At-A-Glance
The parallel
roles of
audit and
accounting
are
prominent in
the
international
news this
month.
Changes that
have
long-term
implications
in both
fields are
coming to
pass. Our
first
article
explores the
ongoing
quest in
search of
the optimal
balance
between an
audit that
is without
risk of
failure and
one that
comes at an
acceptable
cost.
Another
seemingly
endless
pursuit is
toward the
goal of
worldwide
accounting
standards.
While that
journey
proceeds at
a crawl,
broader,
potentially
more complex
reporting
issues are
gaining
traction.
Our second
article
highlights
new
regulatory
measures
that inject
non-financial
measures
into the
financial
reporting
arena.
Finally, we
round out
this issue
with our
quarterly
Worldwide
Update, with
news from
organizations
across the
globe.
Editor Gerald E. Herter, CPA |
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In This Issue
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The Elusive Goal of Audit
Perfection
Persistent audit
deficiencies continue to
raise alarms
The challenge to
preventing an audit
failure is similar in
some respects to that of
preventing a terrorist
attack. No matter how
many resources are
applied, the attainment
of success 100% of the
time cannot be
guaranteed.
Nevertheless, when a
failure occurs, the
inevitable question asks
what more could have
been done. When an Enron
or 9/11 occurs, all the
stops are pulled out to
prevent a similar
occurrence. The result,
at least temporarily, is
usually a decrease in
comparable events.
Eventually though,
either the guard is let
down, or new methods of
attack are devised, such
that the cycle of bad
outcomes increases
again.
Stakeholders may demand
perfection while not
realistically assessing
the cost such results
would require.
Consequently, auditors,
preparers and users of
financial statements
must continually strive
for a balance that
provides an acceptable
level of protection at a
feasible cost.
A variety of
organizations around the
world are addressing
aspects of the audit
dilemma, striving to
improve outcomes and
lessen the instances of
failure. The
International Forum of
Independent Audit
Regulators (IFIAR) in
April issued its 2013
Survey of Audit
Inspection Findings. The
European Parliament in
early April instituted
new rules requiring
mandatory auditor
rotation, expanded audit
reporting, and limiting
auditor advisory
services for audit
clients. The PCAOB is
gauging feedback on a
proposal that would also
expand audit reporting.
Also, companies and
their auditors are
implementing the new
COSO internal control
framework while
assessing the role of
internal audit.
IFIAR includes
regulators from 49
jurisdictions around the
world. Its periodic
surveys are intended to
highlight common audit
performance issues that
occur throughout the
world. The recently
issued 2013 survey does
not pass judgment
quantitatively on
whether audit quality
has improved or
deteriorated since the
2012 survey. However,
the findings indicate
that the same major
shortcomings continue to
occur.
For public entity audits, the three major areas of deficiency were:
- Fair value
measurement
- Internal control
testing
- Adequacy of
financial statement
disclosures.
For financial
institution audits, the
three major areas of
deficiency were:
- Audit of allowance for
loan losses and loan
impairments
- Internal control
testing
- Audit of valuation of
investments and securities.
For inspections of internal
control systems, the three major
areas of deficiency were:
- Engagement performance
- Human resources
- Independence and
ethics requirements.
The problems in auditing fair
value, investment valuation, and
loan impairment are not
surprising considering the
difficulty the FASB and IASB are
having in developing effective
standards for financial
instruments. While internal
control testing is at the very
heart of audit fundamentals, the
rapidly changing nature of
systems and technology pose an
ongoing challenge just to keep
up.
The European Parliament’s
approach addresses the concerns
indirectly, by placing more
restrictions on auditors.
Companies will need to change
auditors every ten years, though
that period can be extended to
twenty years if the audit is at
least put out to bid, or to 24
years if more than one audit
firm is involved in the audit.
Audit reporting transparency is
expanded as well, requiring the
presentation of more audit
procedure details to the audit
committee, and public
disclosures concerning risks of
material misstatement and going
concern uncertainties.
