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Audit & Accounting Alert Newsletter

Issue 2 | February 2015


Gerry Herter

Technology is transforming all aspects of our lives at a rapidly increasing pace. The accounting profession is no exception. In this issue of the Audit & Accounting Alert, we consider two facets that command our close attention. The first is big data and the potential of predictive analytics. The combination of massive computing power and near limitless data can either transform how we function as accountants, or allow others to threaten the future of the profession. Read in our opening article of one firm’s bold move to embrace big data, and how the AICPA envisions the future of auditing.

In our second article, we recount the determined resolve of the extensible business reporting language (XBRL) movement towards global transparency in financial reporting. While the aim of International Financial Reporting Standards (IFRS) is to put all the world’s accounting principles on the same page, XBRL seeks to facilitate comparison and analysis of the world’s financial reports.

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

Editor Gerald E. Herter, CPA

In This Issue 

Big Data is Transforming the Audit and Accounting World

Will Google eat the accountant’s lunch?

From time to time, trends emerge with the potential to transform the accounting profession. When I started out in the sixties, the adding machine had already transformed the work of my predecessors. During the early years of my career, sophisticated new calculators moved the bar even higher. These developments succeeded in freeing up accounting brain power. No longer required to perform the mundane arithmetic tasks, accountants now had capacity for a more robust analytic focus. In the eighties, personal computers appeared on every desk, providing an additional transformative step.

Not all trends succeed in changing the playing field. In the nineties, American Express and others sought to transform the profession through mass consolidation of accounting firms. Countering that threat, many of us started our own investment and pension firms, which along with the US and Canadian CPAs’ exclusive license to audit, limited the reach of the consolidators.

The ultimate success of another trend, the slow, but steady progression of IFRS toward global acceptance, is not yet certain.

With this context in mind, the recent announcement by KPMG of a strategic alliance with McLaren Technology Group warrants consideration. Simon Collins, UK chairman of KPMG, stated in the press release:

"Our alliance with Mclaren gives us the opportunity to accelerate the transformation of our audit and advisory businesses. Mclaren has honed sophisticated predictive analytics and technologies that can be applied to many business issues. We believe this specialist knowledge has the power to radically transform audit, improving quality and providing greater insight to management teams, audit committees and investors. The same is true of our advisory services, where we believe applying Mclaren's predictive analytics and know-how to, for example, a complex international supply chain, could help our clients make a step change in the service they provide to their customers.

A growing concern in the financial world is the backward focus of audits that give opinions on financial statements for time periods that have already passed. McLaren, known for auto racing prowess, has effectively used big data to anticipate future performance of its race cars. KPMG hopes to apply McLaren techniques to better anticipate client audit issues.

In an interview with the Business Development Leaders’ Network, Iain Moffatt, KPMG head of Enterprise, asked “in the next five years, are big accountancy firms going to be our competition, or is it actually going to be Google, or Amazon, or somebody else?” Google’s business is gathering and analyzing big data. While Google may not be licensed to perform audits, they could apply their data analysis techniques to advising companies or investors. With investors increasingly looking more at forward-looking predictive data and less at historical audit data to aid decision making, Moffatt’s concern is valid.

In August, 2014, the AICPA issued a white paper, Reimagining Audit in a Wired World. Peering into the future, the white paper envisions how the audit of the future could look, applying big data techniques and continuous auditing. Though firms have gone far with computerizing traditional auditing practices, the white paper contends that the whole audit process needs to be transformed, incorporating the new technological advances.

The new technology provides expansive handheld computer power that is always on, and that can access data anywhere in the world, from anywhere. This capability provides far greater flexibility and computing power than auditors have ever had. The flexibility enables tasks to be performed wherever, whenever and by whomever they can be most effectively accomplished. For Integra International members, specialized knowledge can be drawn from those members around the world that have the needed expertise, while more routine tasks can be similarly outsourced to the most cost effective provider.

The white paper describes Audit Data Analytics (ADA) which “includes methodologies for identifying and analyzing anomalous patterns and outliers in data; mapping and visualizing financial performance and other data across operating units, systems, products, or other dimensions for the purpose of focusing the audit on risks; building statistical (for example, regression) or other models that explain the data in relation to other factors and identify significant fluctuations from the model; and combining information from disparate analyses and data sources for the purpose of gaining additional insights.”

