PCAOB/SEC/AICPA Update - IASA Session Papers... · •Too much boilerplate disclosures regarding realizability ... •Convertible debt instruments ... “Auditors should take note

IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

PCAOB/SEC/AICPA Update

Session 401

SEC Update

Introduction

Reporting Issues

• Income taxes

• Defined benefit pension and OPEB

• Goodwill

• Business combinations

• Segment reporting

• Stock based compensation

• Non-GAAP financial measures

• Internal control over financial reporting (ICFR)

Standard Setting Update

Enforcement Activities

Comment Letter Trends

SEC Update - Introduction

Transparency and quality of financial reporting

Importance of the following

• Emphasizing material matters and reconsidering disclosures about

immaterial items

• Clearly disclosing accounting policies, especially when alternatives

exist under GAAP

• Avoiding inconsistent disclosures within filings

• Provide appropriate context for disclosures

SEC Update – Reporting Issues

Income taxes

• Rate reconciliation

• Clearly label elements in reconciliation of statutory tax rates to effective tax

rates (items less than 5% of computed amount may be combined)

• Question large “true up” adjustments

• Valuation allowances

• Too much boilerplate disclosures regarding realizability

• Disclosure about realizability should address (i) sources of taxable income,

uncertainties and limitations, (ii) NOL carryovers and period to be used or

expire, and (iii) positive and negative evidence considered


Defined benefit pension and OPEB

• Receiving more attention due to low interest rate environment and

significant assumptions used in measurement

• Clarity of disclosures

• Expected return on plan assets based on fair value or calculated value

• Whether corridor is used to amortize actuarial gains/losses and how

determined

• Sensitivity analysis on impact of change in expected returns

• Reasons for change or expected change in return

• Plan asset contributions and noncash funding of plan


Goodwill

• Clearly disclose specific factors leading to goodwill in a business

combination

• Significant indicators of impairment include adverse business

changes or book value > market cap

• Continued focus on goodwill disclosures in MD&A

• Avoid vague disclosures and disclose reporting units whose FV is not

significantly larger than book value

• Avoid attributing impairments to general factors

•Why did changes occur

•Why did change occur in specific period

•What known developments or other doubts exist


Business Combinations

• Definition of business complexity

• Measurement period adjustments

• New information that existed at date of acquisition

• Disclosed initial accounting for assets and liabilities was incomplete

• Measurement period still in progress

Segment reporting

• Aggregation based on similar economic conditions

• Consider all criteria and attributes in ASC 280 to support aggregation

• Consider future trends but don’t ignore historical results


Stock based compensation

• Critical accounting estimate in IPO

• Clearly discuss assumptions and methods

• Disclose factors driving significant changes in fair value

Non GAAP Financial Measures

• Continued focus from SEC

• Clear labeling and description of non-GAAP adjustments

• Appropriate accounting terminology

• Context for presentation of non-GAAP measures


ICFR

• Maintain focus on ICFR

• SEC looks for indicators of potential control deficiencies (changes in

ICFR and corrections of errors)

• Disclose any material changes in quarter of change

• 2013 COSO framework transition period

SEC Update – Standard Setting Update

IASB Chairman call on U.S. to incorporate IFRS

122 countries have made a public commitment to IFRS

More than 100 countries have adopted IFRSs

FASB improvements in standard setting

• Improve FASB agenda setting

• Complete certain foundational FASB projects

• Promote transparency in US GAAP financial reporting

• Reduce complexity in US GAAP

SEC Update – Standard Setting Update

Convergence Projects

Revenue recognition Q1 2014

Leases 2014

Financial Instruments 2014

Insurance 2015

SEC Update – Enforcement Activities

Investigations down compared to 2006 and 2007

Renewed emphasis at SEC

• Focus on financial reporting and accounting violations

• Bad faith estimates about losses and reserves

• Revenue recognition

• SOX improved world but did not eliminate fraud

SEC Update – Enforcement Activities

Financial Reporting and Audit Task Force

• Established mainly to review restatements and revisions and analyze

industry trends

• Missed or ignored red flags

• Lack of proper documentation

• Professional standards

• “Operation Broken Gate”

Whistleblowers incentivized under Dodd Frank

• Over 3,000 tips received through this program – 17% attributable to

financial statement disclosures

SEC Update – Comment Letter Trends

Hot topics

• MD&A

• Fair value measurements

• Regulatory reporting

• Business combinations and VIEs

• Loss contingencies

• Goodwill and impairment

• Executive compensation


Insurance comments by topic

• MD&A

• Statutory disclosures

• Claims and low interest rate environment


Statutory disclosures in ASC 944

• Amount of statutory capital and surplus necessary to satisfy

regulatory requirements


Statutory disclosures in ASC 944

• Nature of statutory restrictions on payment of dividends and amount

of RE not available for payment of dividends

• Amount of statutory net income/loss for each period presented

• Description of, and financial impact on, statutory surplus for any per

Low interest rate environment

• Impact on financial position, results of operations and cash flows

• Enhance disclosures regarding investment portfolio

• Enhance disclosures around type and value of insurance products

with guaranteed minimum crediting rates and effect of assets backing

these products at lower rates has on spread income


Fair Value Measurements

• SEC continues to focus on compliance with required disclosures in

ASU 2011-4

• All significant inputs used in valuation of Level 3

• Weighted average of significant unobservable inputs

• Valuation amount for each valuation technique within a class when

multiple techniques used

• Factors considered when determining appropriate weighting applied

to each valuation technique

• Controls in place to support completeness and accuracy of prices

received

• Procedures performed to validate 3rd party vendor valuations

PCAOB Standards Setting Update

The Public Company Accounting Oversight Board (PCAOB)

• The PCAOB oversees the Auditors of Companies to Protect Investors

Their Mission is: “to oversee the audits of public companies in order to

protect the interests of investors and further the public interest in the

preparation of informative, accurate and independent audit reports.”