Additionally, in order to
enhance independence, auditors
will be prevented from providing
tax, financial and investment
advice, or other non-audit
services.
The PCAOB has dismissed the
idea of mandatory auditor
rotation, but is considering
audit report expansion. A
proposal for changes to the
auditor’s report, currently out
for discussion, has drawn
spirited feedback, pro and con.
The proposal calls for the
disclosure of “critical audit
matters” (CAM) in the audit
report. Proponents feel that CAM
would provide users with
informative insights into the
audit process that the current
boilerplate reports lack.
Indeed, significant energy can
be spent during an audit between
the company and the auditor
evaluating whether a potentially
problematic issue needs to be
disclosed. Requiring disclosure
would reduce undue pressure on
the auditor to remain silent.
Critics raise the concern of
added legal liability for the
auditor, and added cost for
matters that are considered
company responsibilities to
disclose, not the auditor’s.
Finally, the new COSO
framework is intended to enable
a more current and effective
implementation of measures that
can complement the auditor’s
efforts to assure adequate
safeguards and accurate
financial reporting. Adequate
training of firm financial
personnel, internal auditors,
and external auditors will be
crucial as the new framework is
introduced. Also, a detailed
analysis of existing controls,
as contrasted to the new
framework, will be needed to
reveal gaps that have emerged
over time as systems have
evolved.
For further information, see
IFIAR Global Survey of
Inspection Findings
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Laws and Causes Target Financial
Reporting Standards
Costs, benefits and relevance fuel the
debate
As deliberations continue over
International Financial Reporting
Standards (IFRS), various
organizations and regulatory
jurisdictions push forward with
their own specific agendas. In the
headlines this month are issues such
as conflict minerals,
sustainability, human rights and
corruption.
The Dodd-Frank Act was passed in
2010 by the United States Congress
to restrain behaviors that led to
the recent financial crisis.
However, as often happens, unrelated
measures got added on, as was the
case with conflict minerals
legislation. Designed to shed light
on and reduce the use of minerals
production to fund armed conflicts
and human rights abuses, this
provision added complex and costly
financial reporting disclosure
requirements on public companies.
While use of conflict minerals is a
troublesome issue, determining
whether a company’s products use
minerals of this nature can require
extensive research and analysis.
Private companies can be impacted as
well, since they may sell so called
“tainted” components that go into
the public company’s products.
Surprisingly, a United States Appeals
Court ruled parts of the law
unconstitutional on the basis of
interference with free speech
guarantees. While the ultimate outcome
remains to be seen, the conflict
minerals legislation shows how
passionate political issues can impinge
on the ostensibly detached world of
financial reporting standards.
While the SEC considers how to
respond to the conflict minerals
developments, one of its
commissioners has lashed out at the
Sustainability Accounting Standards
Board (SASB). In our October 2013
issue, we described the SASB’s work
in establishing specific industry
standards for reporting ESG
(environmental, social and
governmental) factors in SEC 10-k
reports.
In a speech at the Tulane University
Law School Annual Corporate Law
Institute, Commissioner Daniel
Gallagher expressed concern that
Federal legislation has given the
SEC too much authority for corporate
governance, which he feels is best
left at the state level. However, in
the area of corporate filings and
disclosures, Gallagher remarked that
the SEC has been given sole
responsibility, such that third
parties like the SASB should not get
involved. He pointed out that SASB
is not an authoritative board, and
that it engages in areas other than
sustainability.
In response, the SASB stated that it
“does not mandate disclosure, and we
have no intention of displacing or
undercutting the SEC’s authority to
prescribe disclosure standards.
Rather, SASB develops standards that
help companies report on material
sustainability factors in a
decision-useful way for investors.”
The SASB noted its support for the
SEC objectives of materiality and
long-term investor protection that
Gallagher mentioned, by providing
resources that help to eliminate
immaterial disclosures and promote
disclosures that assist in assessing
the long-term viability of entities.
