Change is coming faster than ever in the world today. For the accounting profession, reporting standards and technology are two areas where the pace of development has been swift and relentless. Moreover, the new reporting standards, in both accounting and auditing, are substantial as well. Recognizing the added burden that recent standard revisions have placed, especially on smaller firms, professional bodies are taking steps to address implementation timing and applicability, as highlighted in our first article.
The rapid advancement of technology is harder to control and manage. In this arena, outside forces may dictate the speed with which new techniques transform traditional processes. Our second article describes how China is quickly rising toward a dominant position in advancing artificial intelligence applications. While national firms and associations are pooling resources to face the challenge, local firms need to pay close attention to the implications to avoid getting left behind.
Finally, our Worldwide Update covers news from organizations across the globe.
New Accounting and Audit Standards Causing Overload
Delays in effective dates and expanded resources propose to ease burden
The last couple years have been brutal for accounting standards implementation, especially for small companies lacking the wealth of resources that public companies can afford to muster. Either of the new revenue accounting or lease accounting standards alone would put a strain on many private companies. But with the two of them coming back-to-back, along with the myriad other more routine changes that continue to emerge each year, overload is not too strong a term to characterize the situation.
Audit firms have not escaped the upsurge. Along with gearing up for examining their clients’ new revenue and lease accounting, auditors have new standards for forming opinions, reporting, disclosures, quality control and employee benefit plans, among other things.
These developments have been happening within a backdrop of rapidly advancing technology that threatens to transform accounting and auditing processes so quickly that traditional methods may soon prove obsolete. While the pace of change may be beyond control, international bodies are taking steps to address the situation, so that accountants and auditors may better cope.
The Financial Accounting Standards Board (FASB) is proposing to delay the effective dates of four upcoming standards for private and small public companies. These standards cover the lease accounting standard mentioned above, credit losses and hedging, as well as insurance which will also be delayed for large public companies. Additionally, the International Accounting Standards Board (IASB) has proposed delay in its insurance standard for all entities that employ International Financial Reporting Standards (IFRS).
Traditionally, the FASB has allowed private companies an additional year beyond the effective date for public companies, in which to implement new standards. Along with the delays specified above, the FASB is considering a new approach going forward that would automatically allow private and small companies and not-for-profit entities two years to apply major new standards after the standards go into effect for public companies. The new approach would give smaller companies more time to learn from the experiences of public companies, and to benefit from the availability of more resources. Even so, with a standard like lease accounting, companies would be well served not to slow down their implementation process. The delay may only mean that the transition might be doable without working 7 days a week.
In the audit arena, the International Auditing and Assurance Standards Board (IAASB) issued a Discussion Paper in April 2019, Audits of Less Complex Entities. The IAASB is an independent body that produces audit standards for use internationally, with a goal that “enhances the quality and uniformity of practice throughout the world and strengthens public confidence in the global auditing and assurance profession.”
A less complex entity (LCE) is generally considered one that has a concentration of ownership and management and a straightforward operation and accounting, regardless of size. Since the International Audit Standards (ISA) issued by the IAASB and used currently by 129 jurisdictions are the same for all entities, concerns have been raised as to their usefulness and practicality for LCE’s. The Discussion Paper seeks input as to how to address these concerns while not compromising the high quality “robustness” of the ISAs. Three possible approaches offered for consideration are 1) revising the ISAs, 2) developing a separate set of ISAs for LCEs, and 3) developing guidance and resources for auditors of LCEs. Comments are sought by September 12, 2019, after which the IAASB will consider further proceedings.
In other actions, the American Securities and Exchange Commission is proposing an amendment that would ease the burden on smaller public companies complying with the Sarbanes-Oxley Act of 2002, which was enacted in response to financial scandals, such as occurred with the Enron Corporation. If approved, companies with less than $100 million in revenue would no longer be required to have their internal controls over financial reporting attested to by an independent outside auditor. Another proposed amendment would simplify disclosures in filings.
Additionally, the Public Company Accounting Oversight Board has announced educational forums for auditors of small businesses, and has issued resources for audit committees and investors covering the new “critical audit matters” reporting requirements.
