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Audit & Accounting Alert Newsletter

Issue 10 | December 2014

At-A-Glance

Gerry Herter

In this issue, we spotlight three recent major events in the accounting world. First, Integra International members celebrated 20 years as a worldwide association in October. The forward-looking vision of the founders was clearly evident when members from six continents joined together to report the increasingly shared impact of International Financial Reporting Standards (IFRS) in their countries. See our opening article for details.

At the same time, another joint international effort by the Chartered Institute of Management Accountants (CIMA) and the American Institute of Certified Public Accountants (AICPA) produced the first comprehensive set of Global Management Accounting Principles (GMAP). For IFRS to be effective on a global basis, the financial statements prepared using the international standards must have a consistently solid foundation of accounting policies and procedures at work in the companies preparing them. The GMAP represents a practical step forward toward that goal, as explained in our second article.

Finally, we turn to financial reporting on unaudited financial statements in the United States. Our third article summarizes the long-awaited pronouncement that clarifies when and how a practicing CPA is associated with a company’s financial statements. The new standard ends several decades of confusion, with guidance that is similar, but not fully converged, with international standards.

Editor Gerald E. Herter, CPA

In This Issue 

Integra Highlights 20th Year Anniversary Conference with Worldwide IFRS Roundup

Variations standout as countries adapt the “universal” standards to local conditions

Showcasing the association’s far reaching impact since its founding in 1994, Integra International members from six continents highlighted the changing role of International Financial Reporting Standards (IFRS) in their respective countries, at the worldwide conference held recently in Vienna, Austria. A wide range of IFRS use was noted, from substantially full adoption all the way to non-adoption. Even those countries that have fully adopted IFRS have inserted differences to adapt to local regulations or customs. Countries reporting at the conference included Argentina, Australia, France, India, Israel, Japan, Nigeria, New Zealand, the United States of America, and the United Kingdom.

When establishing Integra International near the close of the twentieth century, the founders recognized the growing importance of worldwide collaboration. By 2001, when the International Accounting Standards Board (IASB) was formed to accelerate the move to global accounting standards, the association was ready with a structure in place that enabled members from all parts of the world to work together on this ambitious endeavor.

Just how successful IFRS have been depends on your vantage point in the world. Speaking at a United Nations Conference on Trade and Development (UNCTAD) meeting in October, 2014, Michael Prada, IASB Trustees Chairman, declared that “We are now in a position in which IFRS is undeniably the de facto global accounting standard.” Prada has plenty of statistics to back up his claim. In a global survey of standard setters “representing around 96 per cent of global GDP,” he reports that “four-fifths of the world now mandates the use of IFRS for all or most public companies. Of the remaining one-fifth, almost all countries permit the use of IFRS for some types of companies. The research has also shown that the jurisdictions surveyed have made very few modifications to IFRS and, where they did, the modifications affected only a few companies and were generally regarded as temporary.”

Those in the United States tend to view IFRS in a different light, as reported to the group in Vienna by Integra Global Board member Steve Austin. Austin shared a comment made by former SEC Chairman, Christopher Cox at a June, 2014 conference: “Today, I come to bury IFRS, not to praise them. The fact is, far too much time has gone by with no meaningful progress. I think we have to fairly conclude that the moment has passed. Full-scale adoption of IFRS in the United States might once have been possible, but it is no longer. This is not a prognosis. It’s just a statement of fact.”

While those on opposite sides of the Atlantic may differ as to how well IFRS have been adopted around the world, there is no question as to the pervasive impact various elements of this wide-ranging initiative have had. A prime example, illustrated by Austin, is the sweeping new standard, Revenue from Contracts with Customers.  As covered in recent issues of this publication (see the June, August and September, 2014 issues), the many countries already on board with IFRS, as well as the United States, have agreed to be bound by a single universal standard for reporting revenue in financial statements. Recognizing the tremendous challenge of bringing the world into sync with this standard, an international Transition Resource Group is already in place to work out the kinks.

