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Audit & Accounting Alert Newsletter

Issue 1 | January 2015

At-A-Glance

Gerry Herter

The New Year brings renewed efforts to advance the role of accounting and the accounting profession around the world. In the United States, the future shows a glimmer of life for the International Financial Reporting Standards. Our first article reads between the lines of recent SEC thinking and joint FASB/IASB activities.

Next, we turn to the ever-present threat of fraud in all organizations. Our second article describes a new report from the Anti-Fraud Collaboration, detailing preventive measures designed to make an organization fraud-resistant.

 Finally, we revisit the emerging realm of integrated reporting and accounting for sustainability. More robust approaches and standards are finding their way into the reports of a growing number of companies, while respected world figures tout the role of accountants in furthering the cause. Our third article highlights the developments.

Editor Gerald E. Herter, CPA

In This Issue 

Signs of Life for IFRS in the United States

SEC opens the door slightly while the FASB and IASB consider a future together

Famed American author Mark Twain once said, upon hearing of an obituary written about him, “The reports of my death are greatly exaggerated,” In last month’s issue of the Audit & Accounting Alert, we quoted former SEC Chairman, Christopher Cox, stating “I come to bury IFRS, not to praise them.” Cox was declaring that full scale adoption of IFRS in the United States was no longer possible. While that may be true, recent news indicates that while IFRS may be on “life support” in the US, there still is a “heartbeat.”

The most dramatic news came from James Schnurr, the SEC’s new chief accountant, speaking at the AICPA National Conference on Current SEC and PCAOB Developments in Washington, D.C. Schnurr indicated that the SEC is considering the possibility that US companies in the future may be allowed to “prepare IFRS-based financial information in addition to U.S. GAAP based information that they use for purposes of SEC filings.” Making this approach optional would be a practical solution, since the added cost of providing the IFRS data would only be incurred by companies finding the effort beneficial. This is just one of various alternatives the SEC is studying. Schnurr has been asked by SEC Chair Mary Jo White to take a fresh look at the SEC’s still unresolved position on IFRS. The goal is to make a recommendation so that clarity can be provided. Hopefully, the new 2015 year will bring some movement in this area.

Schnurr also expressed appreciation for the work that the FASB and IASB have done in developing high quality converged accounting standards. At the same time, he stressed the importance of assuring consistency as converged standards are implemented. Ironically, consistency would appear to be more of a challenge in a principles-based IFRS world than in a rules-based GAAP world. Since a principles-based system relies more on judgment without detailed rules, the chances for diversity of application could be greater.

As Schnurr pointed out, the consistency challenge is facing a current test with implementation of Revenue from Contracts with Customers, the newly converged standard. Speaking at the same conference, Russell Golden, FASB Chairman, noted that the FASB staff is researching implementation issues that the joint FASB/IASB Transition Resource Group has already identified. Three significant areas of concern are “1) application issues associated with the pattern of revenue recognition of intellectual property transactions; 2) clarification of guidance related to the determination of certain performance obligations; and, 3) further development of guidance related to determining when revenue should be gross versus net of certain types of arrangements.”

The common goal to consistently implement standards will be a driving force motivating the FASB and IASB to continue working together, despite the formal end of their efforts to converge all standards. The final joint project on leases is nearing completion. Though both boards agree that leases belong on the balance sheet, they cannot reach agreement on the treatment of the related expenses. Schnurr sees this difference a “missed opportunity to not remain converged on such a broadly applicable topic.”

The FASB and IASB will expand their joint efforts as part of the new Accounting Standards Advisory Forum (ASAF). The ASAF joins national and regional accounting standard setters from 12 jurisdictions around the world. The group’s objective is to contribute towards the achievement of globally accepted high-quality accounting standards.

 For further information, see James Schnurr Remarks before the 2014 AICPA National Conference on Current SEC and PCAOB Developments and Remarks by Russell G. Golden.


The Fraud-Resistant Organization

New report from the Anti-Fraud Collaboration stresses prevention

Legendary American football coach Vince Lombardi once said that “the best defense is a good offense.” However, in the arena of financial reporting, when the avoidance of fraud is at stake, the new report from the Anti-Fraud Collaborative, The Fraud-Resistant Organization: Tools, Traits, and Techniques to Deter and Detect Financial Reporting Fraud, encourages good defensive measures as the best offense to forestall fraud before it can take hold.