While the delays in effective dates of standards and the availability of new resources may give accountants some breathing room, time is of the essence for also directing efforts more quickly toward grasping and responding to the implications of the new technological realities, as our next article points out.
Further details can be found at FASB to propose delaying effective dates for 4 major standardsand Exploring the Future Options for Audits of Less Complex Entities.
(https://www.journalofaccountancy.com/news/2019/jul/fasb-proposal-delay-for-major-standards-201921627.html) and (https://www.ifac.org/global-knowledge-gateway/audit-assurance/discussion/exploring-future-options-audits-less-complex).
China and the Implications of Artificial Intelligence (AI)
Will rapid advancements lead China to dominance?
A recent segment of American TV program, 60 Minutes,
featured China’s billionaire venture capitalist, Kai-Fu Lee, who correspondent Scott Pelley characterized as “the oracle of AI.” Displayed behind Lee on the wall of his Beijing headquarters are 50 AI startups Lee’s venture capital company has funded, including ten that Lee stated are billion dollar companies, “including a few ten billion dollar companies.”
According to Lee, in the last five years China has nearly caught up with America’s Silicon Valley as the leader in AI. Pelley indicated that China attracted half of the world’s AI capital in 2017.
AI’s recent rapid advances have been fueled by today’s extremely fast computer speeds and capacities, the vast availability of data online, and the development of “deep learning” programming techniques which involve feeding millions of examples of things into the computer from which it can fine tune its assessment of new data that is encountered. The more data that is evaluated, the more refined the computer’s ability to adapt to minor differences. Since China has a much larger population that produces much more data than America, and with less privacy concerns, that country has an advantage in growing the AI literacy of its computer systems.
The advent of 5G cellular technology will also facilitate the widening range of AI. With speeds anticipated at nearly 1,000 times faster than the current 4G standard, the implications of how far and how broadly AI can reach are practically endless.
While accountants and other professionals may not need to understand the fine points of the underlying AI technology, they need to be aware and prepare for how their world will be impacted in a time frame sooner than they may think. Lee estimates that 40% of the world’s jobs will be displaced within the next 15 years. He points out that there have been industrial revolutions in the past, and humans have always been able to overcome them by developing new jobs. The difference this time is that the change is coming much faster.
Local accounting firms can be known for taking an extended length of time to adapt to new methods and technologies, often resistant to change and limited in resources. Automated tax and audit preparation, outsourcing, and paperless systems are examples of evolving processes that a significant proponent of firms have adopted, in many cases gradually. The pace of accepted change in the past may not prove successful going forward.
The national accounting firms are investing hundreds of millions of dollars to assure their place in the coming new world of AI. Local firms do not have that luxury. Anticipating the obstacle, national associations like the AICPA are forging pathways for the non-national firms to join resources together to tackle the challenge. Firms will need to instill a forward looking atmosphere now to open the way for the transformative change that will soon be required.
Even as accountants and auditors race to keep up with AI and other new technologies, a cautious approach is required. Not long ago, blockchain was touted as the emerging foolproof solution for accounting fraud prevention that would eliminate the need for traditional audit processes. Already weaknesses have been exposed in blockchain, even before widespread implementation of the advanced methodology. As described in the recent CPA Journal article, Fraud in a World of Advanced Technologies
(see link below), whatever the new technology, such as AI, blockchain, robotic process automation, or other, malicious minds are also at work to undermine the safeguards. Therefore, accountants and others need to be on the lookout continuously.
Further details can be found at the How One Man is Advancing Artificial Intelligence
and Fraud in a World of Advanced Technologies
) and (https://www.cpajournal.com/2019/07/01/fraud-in-a-world-of-advanced-technologies/
Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.
International Accounting Standards Board (www.ifrs.org)
- Exposure Draft - Disclosure of Accounting Policies issued August 1, 2019, would amend IAS 1 – Presentation of Financial Statementsto clarify “to clarify the threshold for disclosing information” by replacing the term significant with the term material with regard to accounting policies. New examples and explanations will be added to IFRS Practice Statement 2 for guidance. The comment period ends on November 29, 2019.
