At-A-Glance
Integra International was honored to
host a representative from the
International Accounting Standards Board
(IASB) at the June regional conference
held in Bristol, England. The
presentation of current IASB initiatives
provided timely input to the expanding
worldwide member base of Integra. Our
first article highlights topics covered
along with subsequent developments. Then
in our second and third articles, we
address the call for changes that
address the declining relevance and
credibility of the auditor�s report and
financial statements. In recent and
proposed directives, auditors are
expected to describe major areas of
audit focus and details of the audit
process, while companies need to address
non-financial factors that will impact
long term sustainability.
Editor Gerald E. Herter, CPA |
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In This Issue
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IASB Activities Update
International Board Implementation Director Reports at Integra Conference
At the annual spring meeting of Integra
International�s regional section that serves
Europe, the Middle East, India and Africa
(EMEIA), Michael Stewart, Director of
Implementation Activities at the IASB, presented
a comprehensive look at the current work and
plans of the global accounting standard setter.
Stewart�s appearance grew out of a meeting with
Integra Global Board members Mark Saunders and
Steve Austin at the IASB headquarters in London
last November. Stewart gave a brief review of
the IASB structure and process, and then looked
at the status of IFRS adoption, the IASB work
plan, IFRS interpretations, and IFRS for SMEs.
As reported in our August issue, of the 66
jurisdictions that had completed profiles with
the IASB at that time, 95% were committed to
supporting IFRS, 80% had adopted IFRS for public
companies, few temporary, local modifications
were made, and over 50% had adopted IFRS for
SMEs or planned to. The remaining 15
jurisdictions in the European Economic Area that
Stewart referred to, subsequently submitted
profiles, bringing the total number of completed
profiles to 81, raising the IFRS support numbers
to 96% committed and 85% adopting IFRS for
public companies. Also, the goal is to have
about 50 more countries, including the remaining
IFAC members, post profiles by the end of the
year. Of the 15% of the 81 profiled
jurisdictions that have not yet adopted IFRS,
the most notable are Japan, the United States,
China, India, Pakistan and Indonesia. Those
countries represent about half of the world�s
population.
The IASB work plan is subjected to an agenda
consultation every three years that strives to
balance improvement of the standards, through
issuance of new IFRS, with maintenance of the
standards, through implementation practices.
Post implementation reviews are conducted when
appropriate, as well as efforts to identify
needed improvements.
A high priority indicated from the
consultation called for an update of the
conceptual framework. Following Stewart�s
report, the IASB on July 18 issued a Discussion
Paper: A Review of the Conceptual Framework for
Financial Reporting (DP). The DP states that the
Conceptual Framework �sets out the concepts that
underlie the preparation and presentation of
financial statements. The IASB�s preliminary
view is that the primary purpose of the
Conceptual Framework is to assist the IASB by
identifying concepts that it will use
consistently when developing and revising
IFRSs.�
The current Conceptual Framework was found to
not cover certain important areas, while
guidance for others was unclear or out of date.
Consequently, the DP focuses on these areas,
which include (a) definitions of assets and
liabilities; (b) recognition and derecognition
of assets and liabilities; (c) measurement; (d)
equity; (e) profit or loss and other
comprehensive income (OCI); and (f) presentation
and disclosure.
Originally, this project was jointly begun by
the IASB and FASB in 2004, with eight separate
phases anticipated. Early phases resulted in the
issuance of two chapters in 2010 covering the
objective of general purpose financial reporting
and qualitative characteristics of useful
financial information. Though further work was
underway, the joint project was suspended in
2010 in deference to more pressing projects. In
restarting the project on its own, the IASB
plans to produce a set of proposals that will
update, improve and fill out the existing
Conceptual Framework in one undertaking without
phases, so as to facilitate correlations between
the sections.
Emphasizing the importance of the Conceptual
Framework, Hans Hoogervorst, Chairman of the
IASB said in the press release announcing the
DP: �The Conceptual Framework underpins the work
of the IASB and affects all IFRS that we
develop. This Discussion Paper gives people the
opportunity to help us to shape the future of
financial reporting by discussing the concepts
that drive our work.�
Of the major joint standard projects
mentioned in Stewart�s presentation, final IFRS
are expected in the third quarter for revenue
recognition and hedge accounting, exposure
drafts are now out for leases and insurance
contracts, and deliberations continue on the
other aspects of financial instruments. Narrow
scope amendments and research are also in
process for a variety of standards and topics,
as is work on post-implementation reviews and
interpretations.
The goal and applicability of IFRS for SMEs
was discussed. Characterized as �good financial
reporting made simple,� IFRS for SMEs, issued in
2009, was built on an IFRS foundation that was
simplified by 1) omitting IRFS topics irrelevant
to private entities, 2) including only the
simpler of multiple options, 3) simplifying
recognition and measurement, 4) reducing
disclosures, and 5) simplifying financial report
drafting. To further assist the application of
IFRS for SMRs by the smallest of entities, the
anticipated guidance for those micro-sized
entities was subsequently issued on June 27.