Moving differently than the SEC, the
European Parliament on April 15,
2014 adopted the Directive on
disclosure of non-financial and
diversity information by large
companies and groups. This directive
will require large companies to
disclose “information on policies,
risks and results as regards
environmental matters, social and
employee-related aspects, respect
for human rights, anti-corruption
and bribery issues, and diversity on
boards of directors.” Citing not
only the ethical imperatives, Michel
Banier speaks to the importance for
the future of companies and Europe
alike in stating that “Companies,
investors and society at large will
benefit from this increased
transparency. Companies that already
publish information on their
financial and non-financial
performances take a longer term
perspective in their
decision-making. They often have
lower financing costs, attract and
retain talented employees, and
ultimately are more successful. This
is important for Europe’s
competitiveness and the creation of
more jobs. Best practices should
become the norm.”
Though the European Parliament
indicated that SMEs could also
benefit from efforts in these areas,
SMEs with fewer than 500 employees
were exempted, after negotiations
with the European Council, due to
the administrative burden that would
be incurred by smaller companies.
Even those required to comply will
only need to provide concise, useful
information, rather than a detailed
analysis. The format is flexible.
Overall, the directive is much less
in scope than that envisioned by the
comprehensive report under
development by the International
Integrated Reporting Council.
For further information, see
Court Decision Won't be
Final Word on Conflict Minerals
and
Disclosure of
non-financial and diversity
information by large companies and
groups
Worldwide Update
Quarterly roundup of recent and
upcoming actions and activities by
audit and accounting organizations
International
IASB –
International Accounting Standards
Board (www.ifrs.org)
- Discussion Paper -
Accounting for Dynamic Risk
Management: a Portfolio Revaluation
– issued on April 17, 2014,
addresses macro hedging accounting.
The IASB separated this topic from
IFRS 9-Financial Instruments, which
is in the final stages of
development. Macro hedging manages
risk on a portfolio basis rather
than on individual contracts. IASB
seeks input on a possible approach
that revalues changes in managed
risk through profit and loss. The
comment deadline is October 17,
2014.
- Proposed
amendments to IAS 1, Presentation of
Financial Statements, –
issued on March 25, 2014, as part of
a broader Disclosure Initiative that
is designed to make disclosures more
effective “instruments of
communication and not simply
compliance documents,” according to
IASB Chairman Hans Hoogervorst. The
proposal 1) clarifies materiality,
2) clarifies disaggregation of items
in the financials, 3) specifies
presentation of subtotals in the
financials, 4) clarifies flexibility
in the order of footnotes, and 5)
cleans up guidance on accounting
policies. The comment deadline is
July 23, 2014.
- Revenue
Recognition and Lease Proposal
Status – The proposed joint
IASB-FASB standard, Revenue from
Contracts with Customers, is in
final drafting, but issuance has
been pushed back to the second
quarter 2014, to allow more time for
incorporating revisions and
references. The differences between
the IASB and FASB on the proposed
joint IASB-FASB standard, Leases,
have still not been completely
resolved. An April 24, 2014, joint
meeting was scheduled to address
some, but not all, of the issues.
Consequently, the timing for
finalization of the proposal is
currently unclear.
- IFRS Research Centre
– web-based resource launched on
April 22, 2014, to increase
awareness of issues, and to
encourage engagement in research and
contributions to the standard
setting process by research
professionals.
IFAC –
International Federation of
Accountants (www.ifac.org)
- Agreement to
develop professional accountancy
organizations in emerging economies
– UK Department for International
Development will provide funding for
efforts in Asia, the Caribbean,
Middle East and Africa.
Infrastructure support will help to
improve professional and ethical
standards.