Some of the ways mentioned that ADA can be incorporated in audits are:

  1. Identifying and assessing the risks associated with accepting or continuing an audit engagement (for example, the risks of bankruptcy or high-level management fraud).
  2.  Identifying and assessing the risks of material misstatement through understanding the entity and its environment. This includes performing preliminary analytical procedures as well as evaluating the design and implementation of internal controls and testing their operating effectiveness.
  3.  Performing substantive analytical procedures in response to the auditor’s assessment of the risks of material misstatement.
  4.  Identifying and assessing the risks of material misstatement of the financial statements due to fraud, and testing for fraud having regard to the assessed risks.
  5.  Performing analytical procedures near the end of the audit to assist the auditor when forming an overall conclusion about whether the financial statements are consistent with the auditor’s understanding of the entity.

Applying ADA methodologies, massive computer power can be employed to perform analysis on 100% of a company’s data, rather than just a sample, without incurring significantly more cost. This depth of analysis can provide a higher level of assurance. Also, a continuous auditing approach can be introduced, leading to ongoing assurance with regard to current financial reporting.

For the full benefit of advance technologies to see fruition in the audit and accounting profession, ongoing investments in education and specialization will be needed. The white paper points out three areas that could speed the process:

  1. Encourage audit research and development.
  2.  Provide guidance to practitioners and update auditing standards to encourage the adoption of better technologies.
  3.  Encourage and recognize new resource models that bring to bear the new skills required in today’s world to complement traditional CPA skills.

KPMG has taken a major step with its McLaren Alliance. Time will tell how quickly and how well the profession adapts to this ever changing world of technology.

 For further information, see Reimagining Auditing in a Wired World and KPMG: Why every accountancy firm should worry about Google.

XBRL Promotes Global Transparency in Financial Reporting

The digital language will ease analysis and comparison of financial data

The goal of the International Accounting Standards Board (IASB) is to standardize the application of accounting principles in financial reports throughout the world, through the adoption of International Financial Reporting Standards (IFRS). Parallel to this effort, a broad-based consortium is working toward adoption of a universal digital language that can facilitate the worldwide exchange and analysis of financial reports: extensible business reporting language (XBRL)

When the XBRL effort was first initiated in 1998 by the AICPA, the challenge was described this way:

“Although spreadsheet software had powered the computer revolution, by the 1980s there was a proliferation of applications for specific business functions, such as general ledgers, payrolls, or taxes, all of which could produce just one end result: a report. Only a person can read a report. The data can not be shared with other systems, only with other people. It was like having an e-mail system that could only create a message, not send or receive it. The financial world had become trapped in an electronic Tower of Babel, endlessly copying and pasting information from one system into another.”

The vision for what was to become XBRL was then stated this way:

“What if you could turn a financial report into a database? What if a piece of business information, once entered into a computer anywhere, never needed to be retyped as it moved through the business supply chain?”

By the time the AICPA transferred the XBRL endeavor to an independent organization, XBRL International, in 2001, the vision was well established, and today over 600 organizations support XBRL, which is used to varying degrees in over 50 countries.

The XBRL International website ( is the focal point for information. The website describes that “the change from paper, PDF and HTML based reports to XBRL ones is a little bit like the change from film photography to digital photography, or from paper maps to digital maps…digital business reports, in XBRL format, simplify the way that people can use, share, analyze and add value to the data.”

XBRL is system-independent, so that data can be exchanged between different systems in different organizations. Some of the important features of XBRL are:

  1. Clear definitions – that “capture the meaning contained in all of the reporting terms used in a business report, as well as the relationships between all of the terms.
  2.  Testable business rules that can stop poor quality information, flag questionable information, and create value-added ratios and other data
  3.  Multi-lingual support – reports that can be produced easily in a variety of languages
  4.  Strong software support from a wide range of vendors.

Nevertheless, there are challenges in using XBRL. While XBRL can produce a financial statement that looks exactly like the paper print version, companies may disclose issues differently and sometimes have items unique to their operation. The XBRL structure is described as a tree template, where common features form the trunk and major branches, while company-unique items are added as distinct minor branches. Comparative analysis can bring into focus the commonality and differences between entities.

