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Audit & Accounting Alert - November 2020 (Issue 10)
 

 

AT-A-GLANCE 

The credibility of the accounting profession continues to be threatened by the fallout from major corporate collapses resulting from fraud. Expectations had been that substantive corrective protections instituted following the 2001 Enron failure would prevent future occurrences. However, recent scandals, like that of Wirecard in Germany, are sobering reminders that much work still needs to be done to resolve the endemic challenges. The article in this issue highlights current financial debacles from across the world, from the circumstances causing the breakdowns to possible solutions under consideration.  
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

Wirecard Fraud Raises More Questions From Audit Profession


Credibility suffers in wake of ongoing corporate collapses
 
The financial collapse of Wirecard, the German payment processing company, is just the latest in an ongoing string of audit failures that continue to plague the accounting profession in the twenty-first century. The repercussions from the fall of American energy giant, Enron, in 2001 brought not only the devastating demise of once venerable and respected accounting firm, Arthur Andersen. Regulatory fallout led to establishment of what some have called the “draconian” Sarbanes-Oxley Act (SOX) in 2002, creating the independent audit watchdog, Public Company Accounting Oversight Board (PCAOB), which has soberly scrutinized audits ever since. Though SOX has been fine-tuned over the years, the law has served to tamp down the frequency of colossal frauds in the United States.

Apparently, the rest of the world did not learn from the painful experience of the Americans. Sure, Germany, responding to Enron, in 2004 set up the Financial Reporting Enforcement Panel (FREP) to check on German companies. However, with only a small number of employees and a limited budget, FREP was severely understaffed for the role it was given. FREP’s involvement was subsequently terminated. This shortcoming sounds akin to the predicament the British found themselves in when multi-national construction company, Carillion, failed. The Financial Reporting Council (FRC) was said to have inadequate powers to perform the needed level of enforcement. Consequently, a robust new agency, Audit, Reporting and Governance Authority (the ARGA), is in the works to take over enforcement from the FRC.

Though Enron, Carillion and Wirecard followed a similar pattern, developing growing issues over about a fifteen-year period from their founding, China’s entry into the dramatic world of corporate accounting scandals materialized in a much shorter time span. Less than three years after incorporation, Luckin Coffee, erstwhile Asian challenger to Starbuck’s, was outed for a massive fabrication of sales, leading to its delisting. Audit issues in Luckin’s case are likely to differ as well. As detailed in the September 2020 Audit & Accounting Alert, China’s closed society has caused problems for international regulators for years.

Without question, these and other financial scandals have given a black eye, rightly or wrongly, to the worldwide accounting profession. There is no simple solution. As soon as new reforms are put in place to counter defalcations, more sophisticated fraudulent techniques enter the scene. Nevertheless, the investing public demands more of auditors. Changes and strict adherence to basic audit techniques need to be addressed on the micro level, while radical transformation of the broader profession must also receive serious debate and action. In America, SOX and the PCAOB took the country a step closer to full government takeover of the audit function. Without effective changes, that last resort may become a reality.

Since Wirecard and Luckin Coffee, as well as a couple of other large companies with recent troubled accounting, were all audited by Ernst & Young, the temptation may be to focus solely on major sanctions directed at this audit firm, similar to the initial fervor that was directed at Arthur Andersen during the Enron crisis. Though the arrogance of Andersen executive partners, and an ineptly misapplied policy to destroy evidentiary papers, played a substantial role in the firm’s fall, the audit quality issues uncovered were not unique to Andersen. In the current Carillion case, KPMG was the external auditor, while Deloitte performed an internal audit function. Also, Pricewaterhouse Coopers (PwC) was in the news in recent years for substandard audit work at failed department store chain, British Home Stores (BHS).

Audit firms and regulators need to revisit audit procedures and standards to restore reliability in the process. Independent verification of cash, such as the $2 billion missing at Wirecard, is one of the most fundamental steps called for in an audit. Whether the result of inexperienced staff, complex technology, the myriad of interconnecting entities, inadequate supervisory oversight, or for other reasons, this monumental misstep need not have happened had appropriately planned and implemented procedures been in place. Even so, in the case of Wirecard, there were plenty of warnings over several years, mainly from the reporting of the Financial Times. Unfortunately, no one was listening.