- IAASB Proposes
International Auditing Standard 720
(Revised), The Auditor’s
Responsibility Relating to Other
Information – The
International Auditing and Assurance
Standards Board proposal was
reissued in response to significant
comments that were supportive but
indicated much needed clarification
of auditor objectives, scope of
documents and work effort. The
proposal focuses responsibility on
information in a company’s annual
report, and requires the auditor to
consider whether there are material
inconsistencies with the financial
statements or other knowledge
obtained during the audit. A
separate section of the auditor’s
report would disclose findings
without any opinion. Comments are
requested by July 18, 2014.
- Proposed Guidance
- Developing and Reporting
Supplementary Financial
Measures—Definition, Principles, and
Disclosures – The February,
2014, Exposure Draft intends to
“establish a benchmark for good
practice in developing and reporting
supplementary financial measures to
assist management, investors, and
other stakeholders in understanding
some aspect of an organization’s
performance.” Supplementary
financial measures are defined as
“those financial measures not
specifically identified by a GAAP
framework.” An example is EBITDA
(Earnings Before Interest, Taxes,
Depreciation, and Amortization).
Comments are due by May 26, 2014.
IIRC -
International Integrated Reporting
Council (www.theiirc.org)
1. CDSB Framework 2.0 Consultation Draft – issued in
February, 2014. – The Climate
Disclosure Standards Board is a
consortium of business and
environmental organizations, whose
purpose is for members to “jointly
to develop and advocate an
international reporting framework
for use by companies when making
disclosures in, or linked to, their
mainstream financial reports.” Its
Technical Working Group is
represented by the major accounting
organizations and firms. The
Consultation Draft expands the
original Framework’s focus on the
risks and opportunities posed by
climate change, to include
information on water and forest risk
commodities.
ACCA –
Association of Chartered Certified
Accountants (www.accaglobal.com/)
- Breaking out: public
audit’s new role in a post crash
world – report issued in
February, 2014, by ACCA’s Global
Forum for the Public Sector.
Contributors weigh in on the future
role of auditors in the public
sector, emphasizing the need to be
involved earlier in the process of
how funds are allocated, and to be a
catalyst for improvement, along with
the traditional role of providing
assurance and assessing
accountability.
- Enhancing the
value of the audit committee report
– report issued in March, 2014,
providing examples of how company
audit committees are complying with
the UK Corporate Governance Code
(FRC 2012), that calls for a more
customized and company specific
audit committee report, which also
discloses the most significant
financial statement issues.
- Understanding investors:
the changing corporate perspective-
report issued in February, 2014,
based on a survey of 200 CFOs from
Great Britain. Faster external and
internal reporting is favored by
investors and considered feasible,
though not at the sacrifice of
accuracy. 40% of those surveyed have
moved forward with integrated
reporting, while the rest are taking
a ‘wait and see’ approach. Lower
audit fees and more competition are
desired, but not at the cost of
audit quality.
CIMA – Chartered
Institute of Management Accountants
(www.cimaglobal.co)
- Global Management Accounting
Principles Consultation
Draft-released February 10, 2014, to
assist CFOs and boards with
assessing and enhancing management
accounting principles, in order to
further the success of the business.
See March, 2014, Audit & Accounting
Alert for details on this new
resource. Comments are due by May
10, 2014.
AAA – Americas, Australia &
Asia
FASB – Financial
Accounting Standards Board (www.fasb.org)
- FASB issued Accounting
Standards Update 2014-08,
Presentation of Financial Statements
(Topic 205) and Property, Plant, and
Equipment (Topic 360): Reporting
Discontinued Operations and
Disclosures of Disposals of
Components of an Entity.
Issued on April 10, 2014, and
effective for 2015, the ASU narrows
discontinued operation reporting to
only include disposals that
represent a strategic shift in
operations. Disclosures for
discontinued operations are to have
more information about the affected
assets, liabilities, income and
expenses. For significant disposals
that do not qualify, the pre-tax
income impact is to be disclosed.
- FASB issued Accounting
Standards Update No. 2014-07,
Applying Variable Interest Entities
Guidance to Common Control Leasing
Arrangements. Issued on
March 20, 2014, effective for 2015,
with early adoption allowed. See
April, 2014, Audit & Accounting
Alert for details.