The SEC in December, 2014, announced the launch of a pilot program to facilitate analysis of XBRL-formatted financial statements. Public companies have been submitting financial statements in XBRL as well as in document format to the SEC since 2009. The SEC now has prepared databases that offer the XBRL financial statement data in a structured format contained in quarterly data sets. These data sets are available to download from the SEC website for the quarterly periods from 2009 through 2014. Currently, data is included for the basic financial statements. In 2015, footnote data will be added.

Slowing the usefulness of SEC-filed XBRL data are concerns over accuracy. XBRL exhibits in SEC filings are not subject to audit and consequently more likely to contain errors. A recent study of the 2009-2014 data by XBRL analysis company, Calcbench, revealed that as high as one in eight filings had errors. Most of the errors were readily correctible, and Calcbench offers a service to companies to check and fix errors, along with other robust analysis tools, available to companies and investors alike.

Citing the cost, complexity and reliability concerns with XBRL, the US Congress is considering legislation to exempt companies with less than $250 million in revenue from the XBRL filings. Hopefully, renewed attention by the SEC to these concerns will help accelerate the realization of the potential that XBRL holds for enhancing transparency in financial reporting. To aid in this effort, the SEC has set up an Interactive Data Test Suite to assist developers of software for validating interactive data prior to its submission to the SEC

Of additional interest, the AICPA this past month released research survey results, representing 32% of small public companies, showing that XBRL filing costs were lower than expected. In a statement, the AICPA reported “these results demonstrate that the investments to standardize corporate disclosure data are not overly burdensome on small companies and in fact are worth the additional cost. Companies using XBRL benefit due to their ability to reach more investors and provide analysts with easy access to more detailed financial disclosure information.”

For further information, see Benefits and Potential Uses of XBRL and SEC Financial Statement XBRL Data Sets.

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.


IASBInternational Accounting Standards Board (

  1. Investors in Financial Reporting – program launched December 2, 2014, designed to foster greater investor participation in the development of IFRS. More direct relationships with individuals from the investment community are sought.
  2.  Amendments to IAS 1 Presentation of Financial Statements – issued on December 18, 2914, as part of the Disclosure Initiative, “encourages companies to apply professional judgement in determining what information to disclose and where in their financial statements”, noting that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. Effective generally for 2016, with early application permitted.
  3.  Exposure Draft – Statement of Cash Flows (Proposed amendments to IAS 7) – published December 18, 2014, “responds to requests from investors for improved disclosures about an entity’s financing activities and its cash and cash equivalents balances.” Comment period ends April 17, 2015.

IFACInternational Federation of Accountants (

  1. International Auditing and Assurance Standards Board (IAASB) Exposure Draft - Proposed Amendments to International Standards on Auditing (ISAs), ISA 800 (Revised) and ISA 805 (Revised) – issued January 21, 2015, proposes changes in the audit standards for financial statements prepared in accordance with special purpose frameworks, single financial statements, and specific elements, accounts or items of a financial statement, to take into account the provisions of the new standards described in the next item 2. Below. Comments are due by April 22, 2015.
  2.  International Auditing and Assurance Standards Board (IAASB) - Reporting on Audited Financial Statements – New and Revised Auditor Reporting Standards and Related Conforming Amendments – published January 15, 2015, includes new ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report, and a number of revised ISAs, including ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, and ISA 570 (Revised), Going Concern. The standard requires reporting in the auditor’s report the key matters considered most significant, and how they were dealt with in the audit. Also, more attention is drawn to going concern and providing more transparency in the auditor’s report of work performed. Effective generally for 2016.
  3.  International Auditing and Assurance Standards Board (IAASB) - Strategy for 2015–2019: Fulfilling Our Public Interest Mandate in an Evolving World and Work Plan for 2015–2016: Enhancing Audit Quality and Preparing for the Future – released December 17, 2014, “is underpinned by three strategic objectives that reflect a continued focus on International Standards on Auditing (ISAs) as the basis for high-quality audits, the importance of the IAASB’s standards for other services to address emerging needs of stakeholders, and the board’s intention to strengthen collaboration with others to address public interest matters relevant to its work.”
  4.  International Ethics Standard Board for Accountants (IESBA) - Improving the Structure of the Code of Ethics for Professional Accountants – consultation paper published November 4, 2014, “seeks input from stakeholders on approaches that could be taken to improve the clarity and usability of the Code, thereby facilitating its adoption, effective implementation, and consistent application. Among the various matters on which the Ethics Board is consulting are restructuring the Code to more clearly distinguish requirements from guidance, reorganizing the content of the Code, including rebranding the Code, or parts thereof, as international standards, identifying responsibility for compliance with the Code in particular circumstances and simplifying the wording of the Code so that it can be more readily understood.” Comment period ends February 4, 2015.
  5.  International Public Sector Accounting Standards Board• (IPSASB) - Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities – published October 31, 2014, “provides the IPSASB with the concepts that will underpin the development of International Public Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines (RPGs) in the coming years.” Linkage between standards and transparency of concepts are strengthened.

