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Audit & Accounting Alert Newsletter

Issue 1 | January 2016

At-A-Glance

Gerry Herter

When gauging the depth of China’s financial reporting credibility, the dawn of a new year presents an opportunity to assess accomplishments and challenges on a world-wide stage. When the Audit & Accounting Alert first looked at China in May, 2012, the cautious optimism of International Accounting Standards Board Chairman Hans Hoogervorst, towards China’s progress, was coupled with the reality that much still needed to be done to overcome lingering suspicion in world markets. Our first article applauds the remarkable success of China’s convergence with International Financial Reporting Standards, while also deploring the country’s stubborn intransigence toward multi-national audit inspections.

The rapid pace of technological change, the persistence of deficiencies in audit performance, and the growing sense of doubt surrounding audit relevance, call into question the state of professional competence in the audit and accounting arena. The International Accounting Education Standards Board (IAESB) confronts these concerns in two new documents that spell out future needs and specifically address audit engagement partners. Our second article highlights the Board’s findings and advice.

Finally, our quarterly Worldwide Update covers news from organizations across the globe. 

Editor Gerald E. Herter, CPA

In This Issue 

China: Two Steps Forward, One Step Back

China’s steady, yet cautious move to modern financial reporting and accountability

While China is anxious to gain full acceptance into the world economy, the country’s guarded emergence from decades of a tightly controlled system can still present obstacles that are stubbornly resistant to change. The past two months have brought China admirable success with the International Financial Reporting Standards (IFRS) Foundation, while posing a stiff challenge for the Public Company Accounting Oversight Board (PCAOB).

China has been working toward modernized accounting standards for more than two decades. A process that began in earnest back in 1993 saw fruition with a joint statement in 2005 between the China Accounting Standards Committee CASC) and the International Accounting Standards Board (IASB). China stated a goal then of a standard setting program committed to convergence with international standards. Though the statement noted that “international convergence takes time to happen,” China followed through in 2006, announcing a major new set of standards moving the country well along the way to convergence. Those standards went into effect in 2007 as China continued the work.

Now in November, 2015, the IFRS Foundation, overseer of the IASB, and the Chinese Ministry of Finance, issued a new joint statement proclaiming success with Chinese Accounting Standards “substantially converged with IFRS.” China reaffirmed a “continued commitment towards the work of the IFRS Foundation, the G20-endorsed goal of a single set of high quality, global accounting standards and China’s vision to achieve this goal through full convergence with IFRS.” The bodies will continue to cooperate, will continue to involve China in future development of IFRS, and “will establish a joint working group to explore ways and steps to advance the use of IFRS within China and other related issues, especially for those internationally orientated Chinese companies.”

Unfortunately in the audit arena, progress has been more difficult. Interestingly enough, concurrent with the Chinese accounting standards issued in 2006, new auditing standards for CPAs were released that purportedly “bring China's auditing rules more closely into line with the International Standards on Auditing.” Determining just how well the Chinese have succeeded has proved to be a challenge for the United States audit regulator, the PCAOB.

 Concerned with preserving confidentiality of sovereign data, China has repeatedly refused access by the PCAOB and the U.S. Securities and Exchange Commission to audit workpapers of Chinese companies. An SEC lawsuit for such access, that settled almost a year ago, proved largely ineffective in solving the impasse, since China was not legally bound by the proceeding.

Some encouragement was forthcoming this past summer when the 2015 U.S.-China Strategic and Economic Dialogue produced the following declaration: “With respect for each other’s sovereignty and laws, the United States and China commit to strengthening cross-border cooperation on the oversight of the audits of public companies. The two sides are to work together to conduct a pilot inspection program aiming at establishing a cooperation mechanism of audit oversight to protect investors and promote public trust in each country’s capital markets. Both sides are to explore effective ways of cooperation, and to build experience that could support reliance in the future.”