For further information, see
International Accounting Standards Board
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Major Auditor Report Changes
New laws are enacted in the UK and proposed in the USA
and internationally
While judgment plays a significant role during an
audit, the resulting auditor�s report in recent times
has been pretty cut and dry. The entity, auditor, and
financial reports are identified, the standards employed
are stated, and the resulting opinion (unqualified,
qualified, adverse, or disclaimer) is declared. However,
with recent actions by Britain�s Financial Reporting
Council (FRC), and proposals in the works by the
International Auditing and Assurance Board (IAASB), and
the United States� Public Company Accounting Oversight
Board (PCAOB), judgment will have a more prominent part
in determining what additional content to include in the
report. While a predominant goal in all cases is to
provide more information about significant issues to
investors and other financial report users, each
organization has a slightly different approach.
On August 13, the PCAOB issued two proposals. The
first, The Auditor's Report on an Audit of
Financial Statements When the Auditor Expresses an
Unqualified Opinion, would require:
- the communication of critical audit
matters as determined by the auditor;
- the addition of new elements to the
auditor's report related to auditor independence,
auditor tenure, and the auditor's responsibilities
for, and the results of, the auditor's evaluation of
other information outside the financial statements;
and,
- enhancements to existing language in the
auditor's report related to the auditor's
responsibilities for fraud and notes to the
financial statements.
The second, The Auditor's Responsibilities
Regarding Other Information in Certain Documents
Containing Audited Financial Statements and the Related
Auditor's Report, would:
- Apply the auditor's responsibility for
other information specifically to a company's annual
report filed with the Securities and Exchange
Commission;
- Enhance the auditor's responsibility with
respect to other information by adding procedures
for the auditor to perform in evaluating the other
information based on relevant audit evidence
obtained and conclusions reached during the audit;
- Require the auditor to evaluate the other
information for a material misstatement of fact as
well as for a material inconsistency with amounts or
information, or the manner of their presentation, in
the audited financial statements;
- Require communication in the auditor's report
regarding the auditor's responsibilities for, and
the results of, the auditor's evaluation of the
other information.
On July 25, the IAASB issued an Exposure Draft,
Reporting on Audited Financial Statements:
Proposed New and Revised International Standards on
Auditing (ISAs), that would require:
- prominent placement of the auditor�s
opinion and other entity-specific information in the
auditor�s report;
- auditor reporting on �Key Audit Matters;�
- auditor reporting on going concern;
- auditor reporting on other information in
documents containing audited financial statements;
- an explicit statement that the auditor is
independent of the entity and has fulfilled the
auditor�s other relevant ethical responsibilities,
with disclosure of the source(s) of those
requirements;
- Disclosure of the name of the engagement
partner;
- Improved description of the
responsibilities of the auditor and key features of
the audit.
While supportive of the IAASB�s work, the FRC has
already taken action. On June 4, the FRC issued a
revised standard, ISA 700 (UK and Ireland) "The
Independent Auditor�s Report on Financial Statements,�
which requires auditors to:
- Describe the risks that had the greatest effect
on: the overall audit strategy, the allocation of
resources in the audit, and directing the
efforts of the engagement team;
- Provide an explanation of how they applied
the concept of materiality in planning and
performing the audit.
- Provide an overview of the scope of the
audit, showing how this addressed the risk and
materiality considerations;
This new standard followed the issuance of a previous
ISA revision in September/October, 2013, that required:
- Audit committees to report their activities,
including on their communication with the auditor,
to the board;
- Boards to describe the work of the audit
committee in the annual report;
- The auditor to inform the audit committee
about significant audit judgments; and
- The auditor to report if the board�s
disclosures do not address the matters it
communicated to the audit Committee.
These proposals and actions seek to give users
insights into those areas where the auditors focused
their attention. Using terms like �critical audit
matters,� �key audit matters,� �risks that had the
greatest effect,� they emphasize specifically where the
user may want to be concerned, in case such information
was not apparent from a reading of the financials. They
all call for expanded content about auditor
responsibilities, with the IAASB and FRC asking for even
more specifics about aspects of the audit process. Also,
reporting of auditor assessments of information included
elsewhere, such as in the annual report, is expanded.
Whether this added information enhances the user�s
ability to assess the audited entity remains to be seen.
The credibility of the audit and the auditor�s report
has taken a beating in recent years amidst the financial
crises and audit failures. Users are seeking other means
of evaluating companies. So the changes may be warranted
in hopes of restoring the relevance and perceived
usefulness of the audit.
There is also a concern of the impact on potential
legal liability. The possibility exists that the auditor
will be held liable if a subsequent problem develops in
an area that had not been addressed as significant in
the audit report. However, the expanded reporting may
also provide greater protection by shedding specific
light on areas that may not have been obvious to the
user.
The comment periods for the IAASB and PCAOB proposals
end November 22 and December 11, respectively. The FRC
also issued an Invitation to Comment, for input prior to
its submission of a response to the IAASB, as to the
relationship of the FRC pronouncements to the IAASB
proposal.