QUESTION:

I am a registrant. Why do I care about what the

overseers of my auditing firm are up to?

Answer:

[ADD CURRENT INSPECTION RESULTS STATS

LATER]


Top Inspection Findings:

• Revenue recognition

• Share-based payments and equity financing instruments

• Convertible debt instruments


• Business combinations and impairment of intangibles and long-lived

assets

• Accounting estimates

• Related party transactions

• Use of analytical procedures as substantive tests

• Procedures to respond to risk of material misstatement due to fraud


Pipeline of projects with goal to improve relevance and

reliability of the audit

• Auditor’s reporting model

• Auditor transparency

• Going concern

• Reorganization of attestation standards

• Auditor’s responsibilities with respect to other firms, individual

accountants and specialists

• Auditing estimates, including FV measurements

• Audit firm quality control


Auditor’s reporting model

• Significant proposed change to content of auditor’s report

• Belief is that current report does not communicate the true value of an

audit

• Centerpiece: Addition of Critical Accounting Matters (CAM) to report

• Disclosure re Auditor independence

• Disclosure of Auditor tenure

• Disclosure of Auditor responsibility for, and results of, evaluation of other

information outside of the F/S


• Auditor transparency • Re-proposed in December

• Would require firms to disclose the name of the engagement partner,

as well as names, locations, and extent of involvement of other audit

firms participating in the audit

• Options being discussed as to where and how to provide this info

(report, proxy or PCAOB required firm annual report)

• Expectation is that third parties will begin to collect data on individual

partners such as: size and industry of audits opined on; number of

restatements and “scoring” – similar to what is done with data about

firms today


• Going concern • Proposed new standard by FASB to make this a part of

management’s financial reporting.

• PCAOB’s project to improve the current auditing standard to address

this reporting has been delayed until FASB finalizes GAAP changes.


• Reorganization of attestation standards

• Reorg the auditing standards to structure them in a more logical way

• Integrate interim standards with standards issued since PCAOB’s

inception

• Targeted for completion later this year


• Auditor’s responsibilities with respect to other

firms, individual accountants and specialists • Intended to improve planning, supervision and communication,

amongst other things, when other accounting firms, accountants and

specialists are involved

• Will be addressed together with a proposal to be released in 2014


• Auditing estimates, including FV measurements • Will replace a number of interim standards

• Number and frequency of inspection findings prompted this project

• Proposal expected in late 2014


• Audit firm quality control • Significant changes needed given frequency and number of

deficiencies PCAOB has identified in inspections

• PCAOB believes that current quality control standards do not

appropriately address:

• Tone at the top

• Risk assessment and response to risk

• Accountability and supervisory activities by firm management

• Professional skepticism

• Alignment of individual incentives

• Remediation and root-cause analysis

PCAOB Practice Alert 11

A few recent quotes regarding Internal Control testing and

assessments by auditors and clients:

“Auditors should take note of the matters discussed in this

alert in planning and performing their audits, given the

importance of controls companies use to produce their

financial statements”

- James R. Doty, PCAOB Chairman


“It is particularly important for the engagement partner and

senior engagement team members to focus on these areas

and for the EQRs to keep these matters in mind when

performing their engagement quality reviews”

- Martin F. Baumann, PCAOB Chief Auditor and

Director of Professional Standards


“…at least some of the PCAOB’s inspection findings related

to the audits of internal control over financial reporting are

likely indicators of similar problems with management’s

evaluations of ICFR, and thus potentially also indicative of

risk for unidentified material weaknesses”

- Brian Croteau, Deputy Chief Accountant (OCA)


“…it is surprisingly rare to see management identify a

material weakness without a misstatement.”

“…this phenomenon might suggest that deficiencies are not

being identified or that the severity of deficiencies is not

being evaluated appropriately.”

- Brian Croteau, Deputy Chief Accountant (OCA)


Alert 11 issued October 23, 2013

• Issued in light of deficiencies noted by PCAOB inspectors

• In 2010 inspection year: 15% ICFR failure rate

• Subsequent years: same or higher failure rate

• Not a rule change, but take the following guidance very seriously


Seven Topical Areas of Focus:

Auditors' risk assessment and the audit of internal control

Selecting controls to test

Testing management review controls

Information technology considerations, including system-

generated data and reports

Roll-forward of control testing performed at an interim date

Using the work of others

Evaluating identified control deficiencies

IASA 86TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

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Documents

PCAOB/SEC/AICPA Update - IASA Session Papers... · •Too much boilerplate disclosures regarding realizability ... •Convertible debt instruments ... “Auditors should take note