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Audit & Accounting Alert - September 2020 (Issue 8)
 


AT-A-GLANCE As the coronavirus pandemic continues at varying stages throughout the world, the United States presidential election season has served to politicize this health crisis along with other contentious issues that have polarized the country’s citizens. One of the issues that extends to the accounting profession involves the relationship between the United States and China. However, the origins of the pursuit of financial reporting accountability from Chinese companies extends to prior years before current political considerations. The article in this issue highlights recent history, and the new initiative by the current US Administration to tackle the roadblocks placed by China, that have prevented access to audit work papers of Chinese companies.  
Our Worldwide Update is again split into two sections. The first covers COVID-19 news from organizations across the globe, while the second covers other news.  


Gerald Herter - Editor

Holding China to Account


The years-long effort seeking audit credibility is heating up
 
China frequents the news these days with debates over contentious trade deals and other political maneuvers. The financial reporting realm is no stranger to the ongoing challenges that China’s secretive, autocratic system presents to investors and international regulators. Financial fraud in Chinese companies had been a constant worry, since the auditors’ procedures and controls were not open to review by foreign countries.
 
Back in 2012, the Audit & Accounting Alert (A&A) reported on a slight crack in the door, offering limited access to firms that audit Chinese companies. Specific audit workpapers were still off limits, but “observational visits” would be allowed whereby the regulator, in this case the American Public Company Accounting Oversight Board (PCAOB), could send inspectors to observe an audit firm’s overall audit quality control procedures. The audit workpaper prohibition stemmed from Chinese regulators’ concerns that any access to audit documents would violate the country’s sovereignty. Also, there was a perceived risk that state secrets would be disclosed, especially for audits of state-owned entities. Obviously, such restrictions did not meet PCAOB requirements, but were seen as a first step in what was anticipated to be a protracted negotiation.
 
Then in May, 2013, a Memorandum of Understanding provided for workpapers from audits to be sent to the PCAOB and SEC for review.  Nevertheless, onsite review of workpapers was still off limits, and there was no telling what manner of redaction would be performed before the workpapers were sent for review.
 
The issue became even more visible as described in the June 2014 A&A article, Alibaba Spotlights SEC Dispute with Auditors in China. In what was called the largest Initial Public offering (IPO) in history, Chinese mega-conglomerate, Alibaba Group Holdings, Ltd., was launched despite regulatory warnings against it and its auditors for non-compliance. Though the PCAOB and SEC had the power to stop the listing and sanction the auditors, apparently the financial benefits presented and geopolitical imperatives allowed Alibaba and a number of other China-based companies to thrive on American exchanges. 
 
With regard to accounting standards, the news was more positive. By November 2015, the International Accounting Standards Board (IASB) reported in conjunction with the Chinese Ministry of Finance that Chinese accounting standards were substantially converged with International Financial Reporting Standards (IFRS). However, full compliance with PCAOB audit inspection requirements proved elusive for several more years, despite continued litigation and threats of suspending audit firms and delisting noncompliant companies.
 
A dramatic example of the potential for disaster such flagrant abuse portends is the recent case of Luckin Coffee Inc. Similar to collapses the A&A has reported on in other parts of the world, like Enron in America, Carillion in the United Kingdom, and most recently Wirecard in Germany, Luckin is China’s latest entry. With a plan to beat out Starbucks for coffee dominance in China, Luckin’s May 2019 U.S. public offering and explosive growth, only led to reports in January 2020 of massive exaggerated and fraudulent sales, resulting in a May 2020 implosion and delisting.
 
Consequently, on June 4, 2020, the Administration of United States President Donald Trump directed the President’s Working Group on Financial Markets (PWG) “with examining certain risks to investors in U.S. financial markets posed by the Chinese government’s failure to allow audit firms that are registered with the PCAOB to comply with U.S. securities laws and investor protection requirements.” The PWG responded with recommendations in a report dated July 24, 2020. The PWG is composed of the U.S. Secretary of the Treasury, Federal Reserve Chairman, Securities and Exchange Commission (SEC) Chairman, and Commodity Futures Trading Commission Chairman.
 
