fraudulent scheme, or merely to a lapse in basic audit procedures, remains to be determined. Also, BaFin and the Financial Reporting Enforcement Panel (FREP), Germany’s accounting watchdog, have come under question as to the effectiveness of their oversight. FREP has indicated that its powers are limited, which sounds eerily like the situation with Britain’s Financial Reporting Council (FRC), which in the wake of Carillion and other audit failures, is in the process of being replaced by a more robust new agency.
 
As if the cash manipulation scheme was not enough, new money laundering charges are now emerging against Wirecard as well. Only time will tell the ultimate ramifications as Wirecard takes its place among the devastating financial scandals of the twenty-first century.      
 
Further details can be found at CAQ Report Reveals How Auditors Enhance The Reliability of Company-Reported ESG Information  and Wirecard scandal will have cascading impact on Germany’s audit landscape.
(https://www.thecaq.org/new-report-reveals-how-auditors-enhance-the-reliability-of-company-reported-esg-information/) and (https://www.complianceweek.com/accounting-and-auditing/wirecard-scandal-will-have-cascading-impact-on-germanys-audit-regulatory-landscape/29158.article).
 
Covid-19 related actions and activities by audit and accounting organizations throughout the world.

 
IASB
International Accounting Standards Board (www.ifrs.org)
  1. Coronavirus Information and resources – link – https://www.ifrs.org/news-and-events/2020/03/the-coronavirus-and-the-foundations-work/
  2. Classification of Liabilities as Current or Non-current (Amendments to IAS 1), issued July 15, 2020, responds to COVID-19 by deferring the effective date of the amendment by one year, generally beginning in 2023.

IFAC
International Federation of Accountants (www.ifac.org)
  1. COVID-19 Resources from IFAC's Network – link https://www.ifac.org/knowledge-gateway/series/COVID-19-resources-ifacs-network
  2. International Public Sector Accounting Standards Board (IPSASB)) – COVID-19 Intervention Assessment Tool, published July 22, 2020, “provides an immediate way of evaluating the economic impacts of current and planned policy initiatives, which can be used independently of any given jurisdiction’s public sector accounting basis.”
  3. Six Recommendations for Audit Committees Operating in the "New Normal," Statement issued jointly by IFAC and IIA on July 8, 2020, calling on audit committees “to ensure objective oversight of organizational activities, including risk management, performance, controls, and key processes.”

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
  1. Coronavirus Information and resources – link - https://www.accaglobal.com/us/en/cam/coronavirus.html

CIMA
Chartered Institute of Management Accountants (www.cimaglobal.com)
  1. Update on the Coronavirus and Impact for Association Activities – link - https://www.cimaglobal.com/Members/Update-on-Coronavirus/

IIRC
International Integrated Reporting Council
(www.theiirc.org)
  1. Integrated Thinking and Doing an Integrated Report, 3rd Colloquium Memorandum report published July 15, 2020, by The Good Governance Academy, an academic collaboration supportive of the IIRC. “The report shares insights into the adoption of integrated thinking, some of its clear benefits, such as enhanced connectivity, improved internal communications and greater pro-activity and how to approach developing an integrated report.” The report emphasizes the added importance the topic takes on during this period of “Coronanomics.”

WORLD ECONOMIC FORUM
(www.weforum.org)
  1. The COVID Action Platform – link - https://www.weforum.org/platforms/covid-action-platform -  focuses on three priorities: 1. Galvanize the global business community for collective action. 2. Protect people’s livelihoods and facilitate business continuity. 3. Mobilize cooperation and business support for the COVID-19 response.
  2. New Nature Economy Report II: The Future of Nature and Business, published July 24, 2020, in collaboration with Alpha Beta, an economic development consulting firm, “provides the practical insights needed to take leadership in shifting towards a much needed nature-positive economy.”