However, six months later when speaking to the American Institute of CPAs’ annual Conference on Current SEC and PCAOB Developments on December 9, 2015, PCAOB Chairman James Doty expressed frustration with subsequent developments, stating that “coming to closure on the details of this pilot inspection program has, unfortunately, proven to be significantly more difficult than anticipated.” This bottleneck with China is especially disturbing when the trend with most international jurisdictions has been to cooperate and seek the mutual benefits that can come from joint audit inspections.

Investors have also raised concerns considering the wide-ranging extent of their holdings. A newly passed PCAOB rule will provide some clarity in this regard. On December 15, 2015, the PCAOB adopted a new rule titled Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards. The big news is that audit engagement partners will be required to be named in U.S. public company audit filings. However, along with that, other accounting firms that took part in the audit will also need to be disclosed. For companies with Chinese affiliates, the Chinese audit firms will be revealed. Though this measure does not resolve the lack of audit workpaper review, the reputations of the Chinese audit firms can at least be tracked, just as the reputations of the audit engagement partners will be opened to scrutiny.

China has been a fascinating enigma throughout recent history. The rapid advancements coupled with the inflexibly protracted holdups in the financial reporting and accountability realm are no different. Though progress appears glacial at times, the movement is in a positive direction. Hopefully that continues.

For further information, see China to explore further use of IFRS and Protecting the Investing Public’s Interest in Informative, Accurate, and Independent Audit Reports.


Enhancing Professional Competence

International board consults on future needs and offers guidance

With the reports of continued audit deficiencies detected by the PCAOB, the rapid pace of technology changes, and ongoing questions surrounding the relevance of financial statement audits, the timing is right for a fresh look at professional competence in the accounting profession. Globally, that task falls to The International Accounting Education Standards Board (IAESB), an independent standard setting body operating under the umbrella of The International Federation of Accountants.

The IAESB is addressing the issue from the perspectives of both Initial Professional Development (IPD) and Continuing Professional Development (CPD), in a Consultation Paper issued December 3, 2015, titled Meeting Future Expectations of Professional Competence: A Consultation on the IAESB’s Future Strategy and Priorities, and a document of Questions & Answers in support of International Education Standard 8: Professional Competence for Engagement Partners Responsible for Audits of Financial Statements (IES8).

In order to facilitate usefulness across jurisdictions, the International Education Standards (IES) have shifted in emphasis away from prescribed subject matter to a learning outcomes approach, which focuses on desired technical competence, professional skills, professional values, ethics and attitudes, practical experience and assessment of professional competence. The accomplishment of the outcomes under current conditions first requires an awareness of prevalent trends, which the Consultation Paper quantifies as follows:

1. Changing roles of professional accountants;

  •  Increasing depth and complexity of accounting issues;
  •  Growing range of accounting specializations, with distinct learning needs;
  •  Growing demands placed on professional accountants to be able to work in different jurisdictions and across national boundaries;

2. Changing policy and content;

  •  Increasing recognition by the audit profession of, and emphasis by audit regulators on, the need for auditors and audit firms to improve the quality of their work;
  •  Continuing importance of systemic risk in the accounting and auditing environment;
  •  Accelerating development of new forms of corporate reporting, including integrated reporting and their assurance;
  • Growing recognition of the dynamic Information Technology (IT) environment, including the use of data;
  •  Growing adoption of accrual-based International Public Sector Accounting Standards;
  •   Expanding professional accountancy education capacity-building initiatives in the developing world;

3. Changing nature of accounting education;

  •  Increasing innovation in professional education learning and development;
  •  Evolving accounting education methodology such as the recognition of prior learning;
  •  Changing nature and format of workplace learning.

Two prominent considerations for updating existing standards with regards to these trends revolve around the 1) perceived need for increased professional skepticism and professional judgment, and 2) “the growing impact of aspects of IT such as data analytics, automated and tagged financial reporting, data security, and cloud-based accounting environments” meaning “that professional accountants are increasingly required to research, mine, and interpret such data, rather than just prepare it.” Also, new areas of specialization may call for additional standards to assist with development of required competencies.