Integra International has also been quick to respond. At the Vienna conference, a new Audit & Accounting group was formed under the leadership of Integra member Marzena Richter, from the accounting firm of Staniszewski & Richter, headquartered in Warsaw, Poland. The group will coordinate efforts by Integra members across the world as they work to effectively implement the new Revenue standard, as well as other issues that develop. Consequently, Integra International members will be well positioned to assist clients as they navigate the new accounting pronouncements.

 For further information, see Integra International Celebrates its 20th Anniversary and Integra International Appoints New Accounting & Audit Group Leader.


Global Management Accounting Principles Issued

The quest for “universal” management accounting principles resembles the IFRS movement to worldwide financial reporting standards

The credibility of IFRS based financial reports will depend to a great extent on the presence of a solid undergirding of sound global management accounting principles (GMAP). Yet until now there has not been a push toward a single set of universal management accounting principles comparable to the campaign for IFRS. Recognizing this missing element, the Chartered Institute of Management Accountants (CIMA) and the American Institute of Public Accountants (AICPA) in 2010 jointly embarked on a mission to develop those principles.

Analogous to the IFRS-based relationship between the American-based Financial Accounting Standards Board (FASB) and the international-based International Accounting Standards Board (IASB), the GMAP cause brought together the American-based AICPA and the international-based CIMA. Out of their initial research came the Consultation Paper (CP) issued in February, 2014 that was covered in our March 2014 Audit & Accounting Alert. The wide-ranging responses to the CP from a diverse set of stakeholders around the world confirmed and strengthened the principles as they were finalized.

The formal GMAP, published on October 22, 2014, received instant praise from a group of corporate executives, who stated in a letter to the Financial Times:

“The rise in both the amount of data and the pace at which businesses now operate have not been matched with the systems and mechanisms required to make the right decisions at the right time…Successful businesses recognise the need to professionalise the decision-making process through a framework that factors in external and non-financial information covering the present and the future. That is why we support the new set of Global Management Accounting Principles developed by CIMA and the American Institute of Certified Public Accountants. At a time when economic growth and recovery have never been so critical, we encourage government and business leaders globally to consider how these Principles can help drive sustainable success in their organisations.”

Management accounting is defined as “the sourcing, analysis, communication and use of decision-relevant financial and non-financial information to generate and preserve value for organisations.” With that definition in mind, the GMAP are focused around four overriding principles, as described in the document:

  1. Communication provides insight that is influential. Good management accounting begins and ends with conversations, allowing management to cut across silos and create a path to integrated thinking.
  2. Information is relevant. One of management accounting’s central roles is providing decision-makers the right information on a timely basis. If the needs of the decision-maker are understood, then identification, collection, validation, preparation, and storage of timely information can be carried out.
  3. Impact on value is analysed. This principle requires a thorough understanding of the business model and the macroeconomic environment. Strong management accounting functions are able to turn information into insight by assessing the impact of scenarios being considered.
  4. Stewardship builds trust. The principles require active management of relationships and resources “so that the financial and non-financial assets, reputation, and value of the organisation are protected.”

These principles are further delineated through the 14 identified practice areas:

  1. Cost transformation and management
  2. External reporting
  3. Financial strategy
  4. Internal controls
  5. Investment appraisal
  6. Management and budgetary control
  7. Price, discount and product decisions
  8. Project management
  9. Regulatory adherence and compliance
  10. Resource management
  11. Risk management
  12. Strategic tax management
  13. Treasury and cash management
  14. Internal audit

A diagnostic checklist can be downloaded that provides a practical approach for applying the principles to a specific company. Best practice questions are offered throughout.

First, the importance of qualified personnel is explored by spelling out the necessary competencies, organized by questions designed to assess technical, business, people, and leadership skills.

Next, the adequacy and effectiveness in the company of the four overriding principles are analyzed with questions that focus on strategy, planning, execution and review.

For each of the fourteen practice areas, a definition is given, the value to the organization is described, and then questions serve to probe how well the company’s management accounting function is addressing the practice area.

The principles and the checklist will prove useful to management and CPA advisors alike in strengthening the underpinnings of the management and financial reporting accounting systems.