The five PWG recommendations to the SEC are:
  1. For initial and continued listing on U.S. stock exchanges, require access to work papers of the company’s principal audit firm, or if governmental restrictions preclude such access, then have the company provide a co-audit firm that the PCAOB determines to have sufficient access to work papers and practices to conduct an appropriate inspection. For currently listed companies, a transition period until January 1, 2022 is suggested.
  2. Require enhanced and prominent disclosures of the risks of investing in Non-Cooperating Jurisdictions (NCJs) such as China.
  3. Enhance registered fund disclosures for funds exposed to companies from NJCs.
  4. Encourage or require performance of greater due diligence of indexes and index providers by registered funds that track indexes.
  1. Issue guidance to investment advisers concerning fiduciary obligations when considering investments in NJCs.
On August 27, 2020, Bloomberg reported that the China Securities Regulatory Commission (CSRC) had responded, proposing to allow U.S. regulators to audit its state-owned enterprises (SOEs), but would insist on editing some information for national security reasons. Under the proposal, U.S. authorities would pick one of China’s SOEs for a trial joint inspection. The CSRC is also calling for direct talks with the U.S. on the audit issue, and stating that only through dialogue could there be mutually agreeable resolution.
 
The negotiations are a developing story. Similar attempts in the past have been unsatisfactory. Since both the U.S. Administration and Congress are currently applying pressure, and in light of the fraught political climate, results could be different now. Time will tell.
 
 Further details can be found at Report and Recommendations on Protecting Investors from Significant Risks from Chinese Companies   and China makes proposal to U.S. in concession to solve accounting dispute.
https://home.treasury.gov/news/press-releases/sm1086) and (https://www.reuters.com/article/us-china-audit-dispute/china-makes-proposal-to-u-s-in-concession-to-solve-accounting-dispute-bloomberg-idUSKBN25N0BR).
 
Covid-19 related actions and activities by audit and accounting organizations throughout the world.

 
IASB
International Accounting Standards Board (www.ifrs.org)
  1. Coronavirus Information and resources – link – https://www.ifrs.org/news-and-events/2020/03/the-coronavirus-and-the-foundations-work/

IFAC
International Federation of Accountants (www.ifac.org)
  1. COVID-19 Resources from IFAC's Network – link https://www.ifac.org/knowledge-gateway/series/COVID-19-resources-ifacs-network

ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)
  1. Coronavirus Information and resources – link - https://www.accaglobal.com/us/en/cam/coronavirus.html
  2. Digitisation and the global pandemic, report published August 24, 2020, “examines the impact of COVID-19 in areas that relate to the digitisation agenda of organisations,” following an earlier report, COVID-19 Global Survey: The Road to Recovery? that set out the framework for “charting the path to recovery after the pandemic: Act, Analyse and Anticipate.”

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

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

No new developments

WORLD ECONOMIC FORUM
(www.weforum.org)
  1. The COVID Action Platform – link - https://www.weforum.org/platforms/covid-action-platform -  focuses on three priorities: 1. Galvanize the global business community for collective action. 2. Protect people’s livelihoods and facilitate business continuity. 3. Mobilize cooperation and business support for the COVID-19 response.
  2. Human Capital as an Asset: An Accounting Framework for to Reset the Value of Talent in the New World of Work, white paper published August 19, 2020, in collaboration with Willis Towers Watson, “to provide organizations with a model to reshape human capital accounting. The framework will enable a company to monitor and assess the return on its investments in its employees – in the same way as it measures returns on financial and intellectual capital.”

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

FRC– Financial Reporting Council of the UK(www.frc.org.uk)
  1. FRC guidance for companies and auditors during COVID-19 crisis – link - https://www.frc.org.uk/about-the-frc/COVID-19.

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

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

No new developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)
  1. AICPA Coronavirus (COVID-19) Resource Center – link - https://www.aicpa.org/news/aicpa-coronavirus-resource-center.html
FASB Financial Accounting Standards Board (www.fasb.org)
  1. FASB Response to COVID-19 – link - https://www.fasb.org/COVID19
GASB– Governmental Accounting Standards Board(www.gasb.org)
  1. GASB Response to COVID-19 – link -  https://www.gasb.org/COVID19
COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No new developments

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

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

No new developments

SEC– Securities and Exchange Commission(www.sec.gov)                      
  1. SEC Coronavirus (COVID-19) Response – link - https://www.sec.gov/sec-coronavirus-covid-19-response