IES 8 specifically addresses the professional competence of audit engagement partners. The standard was revised to correspond directly to the “competence and capability requirements set out in International Standards on Auditing (ISA) 220 and International Standard on Quality Control (ISQC) 1.” The Questions & Answers clarify for engagement partners, audit firms and IFAC member bodies, a structured approach for the development, maintenance and assessment of the necessary competencies of professionals in the audit arena.

While IES 8 presumes that an engagement partner initially demonstrates the professional competence to be elevated to that role, the dynamic nature of the financial world, as delineated in the trends above, dictates that the engagement partner continually assess and update that competence as long as the audit function is performed. Successful fulfillment of this obligation requires both CPD and practical experience.

For regulators and audit firms as well, the overriding objective is away from just the routine of engagement partners taking a certain amount of CPD, to an approach that assures ongoing achievement of the understanding necessary to accurately and effectively address issues impacting the audits performed. The IES 8 Questions & Answers offer insights and suggestions for achieving that objective.

IES 8 goes into effect on July 1, 2016. Comments in response to the Consultation Paper are due by March 8, 2016.

For further information, see Consultation Paper, Meeting Future Expectations of Professional Competence and IAESB Staff Questions & Answers Publication.


Worldwide Update

Quarterly roundup of recent and upcoming actions and activities by audit and accounting organizations

Periodically, we summarize significant items impacting the accounting world.

International

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

  1. Exposure Draft – Application of Materiality to Financial Statements published October 28, 2015, is a proposed Practice Statement designed “to provide guidance to assist management in applying the concept of materiality to general purpose financial statements prepared in accordance with International Financial Reporting Standards (IFRS). Information is material if omitting or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity.” Comment period ends February 26, 2016.
  2. Exposure Draft: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts published December 9, 2015, “to address the temporary consequences of the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts Standard.” Comment period ends February 8, 2016.

IFACInternational Federation of Accountants (www.ifac.org)

  1. International Accounting Education Standards Board (IAESB) - Meeting Future Expectations of Professional Competence - Consultation Paper published December 2, 2015, “presents the proposed vision and strategy for the next five years that builds on the completion of its newly revised International Education Standards™ and its work to support the implementation of these standards.” Comment period ends March 8, 2016.
  2. Materiality in Integrated Reporting – published on November 10, 2015, in conjunction with the International Integrated Reporting Council, to provide guidance for the preparation of integrated reports.
  3. Creating Value with Integrated Thinking – Thought Paper published November 3, 2015. See December, 2015, Audit & Accounting Alert for a discussion of this report.
  4. International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft 57, Impairment of Revalued Assets and Exposure Draft 58, Improvements to IPSASs 2015 released October 14, 2015, propose to address property and intangible asset revaluation, and a variety of minor improvements of standards. Comment period ends January 15, 2016.
  5. Guide to Compilation Engagements – published September 24, 2015, to assist IFAC member organizations and their members with implementation of the standards for compilations.

ACCAAssociation of Chartered Certified Accountants (www.accaglobal.com/)

  1. The Data Revolution – research report issued jointly by ACCA and the Institute of Management Accountants (IMA) on December 9, 2015, addressing “three roles of data that present new opportunities for finance and accounting professionals: Data management, which when done correctly can increase productivity and reduce operational costs, whereas poor management can result in lost opportunities, strategic mistakes and financial losses; Data governance, which safeguards and facilitates key areas of data management, and is still an area of struggle for both small and large companies; Data lifecycle, which traditionally fell into the realm of IT and operations departments, will only become more complex and demand increased involvement from users across the business.”
  2. The Challenges of Assuring Integrated Reports: Views from the South African Auditing Community - research report issued November 20, 2015, using “expert insight from the South African business community to understand the challenges for integrated reporting as it evolves to deliver independent assurance in the same manner as conventional annual reports and financial statements. South Africa was the first nation in the world to mandate Integrated Reports (IR) five years ago in a move which has been roundly welcomed by the investor community."
  3. Companion Guide for Not-for-profits to the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) – guide published on October 16, 2015, “as a useful and reliable text to help those involved with financial reporting by not-for-profit entities, as well as international donors, national regulators and policymakers responsible for these matters.”

