Over the past eight years, the Audit & Accounting Alert has followed the multifaceted efforts surrounding convergence of financial reporting standards, while simultaneously covering the parallel search for effective audit standards by which to evaluate the integrity of the financial reporting results. As a new decade commences, an emerging and even more sophisticated set of issues have come into focus.
Globally, limitations on the current and future availability of raw materials and labor resources, coupled with multi-governmental intricacies and restrictions, raise questions as to the ability of businesses and organizations to succeed in the near as well as the long term. Our first article describes the evolving process by multiple agencies to address the identification and measurement of non-financial factors that will impact sustainability alongside the traditional financial elements.
Similarly, those tasked with developing and maintaining financial audit standards are faced with the increasingly rapid advancement of systems employed for producing financial, non-financial, and integrated reports. As our second article relates, technological innovations and operational complexities, coupled with changing needs and expectations of users and stakeholders, require the fresh forward-looking approach that the Auditing Standards Board is applying with its proposed new strategy and work plan.
Finally, our Worldwide Update covers news from organizations across the globe.
Gerald Herter - Editor
Seeking Convergence in Sustainability Reporting
Better Alignment Project facilitates collaboration among diverse boards
The quest for improved and more relevant financial reporting has been a common theme of the Audit & Accounting Alert since the launch of the newsletter in 2012. The protracted, yet largely productive, effort to converge the FASB and IFRS standards extended over most of these past eight years, with coverage in dozens of articles during that span. In similar fashion, the emerging development of principles and standards that discern how and if to incorporate aspects of an organization’s sustainability, the environmental, social and governmental issues (ESG), has been covered regularly. Quantifying sustainability has proved more challenging, but has gained steam in recent years.
The September 2012 Audit & Accounting Report quoted then AICPA Chairman, Greg Anton, who predicted “I truly believe that private companies and our staff are going to be working in an integrated reporting space in the future. I can’t tell you whether it is two, three, four, five years out, but there will be private companies that will want to start using integrated reporting.”
The predecessor of the International Integrated Reporting Council (IIRC) had stated in September 2011,
Integrated Reporting brings together material information about an organization’s strategy, governance, performance and prospects in a way that reflects the commercial, social and environmental context within which it operates. It provides a clear and concise representation of how an organization demonstrates stewardship and how it creates and sustains value, now and in the future.
Though Anton’s prediction may have been overly ambitious, significant progress has been made since then. By 2014, a number of entities were tackling the broader scope of reporting. The Corporate Reporting Dialogue (CRD) was formed in June 2014 to start the process of coordinating the diverse efforts. The participants were:
1. CDP (formerly the Carbon Disclosure Project)
2. Climate Disclosure Standards Board (CDSB)
3. Financial Accounting Standards Board (FASB)
4. Global Reporting Initiative (GRI)
5. International Reporting Standards Board (IASB)
6. International Integrated Reporting Council (IIRC)
7. International Organization for Standardization (ISO)
8. The Sustainability Accounting Standards Board (SASB).
These groups have been responsible for independently developing and issuing a variety of frameworks and standards in recent years. As mentioned above, the FASB and IASB have worked together to converge traditional financial reporting standards. In November 2018, the SASB published the first ever industry specific sustainability standards that covered 77 specific industries. The Better Alignment Project (BAP) was also initiated in November 2018 to guide the CDP, CDSB, GRI, IIRC, and SASB toward improved “coherence, consistency and comparability between their frameworks and standards in pursuit of supporting the ESG disclosure objectives of organizations.
The results of the first year of the BAP initiative are codified in a report, Driving Alignment in Climate-related Reporting. To provide structure for comparing the five groups, The BAP employed the principles and recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD was established in 2015 by the G-20 countries’ Financial Stability Board to “develop voluntary, consistent climate-related financial risk disclosures for use by companies, banks, and investors in providing information to stakeholders.”
The seven principles prescribed by the TCFD are:
1. Present relevant information
2. Be specific and complete
3. Be clear, balanced, and understandable
4. Be consistent over time
5. Be comparable among organizations within a sector, industry, or portfolio
6. Be reliable, verifiable, and objective
7. Be provided on a timely basis
These principles are to be applied with regard to the TCFD’s eleven climate disclosure recommendations, which are categorized into the areas of governance, strategy, risk management, and metrics and targets.