IIRC - International Integrated Reporting Council (

  1. <IR> Technology Initiative – Launched November 26, 2014, as a three year program to “build a deep understanding of how technology can be applied to assist adopters of <IR> on both sides of the report production and consumption value chain.” Charter members of the initiative are CRedit360, Deloitte, Indra, PwC, SAP and Tagetik.

ACCA – Association of Chartered Certified Accountants (

  1. A new breed of adviser for the modern-day enterprise – discussion paper issued December 15, 2014, “challenges businesses and finance professionals to develop their skills and knowledge by working together.” “In order to be able to provide the rounded support that enterprises need from the very beginning of their business journey, accountants need to view their role with the mindset of the entrepreneur.”
  2. Sustainability and business: the next 10 years – survey of business students published December 11, 2014, “about how global macro sustainability trends will impact businesses and the role of accountants in countering these pressures and challenges. A massive 81% said the main impact on business by 2024 would be a decline in natural resources; 70% said an increasing population would be impactful, with this seen as more prominent amongst respondents in Africa, South Asia and Western Europe (73%, 72% and 70% respectively). Instability in the financial markets was a major concern for 67% of respondents, with more prominence placed on this in the Caribbean and Africa at 80% and 72% respectively.”
  3. See the Future 2014 – joint report with European Foundation for Management Development issued November 29, 2014, “reveals that business education providers face four main challenges - costs, staffing issues, market competition and technology. They are being forced to reconsider the content of their degrees, with a growing shift towards a multidisciplinary approach to meet the demands of students and corporate business. Lifelong learning will remain important, but lifestyle learning will come to the fore because of technology developments.”
  4. Balancing Rules and Flexibility - joint report with KPMG issued November 20, 2014, “calls for governments to work towards meeting global corporate governance standards, which are based on the Organisation for Economic Co-operation and Development principles.”
  5. Culture and channeling corporate behavior – joint report with The Economic and Social Research Council issued November 24, 2014, covering “a research project investigating perceptions of corporate culture and its links to dysfunctional behaviour in organisations. This series of four reports aims to assist boards in preparing to assess their corporate culture and in understanding how it can influence either functional or dysfunctional behaviour.”

CIMAChartered Institute of Management Accountants (

  1. The role of the CFO on the modern board – report issued in November, 2014, “considers the role of the CFO in the context of the evolving board agenda and offers five practical tips on how the CFO can help the board to ensure it makes good use of its limited time.”