The Anti-Fraud Collaboration was formed in October, 2010 to bring together the four members of the “financial reporting supply chain.” The four include 1) company financial management represented by the Financial Executives Institute, 2) internal auditors represented by the Institute of Internal Auditors, 3) boards of directors and their audit committees represented by the National Association of Corporate Directors, and 4) external auditors represented by the Center for Audit Quality. Conscientious and trustworthy individuals at all levels are key, since the report states

“if all who have a role in the financial reporting supply chain understand their responsibilities, encourage a strong tone at the top and ethical culture through both word and deed, know how to exercise skepticism, and communicate consistently and effectively with all relevant parties across all geographic locations, an environment conducive to financial reporting fraud is less likely to occur.”

The first chapter summarizes the “Fraud-Susceptible Culture,” noting that the typical fraudster is often the otherwise honest employee who succumbs to the convergence of the three sides of the “fraud triangle:” pressure, opportunity and rationalization. The presence of such conditions likely results from a lack of skepticism, ethical lapses, and/or communication breakdowns in the reporting supply chain.

The second chapter turns to a military strategy, “defense in depth,” a “complex and multilayered defense system to protect against threats,” here referring to the supply chain members as the layers of defense against fraud. Skepticism is singled out as essential at all levels. The six characteristics of skepticism presented are:

  1. A questioning mind—A disposition to inquiry, with some sense of doubt,
  2.  Suspension of judgment—Withholding judgment until appropriate evidence is obtained,
  3.  Search for knowledge—A desire to investigate beyond the obvious, with a desire to corroborate,
  4.  Interpersonal understanding—Recognition that people’s motivations and perceptions can lead them to provide biased or misleading information,
  5.  Autonomy—The self-direction, moral independence, and conviction to decide for oneself, rather than accepting the claims of others, and
  6.  Self-esteem—The self-confidence to resist persuasion and to challenge assumptions or conclusions.

The Professional Judgment Resource, (PJR) developed by the CAQ in August, 2014, contains a helpful tool to help overcome threats to skepticism. Drawing from the PRC, the report lists “Common Judgment Tendencies and the Strategies to Avoid Them and Mitigate Bias”. These are:

  1.  Confirmation - The tendency to put more weight on information that is consistent with initial beliefs or preferences. Strategy – a) Make the opposing case and consider alternative explanations, and b) Consider potentially disconfirming or conflicting information.
  2.  Overconfidence - The tendency to overestimate one’s own ability to perform tasks or to make accurate assessments of risks or other judgments and decisions. Strategy – a) Challenge opinions and experts, and b) Challenge underlying assumptions.
  3.  Anchoring - The tendency to make assessments by starting from an initial value and then adjusting insufficiently away from that initial value. Strategy – a) Solicit input from others, and b) Consider management bias, including the potential for fraud or material misstatements.
  4.  Availability - The tendency to consider information that is easily retrievable or what’s easily accessible as being more likely or more relevant. Strategy – a) Consider why something comes to mind, b) Obtain and consider objective data, and c) Consult with others and make the opposing case.

These are useful principles that would be beneficial to keep in mind for all forms of human discourse, particularly nowadays when questions of politics or religion are often in the forefront of discussions.

In the chapters that detail the role of each level of the supply chain, the implications and challenges of their global interrelationships are underscored. For example, there needs to be an awareness and plan to consider that:

  1. The concept of skepticism is discouraged in some places.
  2.  Ethical principles and codes of conduct must be translated into the various languages in a way that is sensitive to the nuances and unique nature of each country’s customs.
  3.  Whistleblower programs must be tailored to conform with local laws and cultural differences.
  4.  In rapidly growing markets, boards need a more detailed understanding of the business.

The report points out that these issues should be tackled first by learning “the laws, customs and unique risks presented by various locations” and then applying that knowledge by tailoring training and communications specifically to each location while taking care to preserving the original principles.

 For further information, see The Fraud-Resistant Organization: Tools, Traits, and Techniques to Deter and Detect Financial Reporting Fraud.


Sustainability Accounting and Reporting Forge Major Inroads

Diverse sources promote the role of accountants

A year ago in the January 2014 issue of Audit & Accounting Alert, we reported on the release of the International Integrated Reporting <IR> Framework. As noted in the Framework, “the primary purpose of an integrated report is to explain to providers of financial capital how an organization creates value over time. An integrated report benefits all stakeholders interested in an organization’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers.”