- Exposure Draft - Deferred Tax related to Assets and Liabilities arising from a Single Transaction issued July 17, 2019, would amend IAS 12 – Income Taxes to clarify how companies account for deferred tax on leases and decommissioning obligations. The comment period ends on November 14, 2019.
International Federation of Accountants (www.ifac.org)
- International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft 68 - Improvements to IPSAS, 2019, issued July 31, 2019, proposes minor improvements on issues raised by stakeholders. The comment period ends on September 30, 2019.
- International Ethics Standards Board (IESBA) - Exposure Draft - Proposed Revisions to the Code to Promote the Role and Mindset Expected of Professional Accountants, issued July 31, 2019, proposes “revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards).” The comment period ends October 31, 2019.
Association of Chartered Certified Accountants (www.accaglobal.com)
- Business Forms: Building the legal framework to help business succeed, professional insight report issued July 11, 2019, “calls on government to put legal structures in place, so that all businesses can thrive and benefit from the support mechanisms available,” considering the four key elements of realizing the returns, investing into the business, legal characteristics and regulation, and administrative requirements.
- How accountants can bridge the global infrastructure gap, report issued July 3, 2019 in conjunction with Chartered Professional Accountants of Canada (CPA Canada), surveyed 3,611 members from 118 countries, finding “accountants can play a critical role in closing the infrastructure gap by improving the selection, financing and delivery of infrastructure projects; governments must have the right professional team in place to harness the benefits of additional investment while working to mitigate the significant risks associated with infrastructure projects; there is a palpable need for whistle-blowing legislation and a professionalized government finance function in order to meet infrastructure requirements.”
Chartered Institute of Management Accountants (www.cimaglobal.com)
No new developments.
International Integrated Reporting Council
- AI Governance: A Holistic Approach to Implement Ethics into AI, white paper issued May 3, 2019, “aims to enrich the ongoing debate about implementing ethical considerations into artificial intelligence (AI) by looking at possible means and mechanisms to apply ethical values and principles in AI-driven technology` and machines in order to contribute to building a human-centric AI-society.”
WORLD ECONOMIC FORUM
Africa, Europe, India, and the Middle East (AEIME)
- Building Value with Blockchain Technology: How to Evaluate Blockchain’s Benefits, white paper issued July 16, 2019, in conjunction with Accenture. “This practical framework helps organizations identify the value of blockchain technology and build a corresponding business case…to better understand that blockchain technology is a tool deployed to achieve a specific purpose, not a goal in itself.” The comment period ends September 2, 2019.
FRC– Financial Reporting Council of the UK(www.frc.org.uk)
- Consultation on Revisions to Ethical and Auditing Standards 2019, issued July 15, 2019, proposes to set more stringent ethical rules for auditors, in response to findings from recent audit enforcement cases and from audit inspections. In response to feedback from investors, the FRC also proposes to enhance the quality and content of auditor’s reports in order to improve transparency about what is found in the course of an audit. The comment period ends September 27, 2019.
- Amendments to FRS 101 – 2018/19 cycle,issued July 11, 2019, “amends the definition of a qualifying entity so that insurers cannot apply FRS 101 from the effective date of IFRS 17 Insurance Contracts.”
- Exposure Draft - FRED 72 Draft amendments to FRS 102 – Interest rate benchmark reform, issued July 11, 2019, “proposes amendments to specific hedge accounting requirements of FRS 102 to provide relief that will avoid unnecessary discontinuation of hedge accounting as interest rate benchmarks are being reformed.” The comment period ends September 20, 2019.
ICAEW- Institute of Chartered Accountants in England and Wales(https://www.icaew.com/)
EFRAG– European Financial Reporting Advisory Group(www.efrag.org)
- Exposure Draft - Assurance reports on internal controls of service organizations made available to third parties, TECH AAF 01/06, issued August 2, 2019, “sets out the conditions service organizations meet in providing information on internal controls, control procedures and the framework within which reporting accountants deliver assurance reporting.” The comment period ends September 30, 2019.
