At-A-Glance
While the SEC prolongs a decision on
IFRS, progress has been made on other
aspects of financial reporting by
several professional bodies. COSO
enhanced the usefulness of the internal
control framework Exposure Draft by
adding extensive sets of examples and
tools for applying the newly updated
principles. The Financial Accounting
Foundation has named the members of the
new Private Company Council that will be
considering the applicability of certain
financial reporting standards to private
entities. Two AICPA Committees have
proposed revisions to standards that
will clarify when a compilation report
is required with financial statements.
Finally, the PCAOB reached an agreement
with China that will allow limited
access for observational visits to firms
that audit Chinese companies.
Editor Gerald E. Herter, CPA
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In This Issue
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COSO Expands Guidance
New Internal Control Framework Supplemented by
Helpful Tools
In our February issue, we described the newly
issued Exposure Draft, Internal Control –
Integrated Framework (“Framework”), that is on
track to replace its 20 year old predecessor in
2013. During the comment period that ended on
March 31, over 21,000 copies of the draft were
downloaded and over 200 comments from a wide
range of sources were received. Many were
supportive of the efforts to modernize and
codify the principles, while there was also
concern with the scope and the perceived
additional efforts that would be required to
work with the Framework. After considering the
issues over a six month period, an updated draft
was issued in September, with primarily cosmetic
changes to clarify terminology, the relationship
to enterprise risk management, and added
guidance for smaller entities.
The depth of effort devoted to this project
by COSO was evidenced by the additional issuance
in September of two extensive documents
providing practical assistance: Internal Control
over External Financial Reporting: Compendium of
Approaches and Examples (ICEFR) and Illustrative
Tools for Assessing Effectiveness of a System of
Internal Control (Illustrative Tools).
As the Framework indicates, the scope
of the internal control definition covers
objectives relating to operations, reporting,
and compliance. The ICEFR addresses a subset of
the reporting category. As such, the ICEFR will
be helpful to CPAs and their clients in the
preparation and scrutiny of financial statements
that will be going to outside users.
The structure of the ICEFR follows that of
the Framework, so there is a chapter for each of
the five internal control components: control
environment, risk assessment, control
activities, information and communication, and
monitoring activities. Each chapter describes
the internal control principles relating to that
component and lists approaches for each
principle. To further assess whether a principle
is present and functioning, points of focus are
offered. The points of focus were called
attributes in the original exposure draft. For
each approach, real life examples elaborate ways
the approaches have been applied.
For example, under the information and
communication component, there is Principle 15:
The organization communicates with external
parties regarding matters affecting the
functioning of other components of internal
control. The approaches are:
- Communicating information to relevant
external parties
- Obtaining information from outside
sources
- Surveying external parties
- Communicating the whistle-blower program
to outside parties
- Reviewing external audit communications
The points of focus are:
- Communicates to external parties
- Enables inbound communication
- Communicates with the Board of Directors
- Provides separate communication lines
- Selects relevant method of communication
Under approach 4, “Communicating the
whistle-blower program to outside parties,” an
example is provided that describes the specific
steps taken. Here a company has set up a section
of its website to receive questions, concerns,
or complaints. The internal audit department
maintains a process to ensure collecting,
documenting evaluating and addressing all
reported matters. The website is monitored
weekly and secure software is used to summarize
new information. The internal audit director
develops an action plan for each matter. The CFO
or audit committee chair reviews and takes
appropriate action.
The ICEFR is designed to be a reference tool
as opposed to a document that is read from front
to back. The Illustrative Tools are meant to
help with assessing the internal control system
that is in place. Those that have worked with
SOX 404 or the risk assessment SAS’s will find
these tools familiar. Though not intended to
fulfill any particular regulatory requirement
with regards to the appraising the severity of
deficiencies, the tools, like the ICEFR, follow
the Framework structure in addressing internal
control components and principles. A series of
templates are provided for overall and specific
assessments, followed by five scenarios to show
how they can be applied to actual situations.
The scenarios are comprehensive presentations
complete with specific purpose, factual
background information, and extensive filled-in
templates. Issues covered by the scenarios are:
- Is a principle and component present and
functioning?