For Luckin, the presence of voluminous fabricated sales should be the target of strengthened steps developed for the routine audit process. For Enron, unreported debt in related special purpose entities resulted in new requirements and techniques for tracking down and disclosing these questionable accounting approaches, which were designed to use loopholes in rules-based standards to avoid applying common sense principles.

In other cases, difficult to quantify items are subject largely to auditor judgment. In areas such as asset valuation, goodwill, and going concern, standards have already been reevaluated to provide auditors with expanded methods for evaluating and quantifying. Also, often mentioned are a lack of skepticism on the part of auditors, questions of independence from clients, and the earlier mentioned inexperience and inadequate training of the staff performing the crucially basic audit functions. 

On the macro level, the accounting profession needs transformation to avoid losing the exclusive audit franchise that has been a hallmark for decades. In the wake of Carillion and other cases, the United Kingdom is in the process of requiring accounting firms to formally separate the audit function from their more lucrative consulting businesses. While 2024 has been set as a deadline, Deloitte announced in September 2020, that the firm has begun the process by establishing an audit governance board for oversight.

Rotation of audit firms by companies is another means of enhancing independence and reducing the pressures from conflicts of interest. Auditor rotation, along with separation of consulting from auditing, have been hotly debated for years in the US. There is no consensus on whether the benefits from these actions outweigh the advantages of familiarity of a company’s operations that comes with longevity, or the ready access to consulting specialists on staff that bring wider understanding of complex issues. 

Further details can be found at Wirecard Scandal: Credibility of the entire ecosystem (audit) is under question.
(https://cfo.economictimes.indiatimes.com/news/wirecard-scandal-credibility-of-the-entire-ecosystem-audit-is-under-question-says-shailesh-haribhakti/76845487).
 
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
  2. Accountancy Skills Evolution: Impact of COVID-19 & the Path Forward, White Paper published November 4, 2020, presents results from interactions with a broad range of profession-related individuals that describe the “accelerated ways of working, impact of technology, practices that align to new societal demands, and the right balance of skills, which collectively illustrate a roadmap for the professional accountant.”
  3.  International Ethics Standards Board for Accountants (IESBA) and International Auditing and Assurance Standards Board (IAASB) - Using Specialists in the COVID-19 Environment: Including Considerations for Involving Specialists in Audits of Financial Statements, guidance issued jointly with the AICPA on October 6, 2020, “to assist professional accountants in business and in public practice determine when there might be a need to use the services of a specialist to assist in performing specific tasks and other professional activities within their employing organizations, and in serving their clients in the COVID-19 environment. The publication also highlights relevant ethical considerations for accountants when thinking about using a specialist, as well as circumstances that indicate a need for a specialist during an audit of financial statements.”
     

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. Mainstreaming impact: Scaling a sustainable recovery, professional insight report, published October 13, 2020. In response to COVID-19, the survey of ACCA members “identifies barriers and opportunities for mainstreaming businesses’ positive social and environmental impact through engaging finance teams and professional accountants.
  3. Ethics in a Covid-19 World, white paper published October 26, 2020, “explores what ethics now means in a Covid-19 world, looking at the key areas of challenges that organisations are experiencing… This whitepaper reminds and outlines the ethical framework for accountancy and finance professionals. And shines a light on potential risks of ethical compromise across eight areas: 1. Time-constrained decision making; 2. Remote working; 3. Reducing staff size; 4.Assurance services; 5. Presentation of financial information; 6. Increase in fraud; 7. Ethics across the supply chain; 8. Facilities management .” 

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.