- FASB issued Exposure
Draft: Conceptual Framework for
Financial Reporting: Chapter 8:
Notes to Financial Statements.
Issued on March 4, 2014, the ED
proposes an approach to facilitate
the development of effective, yet
practical standards for financial
statement disclosures. Comments are
due by July 14, 2014. See April,
2014, Audit & Accounting Alert for
details.
- Revenue Recognition and
Lease Proposal Status – See
IASB above. .
AICPA – American
Institute of Certified Public
Accountants (www.aicpa.org)
- Auditing Standards Board
(ASB) –issued three
interpretations to Statement on
Auditing Standards No. 122:
Clarification and Recodification,
relating to audit evidence, and
special considerations for group
financials, single financials, and
specific elements of a financial.
These interpretations are in
response to the new GASB standards
that impact governmental
multiple-employer pension plans and
their participants.
- Technical Practice Aids
– The AICPA Financial Reporting
Center issued guidance in April,
2014, for disclosures in
compilation, review and audit
reports on comparative financial
statements. Where, in accordance
with current Private Company Council
GAAP, but not in accordance with
prior year GAAP, VIE’s were not
consolidated, the TPA explains how
the report should read.
PCAOB – Public
Company Accounting Oversight Board (www.pcaob.org)
- Cooperative Agreement
with Sweden for oversight of audit
firms – signed in March,
2014, allows regulators for both
countries to review work of auditors
subject to both jurisdictions. The
PCAOB has similar agreements with
the European Union countries of
Finland, France, Germany, the
Netherlands, Spain and the United
Kingdom, as well as with
Switzerland, Norway, and several
regulators in North America, the
Middle East, Asia and Australia.
SEC – U.S.
Securities and Exchange Commission (www.sec.gov)
- Draft Strategic Plan for
2014-2018 – released on
February 3. Under the objective that
covers the establishment and
maintenance high-quality financial
reporting, the SEC includes an
initiative to promote higher quality
financial reporting worldwide and
consider “whether a single set of
high-quality global accounting
standards is achievable.”
Europe, Middle East, India &
Africa
FRC – Financial
Reporting Council of the UK (www.frc.org.uk)
- Proposed Revisions to UK
Corporate Governance Code-Consultation
Document issued in April, 2014,
covering various compensation
issues, the going concern basis of
accounting, risk assessment and
management, stating the ability to
continue in business, and the
monitoring and annual review and
reporting on internal control
systems effectiveness. Comments are
due by June 27, 2014.
- FRED 53: Draft
Amendments to FRS101: Reduced
Disclosure Framework (2013/14)
– issued in April, 2014, to update
financial reporting disclosures
consistent with IFRS issued during
the past year. Comments were due by
April 30.
- FRED 54: Draft
Amendments to FRS 102-The Financial
Reporting Standard applicable in the
UK and Republic of Ireland: Basic
financial instruments –
issued in February, 2014, to address
unintended accounting consequences
in relation to basic debt
instruments. Comments were due by
April 30.
EP – European
Parliament (www.europarl.europa.eu/)
- Audit reforms pass in
European Parliament- on
April 3, 2014. See first article
above.
- Directive on disclosure
of non-financial and diversity
information by large companies and
groups – adopted by EP on
April 15, 2014. See second article
above.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
Caught Between A Great Wall And
A Hard Place: Issues For U.S.
Public Companies In Responding
To Regulatory Requests For
Chinese Data
-
New XBRL GAAP Pension Analysis
Tool Finds Errors in SEC Filings
-
Turkey Cabinet Revises Its
Decree On Companies Subject To
Independent Audit
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Cyber security: the
weakest link in M&A transactions
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US Department of Justice v
KPMG: Document Shows “Too Few To
Fail” Was Opening Premise
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The Search for Suspect
Accounting
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