The five groups were asked to indicate how well their frameworks and standards align with the TCFD principles and recommendations. In general terms, the results were positive. They showed that:
• The TCFD’s seven principles for effective disclosure are harmonious and complementary with those of the Participants’ frameworks and standards, with the mapping showing no sources of conflict;
• The Participants are well aligned with the TCFD’s 11 recommended disclosures, which are comprehensively covered by the frameworks and standards;
• There are high levels of alignment between CDP, GRI and SASB for the TCFD’s illustrative example metrics, with 70% of the TCFD’s 50 metrics showing no substantive difference between the three participants’ indicators; and
• Overall, 80% of the TCFD's 50 metrics are fully or reasonably covered by the three participants’ indicators.
Also responding to the need for expanded reporting, the United Kingdom’s Financial Reporting Council published a report in October 2019, Climate-related corporate reporting – Where to next? describing investor expectations for “clearer reporting on climate-related issues,” and recommending use of the TCFD framework. Tips and examples are provided for applying the TCFD principles.
However, much work still needs to be done. Consultations with stakeholders indicated that there is much confusion. Relationships between ESG and direct financial information needs to be clearer and use more compatible terms and methods. The frameworks and standards need to be better communicated. Otherwise, establishment of a single framework and/or set of standards would be preferable.
Looking ahead, the following were identified as desirable areas of study:
• Developing a taxonomy to guide users on the meaning of different terminologies and methods used within the Participants’ frameworks and standards, including articulating commonalities and interrelationships;
• Building an online, interactive tool that brings together the frameworks and standards, allowing users to understand how they can be used individually and/or together effectively for different reporting purposes; and
• Convening a formal technical forum for the Participants to benefit from further exchange of developments, ideas and plans between and across technical teams, therein promoting greater long-term alignment.
Further details can be found at Better Alignment Project.
Auditing Standard Board Proposes New Strategy and Work Plan
A more complex and technologically driven global economy is addressed
During 2019, the Audit & Accounting Alert reported on the sweeping changes in audit reporting disclosures, the drastic measures taken to deal with major corporate audit failures, and the persistent and possibly unrealistic expectation gap between public perception and audit assurance. Looking to the future, the AICPA’s Auditing Standards Board (ASB) is seeking input with regards to the Board’s Strategy and Work Plan for the next several years.
The five strategic initiatives in the ASB proposal are:
- Develop high-quality standards in the public interest.
- Enhance communications with our stakeholders.
- Think and operate more strategically.
- Keep our standards relevant in a changing environment.
- Support effective application of our standards.
These are broad aspirations that have a timeless yet elusive quality. More pertinent to the challenges facing the ASB are what the Board refers to as the “factors driving our strategy,” which are enumerated as follows:
- Advancement in, and use of, technology
- Increasing complexity and its implications
- Changing information needs of users
- Changing expectations of stakeholders
The ASB acknowledges how quickly technologies are now changing and how significant is the impact on auditing, citing the examples of artificial intelligence, robotics, blockchain, cloud computing, social networks and new digital payment platforms.
The complexity brought on by these technologies, coupled with more readily accessible global reach and the proliferation of arduous financial reporting standards, can be overpowering. This environment exacerbates the challenge for developing audit standards which are on the one hand applicable to both large, sophisticated entities and smaller straight-forward organizations, while on the other hand also affording availability of the needed audit tools for local accounting practices as well as multi-national audit firms.
These technological advances are upending the very kinds and means of information that the public now requires and employs in making decisions. Auditing needs to adapt in order to address those changes. The ASB refers to examples such as sustainability, cybersecurity, governance and internal control.
While committed to looking ahead, the ASB is also faced with the current state of affairs, where persistent audit deficiencies cast doubt, in some circles, on the effectiveness of current standards and enforcement processes. Addressing those concerns is necessary in order to avoid their magnification when faced with a world of more advanced technology. Optimizing audit quality, while managing the public’s expectations of auditors, will be an ongoing pursuit.
Considering the strategies and driving factors, the ASB has laid out a specific work plan. That plan recognizes that the ASB functions within the context of various national and global bodies, such as the International Auditing and Assurance Standards Board (IAASB). With that in mind, the ASB has sought to find a balance between speed and quality in developing standards, while focusing finite resources, and demonstrating the importance of interagency cooperation.
The projects on the work plan cover the following areas:
- Examination and review attestation standards – closer convergence with IAASB standards;
- Conforming Amendments to SAS No. 134 - Auditor Reporting and Amendments, Including Amendments Addressing Disclosures in the Audit of Financial Statements;
- Audit Evidence (AU-C Section 500) – use of emerging technologies, e.g. audit data analytics, blockchain and other evidence sources, professional skepticism, and sufficiency, accuracy, completeness, relevance and reliability of audit evidence;
- Estimates (AU-C Section 540) – address new complexities and converge with IAASB standards;
- Risk Assessment (AU-C Section 315) – more robust requirements and guidance to converge with IAASB standards;
- Management Specialists (AU-C Section 501) – evaluate in light of amended PCAOB standards;
- Quality Management (QC Section 10, AU-C Section 220)– improve firm management of audit engagement quality, in line with International Standards on Quality Management (ISQM) and IAASB standards;
- Group Audits (AU-C Section 600) – converge with anticipated IAASB standard revisions;
- Projects in the outreach and research phase: a) Noncompliance with Laws and Regulations (NOCLAR); b) Compliance Frameworks (AU-C Section 800); c) Attestation Standards - Topic-Specific Sections: SOC Engagements and Internal Control.