- Are the five components present,
functioning and operating together in an
integrated manner?
- How does a weakness in a control
activity impact principles, components, and
internal control?
- Are the principles and components
present and functioning in a division,
operating unit or function?
- How are the assessments of multiple
locations combined?
The templates and scenarios will prove
helpful in assessing a system of internal
control, documenting the assessment, and
documenting deficiencies that were identified,
all in an organized, structured format.
For further information, see
COSO Internal Control Guidance
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Private Company Council in Place
Financial Accounting Foundation Names Ten Members for
PCC
Momentum continues to build for the launch of the
Private Company Council (PCC), the Financial Accounting
Foundation’s (FAF) answer to the private sector’s call
for meaningful financial reporting standards. In
September, the FAF appointed Billy Atkinson chairman,
along with nine other members, representing a mix of
public accounting, financial and industrial companies.
Atkinson was an audit partner with Pricewaterhouse
Coopers for 39 years prior to retiring in 2011, and has
served on various national and state accounting boards
and councils.
While the PCC membership embodies a depth of
technical expertise and commitment to the profession,
the Council’s ability to attain the long sought after
objectives may prove challenging. In our July issue, we
alluded to AICPA President, Barry Melancon’s cautious
support, when he announced simultaneously a separate
project for a simplified financial framework for smaller
entities that do not need to contend with GAAP.
Melancon’s reservations surfaced again in a statement
when Atkinson’s appointment was announced, as reported
by Ken Tysiac in the Journal of Accountancy: “…We note
that the appointed Chair has in the past publicly
expressed strong reservations about appropriate
significant differences in GAAP for private companies.
Since the job of the PCC is to advocate for those
differences, we can only assume that during the
interview process the FAF reached a point of comfort
that Mr. Atkinson now supports meaningful differences.
I've known Billy for a long time. He is a competent,
passionate professional who has worked hard for the CPA
profession during his career. We expect that his
commitment to differential standards has evolved and
that his actions and those of his council will in fact
fulfill the FAF's commitment to at long last address
this issue.”
Initial topics to be tackled by the PCC according to
Atkinson are:
- Accounting for Uncertainty in Income Taxes or
FIN 48.
- Fair value.
- Variable interest entity consolidation, or FIN
46(R).
- Complexity of derivatives, including simple
interest rate swaps used to convert floating rate
debt to fixed.
- Accounting for warrants as liabilities.
- Elements of business combination accounting such
as separately identified intangible assets.
These are topics well worth considering, since they
most often are of little concern or relevancy to
preparers and users of private company financials.
In our September issue, we described the FASB
Exposure Draft that will determine the criteria the PCC
is to use for selecting matters that can be considered
for private company GAAP exception or modification. The
comment period for the Exposure Draft has just expired
as of October 31.
Bundled into the Exposure Draft is a separate project
deliberating over the definition of a private company
(nonpublic business entity), since the Codification of
standards currently has several definitions for various
situations. The goal of this project is to simplify the
definition, address known issues, and indicate which
types of entities qualify. Tentative decisions for
entities that would not qualify include employee benefit
plans and entities whose securities trade in a public
market. Entities that would qualify generally include
nonpublicly traded entities, including nonpublic
financial institutions, subsidiaries of public entities,
and nonpublic entities that own consolidated public
subsidiaries. Qualified entities in industries that have
industry-specific accounting guidance would be required
to follow that same industry-specific guidance that
applies to public entities. A second phase of this
project will consider which not-for-profit organizations
are nonpublic entities. After these two phases are
complete, a separate exposure draft is expected.
For further information, see
Private Company Council
Financial Statements: To compile or not?
Clarification appears to be near
The compilation and review standards were first
established in 1979 to clarify and expand upon public
accounting services pertaining to unaudited financial
statements. While providing much needed guidance in this
area, the standards also resulted in lingering confusion
over the years about just what constitutes a compiled
financial statement. This confusion was only heightened
by the advances of technology, to the point where the
answer may have depended on who pushed the button on a
computer that caused software to print the financials.
Some relief was allotted in the year 2000, to exempt
certain financials created solely for knowledgeable
management.
