Heads Up | 2015 | Issue 42 | Highlights of the 2015 AICPA Conference on Current SEC and PCAOB Developments has been added to your bookmarks.
Heads Up — Highlights of the 2015 AICPA Conference on Current SEC and PCAOB Developments
Against the backdrop of the headline-grabbing U.S. presidential race, financial statement regulators, preparers, and auditors converged on the nation’s capital and epicenter of American politics in early December to discuss topics that are highly unlikely to be the subjects of any election debate. Nevertheless, the three-day conference generated its own brand of accountant and auditor energy, inspired in part by the #AuditorProud social media blitz that was spearheaded by the CAQ and mentioned in conference remarks by the CAQ’s Executive Director Cynthia Fornelli.
Continuing the historical theme of this annual event, the 2015 conference featured insights on current accounting, reporting, and auditing practice issues from numerous speakers and discussion panels with the common goal of improving the U.S. financial reporting system. Likewise, enhancing transparency and improving ICFR were again key topics because of the critical role they play in protecting investors. Several speakers and panelists addressed these themes in the context of (1) ensuring that registrants’ disclosures are useful, (2) providing high-quality financial information, (3) executing high-quality audits, and (4) developing new accounting standards that reduce complexity and increase transparency.
Disclosure effectiveness and its connection to high-quality financial reporting were at center stage throughout the event. Speakers focused on improving disclosure requirements, with the goal of enhancing the information provided to investors and promoting efficiency, competition, and capital formation. The SEC reiterated its continued focus on disclosure effectiveness, including its outreach to the investor community, its ongoing collaboration with the FASB, its recent release requesting public comment on certain disclosure requirements of Regulation S-X, an expected release seeking feedback on certain aspects of Regulation S-K, and other near-term initiatives. An overarching theme of various discussions was the notion that disclosure effectiveness is a journey that many preparers can embark on today in advance of any formal standard setting and rulemaking. Representatives from the preparer, auditor, legal, and regulatory communities emphasized that effective disclosures do not necessarily mean fewer disclosures as much as they mean better disclosures. See discussion in the attached Heads Up for more information.
Internal Control Over Financial Reporting
As discussed in more detail in the attached Heads Up, ICFR continues to be a key focus for regulators, preparers, and auditors. SEC Chief Accountant James Schnurr stated that “[m]anagement’s ability to fulfill its financial reporting responsibilities depends, in large part, on the design and effectiveness of internal control over financial reporting.” Several speakers commented that the frequency of ICFR-related findings in PCAOB inspections highlights the need for management, auditors, and audit committees to work together to address potential underlying issues with controls and assessments. As discussed in more detail in the attached Heads Up, ICFR continues to be a key focus for regulators, preparers, and auditors. SEC Chief Accountant James Schnurr stated that “[m]anagement’s ability to fulfill its financial reporting responsibilities depends, in large part, on the design and effectiveness of internal control over financial reporting.” Several speakers commented that the frequency of ICFR-related findings in PCAOB inspections highlights the need for management, auditors, and audit committees to work together to address potential underlying issues with controls and assessments.
International Financial Reporting Standards
The SEC’s consideration of the potential incorporation of IFRSs into the U.S. financial reporting system has long been a topic at the conference, and this year was no exception. At the 2014 conference, Mr. Schnurr introduced a potential fourth alternative regarding the use of IFRSs in the United States that would allow U.S.-based filers to voluntarily provide supplemental IFRS-based information without reconciliation to U.S. GAAP. In his remarks before the 2015 conference, Mr. Schnurr indicated that the OCA is likely to recommend that the SEC consider and commence rulemaking that is consistent with this fourth alternative.
Further, in their respective remarks, both SEC Chair Mary Jo White and Mr. Schnurr reemphasized the importance of continued FASB and IASB collaboration on standard-setting projects in an effort to improve the quality of financial reporting. These comments were echoed by IASB Chairman Hans Hoogervorst who, in a call for renewed commitment to ongoing collaboration and convergence, asked participants to “stay engaged [with the IASB] and help us in continuing to build our Standards in the future.”
Chair White and Mr. Schnurr each expressed concerns about the expanding and changing role of the audit committee. They observed that the roles and responsibilities now frequently imposed on audit committees in addition to their core SEC-required duties may interfere with their primary responsibility of overseeing the company’s financial reporting. Chair White stated that the “increasing workload may dilute an audit committee’s ability to focus on . . . selecting and overseeing the independent auditors; internal controls and auditing; setting up an appropriate system for the receipt and treatment of complaints about accounting; and reporting to shareholders.”
In discussing audit committee reporting requirements, Mr. Schnurr recapped the SEC staff’s efforts over the past year to address “(a) whether investors are interested in hearing from audit committees on how (not just if) they have fulfilled their responsibilities; and (b) whether the Commission’s rules support such reporting.” As part of these efforts, the Commission issued a concept release in July 2015 to seek feedback on the proposed changes to the reporting requirements as well as on additional disclosures investors may want. OCA Deputy Chief Accountant Brian Croteau discussed the comments received on the concept release, which generally indicated support for evaluating whether the current requirements could be improved. Commenters also noted that a principles-based disclosure framework would give registrants the flexibility to tailor disclosures as well as potentially eliminate boilerplate disclosure language. The SEC staff is currently evaluating all comment letters received on the concept release and will determine whether to make any recommendations to the Commission.
The SEC staff also indicated that many comments in response to the concept release were about voluntary disclosure trends related to audit committee oversight of the external auditor. Audit committees’ voluntary disclosure practices were also highlighted by Ms. Fornelli, who indicated that the CAQ and Audit Analytics recently released the second edition of their Audit Committee Transparency Barometer. The publication notes that there has been a substantial increase in the number of S&P 500 companies that are disclosing information related to key areas of external auditor oversight. See the Audit Committee Disclosures section in the attached Heads Up for more information.
While no new rules on non-GAAP measures have been issued and none are expected at this time, such measures were still a key discussion topic at this year’s conference (see discussion in the attached Heads Up). In her remarks, Chair White expressed concern that the prevalent use of non-GAAP measures in financial reporting may be a source of potential confusion for investors. She believes that close attention should be paid to this topic to ensure that the current rules are being followed. In addition, the staff in the SEC’s Division of Corporation Finance (the “Division”) reiterated that it continues to focus on the use of non-GAAP measures in determining whether such use complies with the disclosure requirements of Regulation S-K, Item 10(e). The Division staff highlighted that it is therefore focusing on whether non-GAAP measures should be given no greater prominence than GAAP measures and on whether the labeling of adjustments between the two measures is clear. Further, the staff noted that if the non-GAAP measures used in financial reporting for the current period are different from those used in prior period(s), registrants should provide effective disclosures that permit comparability with the prior periods.
View the rest of the Heads Up.
Subscribe and Archives
Heads Up newsletters, published as warranted, analyze important accounting developments, such as new FASB and IASB pronouncements or exposure drafts. Concise examples and answers to frequently asked questions assist readers in understanding and implementing the critical guidance.