In the meantime, the ASB on December 5, 2019, issued SAS No. 138 and SSAE No. 20, both titled Amendments to the Description of the Concept of Materiality,
to make those pronouncements consistent with the use of the materiality concept by the U.S. judicial system and the national regulators and standard setters. The new description of materiality is:
Misstatements, including omissions, are considered to be material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.
Also, articles have resurfaced recently with the age-old questions of 1) whether auditors can be truly independent, since they are paid by their audit clients, and 2) whether auditors are missing the forest for the trees by using routine checklist audit programs which do not emphasize critical thinking. Hopefully, auditors and those developing standards are smart enough to work toward alleviating such concerns as they consider the new audit processes and controls. Ignoring them could lead to a potentially detrimental financial impact on the profession.
Emerging technologies and complexities require skill sets not widely available before recent times, both for auditors and for those that formulate audit standards. Though the list of ASB members includes some individuals who appear to have pertinent background, the ASB should take care to assure there is an adequate depth of the sophisticated technical expertise that will be required to develop effective standards and guidance for the challenging days ahead.
Further details can be found at the Auditing Standards Board - Proposed Strategy and Work Plan
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
International Accounting Standards Board (www.ifrs.org)
- Exposure Draft - General Presentation and Disclosures issued December 18, 2019, “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. The comment period ends on June 30, 2020.
- Guide to Selecting and Applying Accounting Policies—IAS 8, published November 21, 2019, is a step-by-step guide for determining how to select and apply accounting policies when there are specific standards available, standards that cover similar or related issues, or no standards at all dealing with the issue.
International Federation of Accountants (www.ifac.org)
- International Audit and Assurance Standards Board (IAASB) - Audit Client Briefing: Considerations for Management When Determining Accounting Estimates and Related Disclosures, published November 19, 2019, “to make chief financial officers, other senior management responsible for financial statement preparation, and staff directly involved in determining accounting estimates aware of matters to consider in preparing for the auditor’s requests pertaining to ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures.”
- International Accounting Education Standards Board (IAESB) – Revisions to International Education Standards 2,3,4 and 8, issued October 21, 2019, “address learning and development for information and communications technologies (ICT) and professional skepticism. As market expectation increases for ICT skills and professional skepticism, these standards were developed to address the competencies, skills, and behaviors for both aspiring and professional accountants in these critical areas.”
Association of Chartered Certified Accountants (www.accaglobal.com)
- Combating bribery in the SME sector, survey report issued November 13, 2019. “Small and medium-sized enterprises (SMEs) make up the great majority of businesses in all countries, and employ the majority of the global workforce. Yet their significance to the health of the global business environment is often overlooked. This is as true in relation to bribery and corruption problems as to other aspects of business regulation. This report continues ACCA’s work investigating how bribery and corruption damages the SME sector and argues that smaller businesses need to be encouraged and supported in their efforts to combat the threats posed.”
Chartered Institute of Management Accountants (www.cimaglobal.com)
- Updated Code of Ethics, issued October 28, 2019, with a focus on “ethics in the age of digital transformation.” The Code adds a new section, Making good decisions: building trust in a digital world, that covers 1) understanding digital disruption, 2) bias in automated decision-making, 3) data privacy, and 4) ethics and the business benefit.
International Integrated Reporting Council
- See article in this issue of Audit & Accounting Alert.
WORLD ECONOMIC FORUM
Africa, Europe, India, and the Middle East (AEIME)
- The Cybersecurity Guide for Leaders in Today’s Digital World, published October 25, 2019, “to assist the growing number of C-suite executives responsible for setting and implementing the strategy and governance of cybersecurity and resilience in their organization. The guide bridges the gap between leaders with and without technical backgrounds. Following almost one year of research, it outlines 10 tenets that describe how cyber resilience in the digital age can be formed through effective leadership and design.”
- Navigating Uncharted Waters: A roadmap to responsible innovation with AI in financial services, published October 23, 2019, explores and responds to the five key concerns of AI: explainability, systemic risk, bias and fairness, fiduciary duty, and algorithmic collusion.