CIMAChartered Institute of Management Accountants (www.cimaglobal.com)

  1. Integrated Reporting in the Public Sector – report issued in December, 2015, “highlights the wider benefits of integrated reporting to public sector organizations, identifying relevant international examples,” that go “beyond just the production of user-friendly published accounts.”

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

FRCFinancial Reporting Council of the UK (www.frc.org.uk)

  1. Review of the UK Audit Firm Governance Code Consultation Paper issued December 7, 2015, proposes changes to emphasize the primary importance of audit quality, the role and voice of independent non-executives, and to strengthen investor engagement and transparency. Comments are due by March 11, 2016.
  2. Exposure Draft: FRED 63 Draft amendments to FRS 101 Reduced Disclosure Framework – issued December 11, 2015, proposes disclosure exemptions in relation to IFRS 15 Revenue from Contracts with Customers. Comments are due by March 31, 2016.
  3. Exposure Draft: FRED 64 Draft amendments to FRS 103 Insurance Contracts Solvency II – issued December 11, 2015, proposes amendments to FRS 103 Insurance Contracts to reflect changes in the regulatory framework. Comments are due by March 31, 2016.
  4. Exposure Draft: FRED 62: Draft amendments to FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland - Fair value hierarchy disclosures – issued November 04, 2015, proposals “intended to simplify the preparation of disclosures about financial instruments for financial institutions and retirement plans, whilst increasing the consistency with disclosures required by EU-adopted IFRS.” Comments are due by January 31, 2016.
  5. Providing Assurance on Client Assets to the Financial Conduct Authority, FRC Standard issued November 9, 2015, “covers the work auditors do when reporting to the Financial Conduct Authority (FCA) on the compliance by financial services firms, with the FCA’s Client Asset (CASS) rules.” Effective generally beginning in 2016.
  6. Exposure Draft: Guidance on the Going Concern Basis of Accounting and Reporting on Solvency and Liquidity Risks Guidance for companies that do not apply the UK Corporate Governance Code – issued October 15, 2015, “to assist directors in applying the relevant requirements in accounting standards and company law, incorporating recent regulatory developments such as the introduction of new UK and Ireland GAAP and the Strategic Report.” Comments are due by January 15, 2015.
  7. Enhancing Confidence in Audit: - Consultation Paper issued September 29, 2015, as proposed revisions to the Ethical Standard, Auditing Standards, UK Corporate Governance Code and Guidance on Audit Committees. Comments were due by December 11, 2015.

 Americas, Asia, Australia and New Zealand (AAANZ)

FASBFinancial Accounting Standards Board (www.fasb.org)