AAA – Americas, Australia & Asia

FASBFinancial Accounting Standards Board (

  1. Exposure Draft - Income Taxes: I. Intra-Entity Asset Transfers, and II. Balance Sheet Classification of Deferred Taxes- issued January 22, 2015, as part of the Simplification Initiative. The first ED eliminates the “exception that prohibits recognizing current and deferred income tax consequences for an intra-entity asset transfer until the asset or assets have been sold to an outside party. Consequently, this proposal requires that an entity recognize the current and deferred income tax consequences of an intra-entity asset transfer when the transfer occurs.” The exception was considered complex and had little authoritative guidance. The second ED requires that deferred tax assets and liabilities be classified as noncurrent on a classified balance sheet. This proposal eliminates the need to separate current and non-current amounts. Both ED’s would align with the corresponding IFRS. The comment period ends May 29, 2015.
  2.  Income Statement—Extraordinary and Unusual Items ASU 2015-01: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items - issued January 9, 2015, eliminates the concept of extraordinary items from US GAAP. Preparers no longer need to determine and segregate on the income statement, events that are both unusual and infrequent. Effective generally for 2016, with retrospective application allowed.
  3.  Business Combinations ASU 2014-18: Accounting for Identifiable Intangible Assets in a Business Combination – issued December 23, 2014, allows a private company to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination. In this alternative, a private company would no longer recognize the following separate from goodwill: 1. customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and 2. noncompetition agreements. Effective generally for 2016 with early application permitted.
  4.  Exposure Draft - Financial Services—Investment Companies: Disclosures about Investments in Other Investment Companies - issued December 4, 2014, removes the consolidation requirement for controlling interests in other investment companies and, instead, to increase transparency into investee funds requires certain disclosures about an investment company’s investments in other investment companies. The comment period ends February 17, 2015.
  5.  Business Combinations ASU 2014-17: Pushdown Accounting - issued November 18, 2014, provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. Effective November 18, 2014.
  6.  Derivatives and Hedging ASU 2014-16: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity – issued November, 2014, addresses the criterion for determining how to report embedded derivatives.. Effective generally for years beginning in 2016, with retrospective application permitted.

AICPA American Institute of Certified Public Accountants (

  1. Center for Audit Quality (CAQ) a. SEC/PCAOB Independence Rules for Non-Issuer Audit and Attestation Engagements – joint alert with AICPA issued on November 18, 2014, providing an overview of independence rules related to auditors of non-issuer SEC registered broker-dealers and investment advisers, related party custodians and private funds.
  2.  Accounting and Review Services Committee (ARSC) a. Statement on Standards for Accounting and Review Services: Clarification and Recodification (SSARS) No. 21 – issued October 23, 2014. See December, 2014, Audit & Accounting Alert article for details.

COSO - (

  1.  COSO in the Cyber Age –research report published January 14, 2015, “provides direction on how the Internal Control-Integrated Framework (2013) and the Enterprise Risk Management-Integrated Framework (2004) can help organizations effectively and efficiently evaluate and manage cyber risks,” doing so by providing “direction on identifying and implementing internal control components and principles, from demonstrating commitment to integrity and ethical values, to risk analysis, and evaluating and communicating deficiencies.”

CPA Australia - (

  1.  Asia-Pacific Small Business Survey-2014- published November 19, 2014, presents “a picture of small business conditions across the region and over time and shows that conditions are positive in China, Indonesia, Malaysia, Singapore and Vietnam and not so positive in Australia, Hong Kong and New Zealand.”

EMEIA – Europe, Middle East, India & Africa

FRC Financial Reporting Council of the UK (

  1.  Developments in Corporate Governance and Stewardship 2014 – report issued January 15, 2015, indicating that “levels of compliance with the UK Corporate Governance Code have continued to increase. Reporting has become more transparent and informative, with audit committee reports and diversity reporting, particularly improved…However, more needs to be done to ensure asset owners and managers follow-through on their commitment to the principles set out in the [Stewardship] Code`”
  2.  Exposure Draft: FRED 57 Draft Amendments to FRS 101 – Reduced Disclosure Framework (2014/2015 Cycle) – issued December 15, 2014, proposes minor disclosure exemptions for related parties and first-time adoption of IFRS, as well as amendments relating to business combinations and discontinued operations. Comments are due by March 20, 2015.
  3.  Exposure Draft: FRED 56 Draft FRS 104 Interim Financial Reporting – issued November 12, 2014, “would revise the FRC’s existing guidance on interim financial reports for consistency with new UK and Irish GAAP (FRS 102),” which is based on IAS 34. Comments were due by January 15 2015. 

Additional A&A News 

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

  1. 6 key threats to auditor independence in Australia
  2. The Alarming Trend of Customized Accounting - The Great IPO Lie
  3. IFRS: Common Good?
  4. The Rise of the Advisory Bookkeeper
  5. Private Company Council a Catalyst for FASB Simplification
  6. PCAOB Revamps Standard-Setting Agenda

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: [email protected]