FRC– Financial Reporting Council of the UK(www.frc.org.uk)
- Climate-related corporate reporting Where to next?, research report issued October 22, 2019, describing investor calls for more effective climate reporting. See article in this issue for further detail.
- Client Asset Assurance Standard (Revised), issued November 25, 2019, updating the standard for audits of client assets held by financial services firms. Effective for periods beginning in 2020.
ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)
- A buyer’s guide to assurance on non-financial information, published on November 2019 with the World Business Council for Sustainable Development, to help businesses “better understand how non-financial assurance works.”
EFRAG– European Financial Reporting Advisory Group(www.efrag.org)
No new developments.
Americas, Asia, Australia and New Zealand (AAANZ)
AICPA –American Institute of Certified Public Accountants(www.aicpa.org)
- Auditing Standards Board – Statement on Auditing Standards 138 - Amendments to the Description of the Concept of Materiality, issued December 5, 2019, to make the description of materiality consistent nationally and internationally. Effective for audit reports dated on or after December 15, 2020.
- Auditing Standards Board - Statement on Standards for Attestation Engagements No. 20 - Amendments to the Description of the Concept of Materiality, issued December 5, 2019, to make the description of materiality consistent nationally and internationally. Effective for examination or review reports dated on or after December 15, 2020.
- Auditing Standards Board - Statement on Standards for Attestation Engagements No. 19 - Agreed-Upon Procedures Engagements, issued December 5, 2019, “provides flexibility to a practitioner performing an agreed-upon procedures engagement by:
- removing the requirement that the practitioner request an assertion from the responsible party;
- allowing procedures to be developed over the course of the engagement;
- allowing the practitioner to develop or assist in developing the procedures;
- no longer requiring intended users to take responsibility for the sufficiency of the procedures and instead requiring the engaging party to simply acknowledge the appropriateness of the procedures prior to the issuance of the practitioner’s report, and
- permitting the practitioner to issue a general-use report.”
- Effective for agreed-upon procedures dated on or after July 15, 2021, with early implementation permitted.
FASB –Financial Accounting Standards Board (www.fasb.org)
GASB– Governmental Accounting Standards Board(www.gasb.org)
- Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, ASU No. 2019-12, issued December 18, 2019, intended to reduce cost and complexity. Organizations no longer need to analyze whether the exceptions apply with regard to 1) the incremental approach for intraperiod tax allocation, 2) accounting for basis differences when there are ownership changes in foreign investments, and 3) interim period income tax accounting for year-to-date losses that exceed anticipated losses. Simplification is also provided for franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. Effective generally for years beginning in 2021 for public companies and 2022 for other entities. Early adoption is generally permitted.
- Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU No. 2019-11, issued November 26, 2019, addresses questions about various issues, including reporting of expected recoveries and the prohibition of recording negative allowances for available-for-sale debt securities. Effective generally in 2020.
- Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, ASU No. 2019-10, issued November 15, 2019, “finalizes various effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses (CECL), leases, and hedging standards.”
- Financial Services—Insurance (Topic 944): Effective Date, ASU No. 2019-09, issued November 15, 2019, “finalizes insurance standard effective date delays for all insurance companies that issue long-duration contracts, such as life insurance and annuities.”
- Exposure Draft – Derivatives and Hedging (Topic 815) - Codification Improvements to Hedge Accounting,issued November 12, 2019, to clarify certain sections of the 2017 hedge accounting standard.” The comment period ends January 13, 2020.
- Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606) No. 2019-08 November 2019 Codification Improvements—Share-Based Consideration Payable to a Customer – ASU 2019-08, issued November 11, 2019, “simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers.” Effective generally in 2020.
- Codification Updates to SEC Sections—Amendments to SEC paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates– ASU 2019-07, issued July 26, 2019, provides guidance on the SEC disclosures. Effective immediately.
COSO- The Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)
- Exposure Draft – Implementation Guidance Update—2020, issued December 4, 2019, “contains proposed new questions and answers that address application of the Board’s standards on the financial reporting entity, fiduciary activities, leases, external investment pools, asset retirement obligations, and conduit debt obligations. The Exposure Draft also includes proposed amendments to previously issued implementation guidance.” The comment period ends January 31, 2019.
No new developments.
PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)
No new developments.
SASB– Sustainability Accounting Standards Board(www.sasb.org)
See article in this issue for developments.
SEC– Securities and Exchange Commission(www.sec.gov)
No new developments.
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 ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
Integra International is registered in London at 1st Floor Sackville House, 143-149 Fenchurch Street, London, EC3M 6BN, United Kingdom