CAANZ– Charted Accountants Australia New Zealand (https://www.charteredaccountantsanz.com/)
  1. Financial reporting and audit issues stemming from COVID-19, guidance published August 4, 2020 to assist financial statement preparers and auditors. - link - https://www.charteredaccountantsanz.com/news-and-analysis/news/covid19-updates
     
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
 

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

No new developments

IFAC
International Federation of Accountants (www.ifac.org)
 
  1. International Auditing and Assurance Standards Board - ISA 540 (Revised) Implementation - Illustrative Examples for Auditing Expected Credit Loss (ECL) Estimates, nonauthoritative guidance published August 31, 2020, to assist in applying ISA 540 to IFRS 9.
ACCA
Association of Chartered Certified Accountants (www.accaglobal.com)

No new developments

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

No new developments

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

No new developments

WORLD ECONOMIC FORUM
(www.weforum.org)

No new developments

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

FRC– Financial Reporting Council of the UK(www.frc.org.uk)

No New Developments

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

No New Developments

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

No New Developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA American Institute of Certified Public Accountants(www.aicpa.org)
  1. Auditing Standards Board (ASB) – Exposure Draft - Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, issued August 27, 2020, to supersede SAS No. 122 and various other standards. The exposure draft is based on International Standard on Auditing 315, Identifying and Assessing the Risks of Material Misstatement, and proposes to “enhance the requirements and guidance on identifying and assessing the risks of material misstatement, in particular the guidance that addresses the entity’s system of internal control and information technology (IT),” and “revise the definition of significant risks.” The comment period ends November 25, 2020. 
  2. Materiality Considerations for Attestation Engagements Involving Aspects of Subject Matters That Cannot be Quantitatively Measured, discussion paper published August 14, 2020, provides “nonauthoritative guidance to highlight the challenges that practitioners may face when making professional judgments about materiality in such engagements and to provide its views on the ways in which practitioners might address those challenges.”
FASB Financial Accounting Standards Board (www.fasb.org)
  1. Exposure Draft - Proposed Accounting Standards Update - Compensation—Stock Compensation (Topic 718) - Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards -a proposal of the Private Company Council, issued August 17, 2020, “intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date.” Comment period ends October 1, 2020.

GASB– Governmental Accounting Standards Board(www.gasb.org)

No New Developments

COSOThe Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No New Developments

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

No New Developments

SASB– Sustainability Accounting Standards Board(www.sasb.org)                               
 
  1. Exposure Draft - Proposed Changes to the SASB Conceptual Framework and Rules of Procedure, issued August 28, 2020. The proposal is intended to update “the outdated organizational mission statement contained in the existing documents, as well as the Board’s view that the existing documents do not reflect SASB’s global perspective and that they contain outdated assumptions, definitions, and data.” According to Dr. Jeffrey Hales, Chair of the SASB Standards Board, “While the Standards Board is updating these documents to more clearly articulate and explain our existing approach to standard setting, these revisions are not changing our fundamental approach to, or processes for, setting SASB Standards. “Comment period ends November 30, 2020.
SEC– Securities and Exchange Commission(www.sec.gov)                      

No New Developments


ADDITIONAL
A&A NEWS


Optimizing Your China Accounting and HR Processing with Cloud Technology – New Issue of China Briefing Magazine
(https://bit.ly/3moQhm6)

Blockchain not seen transforming accounting processes — yet
Journal of Accountancy (
https://bit.ly/2FzvYSb)

Why CPAs should care about RPA
(https://blog.aicpa.org/2020/08/why-cpas-should-care-about-rpa.html#sthash.SGMYYUZK.Ff8OFiMv.dpbs)

The rise of cybercrime in the accounting profession continues
Accounting Today (
https://bit.ly/2RqPVxd)

Professional skepticism: A critical element of the COVID-era audit 
Accounting Today (
https://bit.ly/2ZDknsn)

Accounting Today's complete coverage of the coronavirus impact
(
https://bit.ly/3hwrf0I)

Accountancy Age's Resource on UK regulations on accountancy during coronavirus
(
https://bit.ly/2DZso3i)
 
California CPA Society Coronavirus Resources and Information
(
https://bit.ly/3iI8AAs)

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

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

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

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


Editor Gerald E. Herter 
email:  [email protected]
     
Integra International is registered in London at 1st Floor Sackville House, 143-149 Fenchurch Street, London, EC3M 6BN, United Kingdom
 
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