A number of significant developments have propelled the cause of integrated reporting forward, as well as the sustainability accounting standards that form the foundation. At the recent World Congress of Accountants held in Rome, one of the three major sessions was titled Integrated Thinking, The Key to Improved Performance and Value Creation. “Integrated thinking means that integrated reporting is inextricably connected to the organization’s management processes concerning resources, relationships, risks, and opportunities—in both strategy and daily management.” (Alta Prinsloo, IFAC, 11/25/14).

While there is still substantial work to be done before integrated reports are as common and standardized as current financial reports, a surprising amount has already been accomplished and much more is in process.

Though Integrated Reporting is in the early stages in the United States, the concept is much further along elsewhere. In South Africa, public companies have been required to produce integrated reports for several years already. A 2014 research report by the World Business Council for Sustainable Development analyzed results for South African companies thus far. From interviews with companies and institutional investors, the report concluded that integrated reporting is a journey for the entire organization, integrated thinking is key to successful integrated reporting, but not a prerequisite, and assembling an integrated report promotes integrated thinking, by breaking down silos of business activity and introducing a new way of assessing value. Takeaways to be considered for producing an effective integrated report are:

  1.  Obtain buy-in and support from the top
  2.  Establish a formal structure
  3.  Put in place systems to collate data and information
  4.  Set up broadly represented integrated teams
  5.  Maintain an ongoing annual process that aligns with external reporting
  6.  Have a robust process for developing content.

Since technology will be critical for integrated reporting, the IIRC has launched a technology initiative to assess how technology is being used, and how it can be developed and assimilated to assist the integrated reporting process. Deloitte and PwC are joining several other companies as charter members in this initiative.

In a separate development, the Institute of Management Accountants (IMA) has joined the International Integrated Reporting Council (IIRC). An American organization, the IMA will help push the U.S. along in the <IR> movement. IMA president, Jeff Thomson, pointed out, however, that the benefits <IR> brings will need to be balanced with the “current reality of disclosure overload as well as the potential for litigation and reputation risk.”

Robert Herz, former chairman of the Financial Accounting Standards Board (FASB), has recently joined the board of another American based organization, Sustainability Accounting Standards Board (SASB). For integrated reporting to be effective, the underlying accounting standards that delineate the elements of sustainability must be clearly defined and consistent. The SASB was established to develop voluntary industry standards. Thus far, provisional standards have been issued for 45 industries in the following sectors: healthcare, financials, technology and communications, non-renewable resources, transportation, and services. Standards for another 35 industries are in the works for the resource transformation, consumption, renewable resources & alternative energy, and infrastructure sectors.

As if these developments were not enough, accountants have also gained the attention of two world figures. Britain’s Prince Charles is no newcomer to the cause of sustainability. In fact, The Prince’s Accounting for Sustainability Project (A4S), which he initiated ten years ago, was responsible for forming the IIRC. Speaking at the A4S Summit in December, 2014, he stated “how vital I think it is that we properly account for the real value of all our economic activities. It is quite simply an essential skill if mankind is to thrive within the constraints of an increasingly crowded planet. Finance and accounting professionals provide, as it were, the dashboard to set the direction and speed of travel of our organizations and economies, the engine to translate those instructions into action and the steering to avoid the worst of the potholes along the road!” He went on to encourage the members to “work with the finance, accounting and investment community to dispel the idea that there is necessarily a choice between making money on the one hand and "doing the right thing" on the other. On the contrary, once it is recognized that "business as usual" is unsustainable it follows naturally that those organizations which start to develop resilient business models will be the ones which succeed.”

Even Pope Francis has gotten into the act. At the afore-mentioned World Congress of Accountants, he gave perspective to the efforts being made by affirming that “All those called to work in various capacities in the economy and finance, are called to make choices that foster the social and economic well-being of the whole of humanity…In your activity, you accountants support businesses, but also families and individuals, in giving your economic and financial advice… If we want to give future generations an improved environmental, economic, cultural and social patrimony than we inherited, we are called to assume the responsibility to work for a globalization of solidarity. Solidarity is a requirement that flows from the network itself of the interconnections that are developing with globalization.” 

 For further information, see Integrated Thinking: The Key to Improved Performance and Value Creation and SASB Proposes Sustainability Accounting Standards for Service Industries and The Prince of Wales hosts the Accounting for Sustainability Annual Forum


Additional A&A News 

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

  1. China Auditors See Settlement Nearing in Standoff With SEC
  2. More Hints on Putting New COSO to Work
  3. U.K. and Australian Accounting Groups Join Forces
  4. Bangladesh audit reform moves forward, despite disagreements
  5. 7 risk areas for the 2014 audit cycle
  6. IASB launches Investors in Financial Reporting Program

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