Africa, Europe, India and the Middle East (AEIME)

FRC– Financial Reporting Council of the UK(www.frc.org.uk)
  1. FRC guidance for companies and auditors during COVID-19 crisis – link - https://www.frc.org.uk/about-the-frc/COVID-19.
  2. Exposure Draft - FRED 76 Draft amendments to FRS 102 and FRS 105 – COVID-19-related rent concessions, issued July 23, 2020, “proposes explicit requirements for accounting for temporary rent concessions for operating leases occurring as a direct consequence of the COVID-19 pandemic, and within a limited timeframe.  They shall be recognised over the period the concession is intended to compensate, reflecting the economic substance of the concessions and their temporary nature.” Comment period ends September 1, 2020.

ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)
  1. Coronavirus – updates – link - https://www.icaew.com/insights/coronavirus.

EFRAG– European Financial Reporting Advisory Group(www.efrag.org)

No new developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)
  1. AICPA Coronavirus (COVID-19) Resource Center – link - https://www.aicpa.org/news/aicpa-coronavirus-resource-center.html
FASB Financial Accounting Standards Board (www.fasb.org)
  1. FASB Response to COVID-19 – link - https://www.fasb.org/COVID19
  2. Exposure Draft – Proposed Accounting Standards Update – Effective Date and Early Application - Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), issued July 9, 2020, delays implementation by one year generally to 2023 for public entities and 2024 for all others, as a result of COVID-19. Comment period ends August 24, 2020.
GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. GASB Response to COVID-19 – link -  https://www.gasb.org/COVID19
COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No new developments

PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)                                
  1.  PCAOB Response to COVID-19 – link -  https://pcaobus.org/Pages/response-to-COVID-19.aspx

SASB– Sustainability Accounting Standards Board(www.sasb.org)                               
  1. See article in this issue for developments.
SEC– Securities and Exchange Commission(www.sec.gov)                      
  1. SEC Coronavirus (COVID-19) Response – link - https://www.sec.gov/sec-coronavirus-covid-19-response
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
 

IASB
International Accounting Standards Board (www.ifrs.org)

No new developments

IFAC
International Federation of Accountants (www.ifac.org)

No new developments

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)

No new developments

CIMA
Chartered Institute of Management Accountants (www.cimaglobal.com)

No new developments

IIRC
International Integrated Reporting Council
(www.theiirc.org)

No new developments

WORLD ECONOMIC FORUM
(www.weforum.org)

No new developments

Africa, Europe, India and the Middle East (AEIME)

FRC– Financial Reporting Council of the UK(www.frc.org.uk)
  1. Exposure Draft - FRED 75 Draft amendments to FRS 104 – Going concern, issued July 23, 2020, “proposes to: a. clarify the requirement to assess the going concern basis of accounting; and b. require the disclosure of any related material uncertainties, when preparing interim financial statements in accordance with FRS 104. Comment period ends September 1, 2020.
  2. ISA (UK) 315 (Revised – July 2020) - Identifying and Assessing the Risks of Material Misstatement, issued July 9, 2020, adopts the standard of the same name issued by the International Auditing and Assurance Board (IAASB) in December 2019. Effective generally for audits for periods beginning in 2022 and later.
  3. International Standard on Assurance Engagements (ISAE) (UK) 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, issued July 9, 2020, adopts generally the corresponding ISAE issued by the IAASB in December 2013. Effective for reports dated on or after September 15, 2020.
  4. Principles for operational separation of audit practices, issued on July 6, 2020, with the objectives to “1: Improve audit quality by ensuring that people in the audit practice are focused above all on delivery of high-quality audits in the public interest; and 2: Improve audit market resilience by ensuring that no material, structural cross subsidy persists between the audit practice and the rest of the firm.” Implementation plans from the Big 4 firms are required by October 23, 2020, with implementation to be completed by June 30, 2024.

ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)

No New Developments

EFRAG– European Financial Reporting Advisory Group(www.efrag.org)
 
  1. Accounting for crypto-assets (liabilities): holder and issuer perspective, Discussion Paper published July 20, 2020, to gather input to determine what, if any, new or amended IFRS standards are needed to clarify the accounting for crypto-assets and liabilities. Comment period ends July 31, 2021.


Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)
  1. Auditing Standards Board (ASB) - Statement on Auditing Standards No. 143, Auditing Accounting Estimates and Related Disclosures, issued July 10, 2020, supersedes SAS No. 122 and amends various sections of other SAS’s, providing “more robust guidance for auditors who are addressing an increasingly complex financial reporting environment.” Effective generally for periods ending after December 15, 2023.
  2. Auditing Standards Board (ASB) - Statement on Auditing Standards No. 142, Audit Evidence, issued July 09, 2020, “addresses the evolving nature of business and audit services and issues that have arisen since extant AU-C section 500 was originally issued. The issues arising include the use of emerging technologies by both preparers and auditors, the application of professional skepticism, the expanding sources of information to be used as audit evidence, and more broadly, the accuracy, completeness, relevance and reliability of audit evidence.” Effective generally for periods ending after December 15, 2022.
FASB Financial Accounting Standards Board (www.fasb.org)
 
  1. Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), ASU 2020-06 - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity), issued August 5, 2020, “to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liabilities and equity.” Effective generally for public entities in 2022 and for all others in 2023.
  2. Exposure Draft - Proposed Statement of Financial Accounting Concepts: Concepts Statement No. 8, Conceptual Framework for Financial Reporting, Chapter 4: Elements of Financial Statements, issued July 16, 2020. The new chapter “defines 10 elements of financial statements to be applied in developing standards for public and private companies and not-for-profit organizations. They are assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income.” Comment period ends November 13, 2020.

GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. Exposure Draft - Financial Reporting Model Improvements, issued July 24, 2020, “designed to improve to key components of the blueprint for state and local government annual financial reports.”  The comment period ends February 26, 2021.

COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)
  1. Blockchain and Internal Control: The COSO Perspective, research paper published August 4, 2020, sponsored by Deloitte, “provides perspectives for using the COSO Internal Control – Integrated Framework (2013) to evaluate risks related to the use of blockchain in the context of financial reporting and to design and implement controls to address such risks. It is intended to help inform decisions regarding oversight, risks, and internal control over financial reporting (ICFR) in a blockchain environment.”

PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)                                

No New Developments

SASB– Sustainability Accounting Standards Board(www.sasb.org)                               

No New Developments

SEC– Securities and Exchange Commission(www.sec.gov)                      

No New Developments


ADDITIONAL
A&A NEWS


The perception of audit has changed – and with it the market 
Accountancy Age (https://bit.ly/2PVqeEa)

8 things to know about the audit evidence standard 
AICPA (https://bit.ly/3kLo0FF)

Accountants leverage RPA amid coronavirus 
Accounting Today (https://bit.ly/2Y1b9oW)

Evaluating blockchain and internal control through a COSO lens
Journal of Accountancy (https://bit.ly/3iGtX4R)

BEIS committee MP calls for patience over audit reform
Accountancy Age (https://bit.ly/3iBWIj2)

Accounting Today's complete coverage of the coronavirus impact
(https://bit.ly/3kEJDaC)

Accountancy Age's Resource on UK regulations on accountancy during coronavirus
(https://bit.ly/2PQWs3l)

California CPA Society Coronavirus Resources and Information
(https://bit.ly/3iEKt5t)

Accountingweb's Coronavirus Content Series
(https://www.accountingweb.com/content/coronavirus-content-series)

Accountancy Daily Corona Virus Resources
(https://www.accountancydaily.co/coronavirus-0)

China Briefing's Coronavirus Insights for Your Business in China
(https://www.china-briefing.com/landing/coronavirus-updates)

 
 Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession.  The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting enabling them to stay on the forefront of industry trends.This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice.  Please refer to your advisors forspecific advice.


Editor Gerald E. Herter 
email:  gerry.herter@integra-international.net
     
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