  1. U.S. GAAP Financial Reporting Taxonomy –2016 Version –available as of December 17, 2015, “is a list of computer-readable tags in eXtensible Business Reporting Language (XBRL) format that allows companies to tag precisely the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for, assemble, and process data so it can be readily accessed and analyzed by investors, analysts, journalists, and regulators.” The taxonomy is pending SEC approval.
  2. Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)—on December 16, 2015, announced affirmation with exposure draft issued on August 31, 2015. See October, 2015 Audit & Accounting Alert article for details. Standard to be issued in near future.
  3. Exposure Draft - Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement - issued December 3, 2015, designed to improve effectiveness of footnote disclosures, by clearly communicating the information most important to users, and clarifying disclosure requirements. The comment period ends February 29, 2016.
  4. Exposure Draft - Business Combinations: Clarifying the Definition of a Business - issued November 23, 2015, “to clarify the definition of a business with the objective of adding guidance to assist organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.” The comment period ends January 22, 2016.
  5. Income Taxes ASU 2015-17: Balance Sheet Classification of Deferred Taxes - issued November 20, 2015, “eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. Effective generally in 2017 for public companies and 2018 for private companies, with early application permitted.
  6. Three-Year Review of the Private Company Council-Final Report, issued November 18, 2015, outlines revisions to operations of the PCC to improve effectiveness. Decisions include that the PCC 1) maintains the ability to propose private company alternatives; 2) should increase the effectiveness of its advisory role; 3) should establish a technical agenda consultation group composed of FASB and PCC members; 4) will retain its size and composition; and 5) will have its oversight transition to the Trustees’ Standard-Setting Process Oversight Committee.
  7. Exposure Draft - Government Assistance: Disclosures by Business Entities about Government Assistance - issued November 12, 2015, “to increase transparency about government assistance arrangements entered into by businesses and other for-profit organizations.” The comment period ends February 10, 2016.
  8. Business Combinations ASU 2015-16: Simplifying the Accounting for Measurement-Period Adjustments – issued September 25, 2015, changes the requirement from retrospective accounting of the adjustments to only prospective recognition in the period the adjustment amounts are determined. Effective generally in 2016 for public companies and 2017 for private companies, with early application permitted.
  9. Exposure Draft - Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients - issued September 30, 2015, “to improve the guidance on collectability, noncash consideration, and completed contracts at transition in the new revenue recognition standard. Additionally, the amendments would provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers.  The comment period ended November 16, 2015
  10. Exposure Drafts - Proposed Concepts Statement—Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information and Proposed Accounting Standards Update, Notes to Financial Statements: Assessing Whether Disclosures Are Material - issued September 24, 2015. See November, 2015 Audit & Accounting Alert for discussion of materiality. The comment period ended December 8, 2015.

GASBGovernmental Accounting Standards Board (www.gasb.org)

  1. GASB Statement No. 79, Certain External Investment Pools and Pool Participants, issued December 23, 2015, “permits qualifying external investment pools to measure pool investments at amortized cost for financial reporting purposes.” Effective April, 2016.
  2. Exposure Drafts, Fiduciary Activities, “would establish guidance regarding what constitutes fiduciary activities for financial reporting purposes, the recognition of liabilities to beneficiaries, and how fiduciary activities should be reported;” Certain Asset Retirement Obligations, “would establish guidance for determining the timing and pattern of recognition for liabilities related to asset retirement obligations and corresponding deferred outflows of resources;” Pension Issues, “addresses practice issues raised by stakeholders during the implementation of Statements No. 67,Financial Reporting for Pension Plans, and No. 68,Accounting and Financial Reporting for Pensions.” All were issued on December 22, 2015, with comments due by February 12, 2016 for the Pension Issues ED, and March 31, 2016 for the others.
  3. GASB Statement No. 78, Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans, issued on December 11, 2015, “assists governments with these plans by focusing employer accounting and financial reporting requirements for those pension plans on obtainable information. Effective immediately.

AICPAAmerican Institute of Certified Public Accountants (www.aicpa.org)