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

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

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 Guide: Financial reporting and audit issues stemming from COVID-19 – link - https://www.charteredaccountantsanz.com/tools-and-resources/client-service-essentials/reporting/financial-reporting-and-audit-guide-financial-reporting-and-audit-issues-stemming-from-covid19     
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)
 
  1. Consultation Paper on Sustainability Reporting, published on September 30, 2020. See article in this issue for details.

IFAC
International Federation of Accountants (www.ifac.org)
  1. International Ethics Standards Board for Accountants (IESBA) -Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants, issued October 5, 2020, “explicitly recognize that the accountancy profession is entrusted with public confidence in the wide-ranging roles it plays in society and that such confidence is based on the skills and values it brings to its professional activities. Importantly, they reaffirm the profession’s responsibility to act in the public interest and the fundamental role of the Code in meeting that responsibility.” Effective December 31, 2021.
  2. International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft (ED) 74, IPSAS 5, Borrowing Costs – Non-Authoritative Guidancepublished October 21, 2020, “would clarify how the existing principles for when borrowing costs can be capitalized should be applied in various regularly encountered public sector contexts.” Comment period ends March 1, 2021.
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)
  1. Exposure Draft -  ISA (UK) 240 (Updated January 2020) - The Auditor's responsibilities Relating to Fraud in an Audit of Financial Statements – Proposed Revisions – consultation published on October 20, 2020, addressing that “concerns  have been raised that auditors are not doing enough work to detect material fraud…The FRC is proposing revisions to address these concerns. These include providing increased clarity as to the auditors obligations together with enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks.” Comment period ends January 29, 2021.
  2. Amendment to FRS 101 – Effective date of IFRS 17, issued October 19, 2020, delays the effective date for two years until periods beginning in 2023.
  3. Amendments to FRS 104 – Going concern – issued October 19, 2020, “which clarifies and enhances requirements relating to the going concern basis of accounting in respect of interim financial reports.” Effective for periods beginning in 2021, with early application permitted.   
  4. A Matter of Principles – the Future of Corporate Reporting, discussion paper published on October 8, 2020, includes proposals for “unbundling the existing purpose, content, and intended audiences of the current annual report by moving to a network of interconnected reports; a new common set of principles that applies to all types of corporate reporting; objective-driven reports that accommodate the interests of a wider group of stakeholders, rather than the perceived needs of a single set of users; embracing the opportunities available through technology to improve the accessibility of corporate reporting; and a model that enables reporting that is flexible and responsive to changing demands and circumstances. Comment period ends on February 5, 2021.