For further information, see Global Management Accounting Principles


Reporting on Unaudited Financial Statements gets a Major Overhaul in the United States

AICPA issues new Compilation and Review Standard

The late 1970’s brought two major changes to public accounting in the United States that are still with us today. First, in 1977, peer review was introduced to strengthen the quality of assurance services. Then in 1978, just after I joined my current firm to bolster their accounting and audit practice, reporting on financial statements was turned upside down. For many years prior to 1978, there had been two primary financial statement reports: audited and unaudited.

Then along came SSARS 1. No, I am not talking about the deadly virus that originated in China (SARS). The first Statement on Standards for Accounting and Review Services was issued in December 1978, casting a whole new light on financial statement reporting. The terms “compilation” and “review” took on new meaning for CPAs. Audits had become costly for small companies and were not always practical for their needs. Nevertheless, users wanted some assurance of the credibility of the financials that an unaudited report did not provide.

Now, some 36 years later comes the most significant change in reporting since the introduction of compilation and review: SSARS 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification. Consider that in 1978 accountants did not even have personal computers on their desks. Today, smart phones have much more power than the early personal computers, to say nothing of computing in the cloud. With the technological advances that have taken place, the need for a new look in reporting standards was long overdue.

Decades of confusion stemmed from the SSARS 1 requirement that all financial statements “submitted” by a CPA to a client or third party include, at least, a compilation report. Unfortunately, the pronouncement did not define “submission.” After years of creative attempts by practitioners to get around the requirement, SSARS 7, issued in 1992, added a definition stating that “financial statements have been submitted if the accountant has: (1) generated either manually or through a computer a financial statement or (2) materially changed account classifications, amounts or disclosures directly on client prepared financial statements.” That definition caused more years of confusion, so in the year 2000, SSARS 8 changed the submission definition to "presenting to a client or third parties financial statements that the accountant has prepared either manually or through the use of a computer software." Alas, that definition did not solve the problem. As technology has progressed, determining when a CPA has crossed the line from advising to preparing has become increasingly difficult.

Finally, in October, 2014, the issuance of SSARS 21 eliminated the guesswork, stating that a report is required only when a CPA is “engaged” to compile, review or audit financial statements. When engaged to perform a compilation, the existing rules generally continue to apply, and are listed here in the form that the new standard states them:

  1. A compilation report is required,
  2. The report is streamlined to differentiate the non-assurance compilation report from assurance (review and audit) reports so that the standard report contains only one paragraph with no headings,
  3. The compilation report must be modified whenever the accountant’s independence is impaired,
  4. An engagement letter must be signed by both the accountant and the client’s management, and
  5. The financial statements may or may not have disclosures.

If the CPA is engaged to prepare the financial statements, but is not engaged to perform an audit, review or compilation, then the standard states:

  1. No report is required,
  2. A legend is required on each page of the financial statements stating that no assurance is being provided, and
  3. An engagement letter must be signed by both the accountant and the client’s management.

The requirements for a “review” engagement are redrafted into the new “clarity” format, but with minimal changes otherwise.

According to the AICPA, international compilation and review standards were considered when producing SSARS 21, but there is not full convergence between them.

SSARS 21 is effective for financial statement engagements for periods ending on or after December 15, 2015, with early implementation permitted.

For further information, see Summary of SSARS No. 21


Additional A&A News 

The following links provide a selection of current articles devoted to highlighting other A&A topics currently making news.

  1. Auditor Independence Is the CFO’s Responsibility, Too
  2. IASB Vice-Chairman predicts period of calm for financial reporting
  3. PwC Contributes $1 Million to SASB
  4. Former AICPA chair named IFAC president
  5. Islamic finance body AAOIFI picks up pace with new standards
  6. FASB Studies Possible Deferral for Revenue Recognition

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.

Editor Gerald E. Herter  •  HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin, CA 92780-7924
 •  Tel: 1 714 505-9000  •  Fax: 1 714 505-9200  •  Email: gerry@hmwccpa.com