  1. SOC 2 + HITRUST Illustrative Report – published on December 17, 2015, in collaboration with the Health Information Trust Alliance (HITRUST), “to assist CPAs in reporting on the fairness of the presentation of a description of a service organization’s system relevant to security, availability and confidentiality, and the suitability of the design and operating effectiveness of controls over those aspects of the system.
  2. Accounting and Review Services Committee (ARSC)                                                 a) Proposed Statements on Standards for Accounting and Review Services: Compilation of Prospective Financial Information, Compilation of Pro Forma Financial Information, Omnibus Statement on Standards for Accounting and Review Services – 2016,-issued on December 8, 2015, would move and change some of the requirements and guidance for compilations of prospective financial information from the Statements on Standards for Attestation Engagements to the SSARSs literature, would clarify requirements for pro forma financial information, and would amend various existing SSARS literature to incorporate the concepts and provisions of these proposals as well as to require that the accountant follow the preparation guidance when engaged to prepare prospective financial information but not engaged to perform a compilation, examination, or agreed-upon procedures engagement with respect to the prospective financial information. Comments are due by May 6, 2016.
  3. Auditing Standards Board                                                                                               a) Statement on Auditing Standards (SAS) No. 130, An Audit of Internal Control Over Financial Reporting That Is Integrated With an Audit of Financial Statements (AICPA, Professional Standards, issued October 28, 205, provides that the auditor will be required to examine and report directly on the effectiveness of internal control over financial reporting when reporting on the audit of financial statements, and provides guidance. Effective generally for 2016, at which time the related attestation statement and interpretation will be withdrawn.                                                                                                                      b) Interpretation No. 2, Sustainability Financial Statements Under Federal Financial Accounting Standards - Auditor Reporting, of AU-C section 700, Forming an Opinion and Reporting on Financial Statements, issued October 28, 2015, advises that “an auditor may report on the basic financial statements [of the U.S, Government], which include the statements of social insurance, changes in social insurance amounts, and long-term fiscal projections.” An example report is provided.

PCAOBPublic Company Accounting Oversight Board (www.pcaob.org)

  1. Improving the Transparency of Audits: Rules to Require Disclosure of Certain Audit Participants on a New PCAOB Form and Related Amendments to Auditing Standards (Release 2015-008), released December 15, 2015, to “require audit firms to disclose the names of each audit engagement partner as well as the names of other audit firms that participated in each audit.” The rule is effective generally for audit reports issued as of the latter of three months following the date the SEC approves the rule, or January 31, 2017.
  2. Inspection Observations Related to PCAOB "Risk Assessment" Auditing Standards (No. 8 through No.15) (Release 2015-007), released October 15, 2015 details significant deficiencies relating to assessment and response to risk in audits. See November, 2015 Audit & Accounting Alert for discussion of this report.
  3. Annual Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers (2015-006), released August 18, 2015, “identified high levels of independence findings and audit deficiencies, similar to reported findings and deficiencies in previous years.”

SASBSustainability Accounting Standards Board (http://www.sasb.org)

  1. Renewable Resources & Alternative Energy Sector Provisional Standards – issued December 16, 2015, to address sustainability disclosure topics relevant for companies in the following industries: 1) Biofuels, 2) Forestry & Logging, 3) Fuel Cells & Industrial Batteries, 4) Paper & Pulp Products, 5) Solar Energy, and 6) Wind Energy.
  2. The SASB Implementation Guide for Companies, issued December 1, 2015, “to help issuers achieve three objectives: 1) identify the industry-specific sustainability topics most likely to be material to an investor, 2) understand the current state of disclosure and performance on those topics, and 3) enhance existing reporting processes to more effectively disclose material information on sustainability topics.”
  3. Consumption II Sector Provisional Standards – issued September 23, 2015, to address sustainability disclosure topics relevant for companies in the following industries: 1) Apparel, Accessories & Footwear, 2) Appliance Manufacturing, 3) Building Products & Furnishings, 4) Drug Retailers & Convenience Stores, 5) E-Commerce, 6) Food Retailers & Distributors, 7) Multiline and Specialty Retailers & Distributors, 8) Toys & Sporting Goods.
 

Additional A&A News

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

  1. FASB to Issue Financial Instruments Standard in Early January
  2. Revenue recognition clarifications affirmed by FASB, IASB
  3. South Africa’s Integrated Reporting Journey
  4. Australia - The enhanced auditor report ‘sea change’ – delivering relevancy through transparency
  5. Special Report: Accounting firms, SEC hobble U.S. audit watchdog
  6. The Force Awakens and the Truth Behind ’Hollywood Accounting’

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