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 - Amendments to AU-C Sections 501, 540, and 620 Related to the Use of Specialists and the Use of Pricing Information Obtained From External Information Sources, issued November 4, 2020, “The proposed SAS provides guidance in AU-C section 501 on applying SAS No. 143 when management has used the work of a specialist in making accounting estimates, as well as other proposed amendments to enhance guidance about evaluating the work of the management’s specialist.” Comment period ends February 4, 2020.
  2. Center for Audit Quality (CAQ) - The Role of Auditors in Company-Prepared Cybersecurity Information: Present and Future, report published October 27, 2020, to “provides an overview of the types of company-prepared information stakeholders and companies are using to disclose cybersecurity risks, the current role auditors play in assessing those risks, and how that role could evolve by providing advisory or attestation services on company-prepared cybersecurity information.”
  3. Center for Audit Quality (CAQ) - 2020 Audit Committee Transparency Barometer, report published October 12, 2020, “shows encouraging long-term trends across topics such as Audit Firm Evaluation and Supervision. We also see positive trends in disclosure of risk oversight in emerging areas such as Cybersecurity, COVID-19 and the discussion of Critical Audit Matters (CAMs)…[However] discussion of audit fees and its connection to audit quality, how the audit committee considers auditor compensation, and disclosure of significant areas of discussion with the auditor remain low in 2020”
FASB Financial Accounting Standards Board (www.fasb.org)
  1. Codification Improvements, ASU No. 2020-10, issued October 29, 2020, includes updates to a wide variety of topics. Effective generally for public entities for periods beginning after December 15, 2020, and for other entities after December 15, 2021.  
  2. Exposure Draft - Reference Rate Reform (Topic 848) Scope Refinement, issued October 29, 2020. “The amendments in this proposed Update would clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to contracts that are affected by the discounting transition.” Comment period ends November 28, 2020.
  3. Debt (Topic 470): Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762, ASU 2020-09, issued October 26, 2020, is a minor update in response to SEC changes made to disclosure rules for guaranteed debt securities offerings. Effective on January 4, 2021, with early application permitted.
  4. Exposure Draft - Franchisors— Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470- 50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Forwards and Options, issued October 26, 2020, proposes “to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of freestanding equity classified forwards and options (including warrants) that remain equity classified after modification or exchange.” Comment period ends December 28, 2020.
  5. Exposure Draft - Franchisors— Leases (Topic 842) Targeted Improvements, issued October 20, 2020. “The amendments in the proposed ASU address the following areas: 1. For lessors, it would amend lease classification requirements for leases in which the lease payments are predominantly variable by requiring lessors to classify and account for those leases as operating leases. In doing so, the risk of lessors recognizing losses at lease commencement for sales-type leases that are expected to be profitable would be mitigated and the resulting financial reporting is expected to more faithfully represent the economics underlying the lease. 2. For lessees, it would provide the option to remeasure lease liabilities for changes in a reference index or a rate affecting future lease payments at the date that those changes take effect; that option would be available as an entity-wide accounting policy election. 3. Finally, for both lessees and lessors, it would change the requirements when there is an early termination of some leases within a contract that does not economically affect the remaining leases in that contract. In those circumstances, entities would be exempt from applying modification accounting to the remaining leases.” Comment period ends December 4, 2020.
  6. Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs, ASU No. 2020-08, issued October 15, 2020, “clarify that an entity should reevaluate whether a callable debt security is within the scope of paragraph 310-20-35-33 for each reporting period.”  Effective generally for public entities for annual periods beginning after December 15, 2020, and for other entities after December 15, 2021. Early adoption is permitted.

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)                                
 
  1. Interim Analysis Report - Evidence on the Initial Impact of Critical Audit Matter Requirements, PCAOB Release No. 2020-002, published October 29, 2020. “Key findings from the staff's analyses include the following: Audit firms made significant investments to support initial implementation of the CAM requirements; Investor awareness of CAMs communicated in the auditor's report is still developing, but some investors are reading CAMs and find the information beneficial; The staff has not found evidence of significant unintended consequences from auditors' implementation of the CAM requirements for audits of large accelerated filers in the initial year.”

SASB– Sustainability Accounting Standards Board(www.sasb.org)                               
  1. No New Developments
SEC– Securities and Exchange Commission(www.sec.gov)                      

No New Developments


ADDITIONAL
A&A NEWS


How CPAs Can Help Make the Pandemic a "Candemic"

(https://www.cpapracticeadvisor.com/small-business/news/21161609/how-cpas-can-help-make-the-pandemic-a-candemic-httpscandemiccom)

Auditing in a pandemic: What will stick in 2021?

Accounting Today (https://bit.ly/3m13BwI)

9 tips for successful auditing of revenue recognition

Journal of Accountancy (https://bit.ly/363aFU2)

SEC saw concern over COVID-19-related fraud skyrocket 

(https://www.weforum.org/agenda/2020/09/systemic-change-reporting-progress/)

Developing a strategic audit plan

(https://www.journalofaccountancy.com/newsletters/2020/nov/developing-strategic-audit-plan.html)

Remote working furthers the case for continuous accounting

(https://www.accountancyage.com/2020/10/19/remote-working-furthers-the-case-for-continuous-accounting/)

Accounting Today's complete coverage of the coronavirus impact

(https://bit.ly/2J2496N)

Accountancy Age's Resource on UK regulations on accountancy during coronavirus

(https://bit.ly/39dqEAU)
 
California CPA Society Coronavirus Resources and Information

(https://bit.ly/361oFNR)

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:  gerry.herter@integra-international.net
     
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