- AI in Corporate Advisory, published July 4, 2019, in association Drooms, a leading data solutions company, “focuses on the opportunities and risks of using AI for those involved in corporate finance transactions, including: businesses, investors, advisers, bankers and the wider economy. It explores how AI technologies will augment the existing business models of advisory firms, corporations and consulting groups, allowing organisations to do better due diligence, make better predictions, and guarantee the success of deals.”
No new developments.
Americas, Asia, Australia and New Zealand (AAANZ)
AICPA –American Institute of Certified Public Accountants(www.aicpa.org)
- Auditing Standards Board – Statement on Auditing Standards 136 - Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, issued July 11, 2019, “addresses the auditor’s responsibility to form an opinion and report on the audit of financial statements of employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA), and the form and content of the auditor’s report issued as a result of an audit of ERISA plan financial statements. The SAS includes new requirements for: engagement acceptance, audit risk assessment and response, communications with those charged with governance, procedures for an ERISA section 103(a)(3)(C) audit, [and] considerations relating to the Form 5500.” Generally effective for year ends after December 15, 2020.
- Auditing Standards Board – Statement on Auditing Standards 137 - The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports, issued July 11, 2019, “requires the auditor to read and consider the other information because other information that is materially inconsistent with the financial statements or the auditor’s knowledge obtained in the audit may indicate that a material misstatement of the financial statements or that a material misstatement of the other information exists, either of which may undermine the credibility of the financial statements and the auditor’s report thereon.” Generally effective for year ends after December 15, 2020.
- Forensic and Valuation Services Executive Committee - Statement on Standards for Forensic Services No. 1, issued June 30, 2019, “provides guidance and establishes enforceable standards for members performing certain forensic and valuation services…to protect the public interest by preserving and enhancing the quality of practice of a member performing forensic services.” The standard applies to litigation and investigation engagements. The statement is effective for new engagements accepted on or after January 1, 2020, with early application permissible.
FASB –Financial Accounting Standards Board (www.fasb.org)
GASB– Governmental Accounting Standards Board(www.gasb.org)
- Exposure Draft – Investments - Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,issued July 31, 2019, “would reduce the number of accounting models for convertible debt instruments and convertible preferred stock. It would revise the derivatives scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events. The proposed ASU also would improve and amend the related disclosure and earnings-per-share guidance.” The comment period ends October 14, 2019.
- Exposure Draft – Investments - Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815),issued July 30, 2019, to “clarify the interaction between the accounting standard on recognition and measurement of financial instruments and the accounting standard on equity method investments.” The comment period ends August 29, 2019.
- Exposure Draft - Disclosure Improvements - Codification Improvements to Topic 326, Financial Instruments—Credit Losses, issued June 27, 2019,addresses stakeholder issues with regard to ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Narrow technical improvements are proposed along with treatment of negative allowances related to impaired loans. The comment period ends July 29, 2019.
COSO- The Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)
- Exposure Draft – Omnibus 20XX, issued June 24, 2019, proposes “guidance addressing various accounting and financial reporting issues identified during the implementation and application of certain GASB pronouncements. The comment period ends October 4, 2019.
- Exposure Draft - Internal Revenue Code Section 457 Deferred Compensation Plans That Meet the Definition of a Pension Plan and Supersession of GASB Statement 32, issued June 28, 2019, “proposes that if a Section 457 [deferred compensation] plan meets the definition of a pension plan in GASB guidance, the appropriate GASB pension standards should be applied to the financial reporting for that plan and for the benefits provided through that plan. Under existing guidance, Section 457 plans are explicitly excluded from the pension standards. The comment period ends September 27, 2019.
No new developments.
PCAOB– Public Company Accounting Oversight Board(www.pcaob.org)
No new developments.
SASB– Sustainability Accounting Standards Board(www.sasb.org)
No new developments.
SEC– Securities and Exchange Commission(www.sec.gov)
- Exposure Draft – Modernization of Regulation S-K Items 101, 103, and 105, issued August 8, 2019, proposes “rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. The proposed amendments are intended to update the rules to improve disclosures for investors and to simplify compliance efforts for registrants.” The proposal has a 60 day comment period.
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 ~ HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin CA
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