For further information, see
PCAOB Proposes a New Auditing
Standard and
International Standards on Auditing and
FRC
issues revised auditing standards
Sustainability Focus in Financials Offers Long-Term Benefits
Healthcare sector first to receive standards of sustainability reportings
In our September 2012 issue, we mentioned that the
American-based Sustainability Accounting Standards Board
(SASB) planned to design industry-specific ESG
(environmental, social and governmental) standards that
can be adapted for inclusion in the risk factors section
of SEC 10-k reports. On July 31, the SASB issued the
first of those provisional standards for six industries
in the healthcare sector, one of ten sectors and 88
industries that the Board intends to address in the next
two years. While companies are not required to apply
these specific standards, securities regulations do
require �that companies describe known trends, demands
and uncertainty that have a material impact on financial
results.� �Material� is defined by the U.S. Supreme
Court as �presenting a substantial likelihood that the
disclosure of the omitted fact would have been viewed by
the reasonable investor as having significantly altered
the �total mix� of information made available.�
The SASB designed the standards to provide a
consistent and measurable means for companies to present
comparable information. The healthcare industries
covered by the standards include biotechnology,
pharmaceuticals, medical equipment and supplies, health
care delivery, health care distribution, and managed
care. A universal set of 40-plus ESG issues was
established in the five broad areas of environment,
social capital, human capital, business model &
innovation, and leadership & governance. Then they were
adapted for each industry. For example, product quality
and safety is an issue that is listed under the area of
business model & innovation. For the biotechnology
industry, an applied issue of that type is drug safety &
side effects. A couple measurable �metrics� could be
fatalities and recalls with regards to company products.
While the SASB produces industry standards, Britain�s
FRC, in recent legislation, begins to require large
companies, with years starting after September, to
include in their annual reports an analysis of key
non-financial performance indicators relating to
environmental and employee matters, that are necessary
for an understanding of the business. For public
companies, that analysis is expanded to include future
trends and factors that are likely to affect the
business with regards to �(i) environmental matters
(including the impact of the company�s business on the
environment), (ii) the company�s employees, and (iii)
social, community and human rights issues, including
information about any policies of the company in
relation to those matters and the effectiveness of those
policies.�
The AICPA has taken a broader approach with its
Enhanced Business Reporting Consortium (EBRC)
initiative. Within the Sustainability Reporting and
Assurance section of that initiative, a June 2013 white
paper covers �The Economics of Sustainability
Initiatives.� While acknowledging the importance of
specific measures to report relationships between
financial and nonfinancial performance, the white paper
calls for a longer range view. This approach may help to
overcome the short-sighted mentality that lives and dies
by quarterly earnings reports. By grasping the
implications underlying the ESG data reported, a company
will be better positioned to produce a strategy that
enhances the ability to create sustainable value in a
manner compatible with the world around it.
Supporting this position, the white paper refers to
the Edelman Trust Barometer which �tells us that in 2008
operational excellence drove corporate reputation. In
2013, operational excellence is near the bottom of the
Edelman Trust Barometer list of attributes that form the
basis for trust, falling below other societal concerns
such as �has ethical business practices,� �treats
employees well,� and �addresses society�s need in its
everyday business.� The Edelman Trust Barometer is a
survey of 31,000 respondents worldwide, by Edelman, the
world�s largest public relations firm, which measures
trust in institutions, industries and leaders.
As the white paper concludes, a company needs to
�balance the imperative for long term viability�for both
shareholders and society�with demands for short term
competitiveness and profitability. Sustainable
strategies are the only way a business can create value
in ways that benefit the interests of shareholders and
society.�
The issue of sustainability does not only affect
large companies and Big 4 accounting firms. A recent
survey by the International Federation of Accountants
(IFAC) indicates that local accounting firms have
service opportunities in this arena, and that many are
already involved. Commenting on the survey, Small- and
Medium-sized Accounting Practices (SMP) Committee Chair
Giancarlo Attolini stated: �The widespread provision of
sustainability services suggests that small businesses
are increasingly recognizing the tangible benefits of
operating more sustainably. This, in turn, seems to be
fueling a desire to seek advice from their professional
accountants. SMPs can help their SME clients in many
ways, for example, advising on the costs and benefits of
behavioral changes aimed at reducing waste, appraising
potential investments in alternate sources of energy,
and assisting with the implementation of an
environmental management system (EMS). This is a large
and growing area of demand that SMPs need to be prepared
to meet.�
For further information, see
Sustainability Accounting Standards Board and
Financial Reporting Council Regulations 2013 and
Enhanced Business Reporting Consortium
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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FASB to improve Financial
Reporting for Development Stage Entities
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IASB chair states case for leases on balance sheets
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Why SEC let Lehman Brothers Execs off the Hook
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FRC fines Deloitte 14 million pounds over MGR over advice
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Accounting profits adjusted to satisfy information hungry market
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New India Companies Act draft rules put a cap on term of auditors
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