However, this past June two AICPA committees, the
Professional Ethics Executive Committee (PEEC) and the
Accounting and Review Services Committee (ARSC) both
issued complementary Exposure Drafts that are intended
to lay to rest much of the confusion. The PEEC Exposure
Draft, Proposed Revised and New Interpretations and
Proposed Deletion of Ethics Rulings, would amend
Interpretation 101-3 of AICPA Professional Standards
Rule 101, to state that financial statement preparation
is a nonattest service. Nonattest services do not fall
under the independence provisions of Interpretation
101-3.
The ARSC Exposure Draft, Compilation of Financial
Statements, would amend AR section 80 to state that a
compilation is required only when the accountant is
engaged to perform one, while Exposure Draft, Proposed
SSARS: Association With Unaudited Financial Statements,
would call for the financials to indicate that they have
not been audited, reviewed, or compiled when the
accountant is associated with them, or else have the
accountant attach a disclaimer to that effect.
These revisions should eliminate, for the
practitioner, some of the judgmental gray areas over
whether various levels of involvement constitute a
compilation. A mere annotation is all that is needed on
the financials to show that none of the three levels of
attest services has been performed. Also, these
financials would not be subject to peer review. A
compilation engagement is referred to as “read and
report,” while an association is characterized as
“prepare and present.”
The original comment period deadline of August 31,
2012 has been extended to November 30, 2012. About 60
Comment Letters have been received thus far. While a
majority are favorable, many of those appear to be form
letters from members of a single accounting
organization. Smaller practitioners feel relieved that
the compilation burden was being lifted, especially
tax-return-only practices that had previously abandoned
financial statement work because of the added peer
review requirements.
Some of the other respondents, such as the National
Association of State Boards of Accountancy, are
concerned with the financials going out without an
accountant letter. They would make the disclaimer letter
mandatory. However, while confusion may be lessened for
CPAs, some feel that more confusion may be caused among
the users of financial statements. There is a contention
that many users do not comprehend the difference between
the levels of service, ascribing a level of assurance
not intended by the CPA. So regardless of the content of
the letter attached to the financials, its presence may
give credibility not warranted. So for some, whether the
new standard will lower liability exposure remains
unclear.
The proposed effective dates for the revised
standards would be two years out, at the end of 2014.
For further information see
AICPA White Paper on Preparation as a Nonattest Service
PCAOB Reaches Agreement With China?
Observations of audit firm quality controls to begin
Following intensified efforts over the past year, the
PCAOB announced in early October that an agreement had
been reached with Chinese regulators, allowing
observations of the quality control systems of firms
that audit Chinese companies. In our May issue, we
highlighted the immense challenges China faces as the
country seeks credibility, both with accounting
standards which still have a long way to go in achieving
IFRS comparability, and with Chinese companies whose
records and reports continue to be the subject of
questionable integrity.
The new agreement, while not permitting review or access
to specific audit workpapers, will open the Chinese
audit firms to observational visits, so inspectors can
assess overall audit quality control procedures. That
step allows both sides to work more closely together
and, hopefully, to develop a higher level of trust.
Ultimately, PCAOB standards require the review of actual
workpapers. But for now, the agreement buys time as
negotiations continue in the attempt to achieve that
final goal.
China has concerns that any access to audit documents
would violate the country’s sovereignty. Also, there is
a perceived risk that state secrets would be disclosed,
especially for audits of state-owned entities. If the
differences between the PCAOB and the Chinese government
are not resolved, the consequences could be
far-reaching. The PCAOB could disqualify audit firms
whose workpapers are not opened for inspection. The SEC
could delist companies whose auditors are not in
compliance. With the huge and expanding presence of
Chinese companies on the world market, such an outcome
would be regrettable.
For further information see
China Agrees to “Observational Visits” by PCAOB
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
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Going Concern SAS 126 Arrives
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ASB weighs in on IAASB “auditor commentary”
requirements
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PCAOB and China Reach Agreement on Audit
Observations
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Cloud Computing for CPAs: Beware the Risks
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FASB Decides on New Exposure for Impairments
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Big Four alumni's influence could restrict
competition in UK
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