Business acumen is keenness and quickness in understanding and dealing with a business situation in a manner that is likely to lead to a good outcome. For CPAs in public accounting this means performing higher quality audits. But who has the time to compile a list of relevant and timely accounting news relevant to CPAs? We do! In this post, we discuss issues raised by keynote speakers at the AICPA National Conference on Current SEC and PCAOB Developments held in Washington D.C. on December 9-11, 2015.

Keynote Address – Mary Jo White, Chairman, SEC

Chairman White began by noting our shared responsibility to maintain high-quality, reliable financial reporting, which is essential to ensuring our capital markets remain the safest and strongest in the world. She said it is key that we maintain “high-quality reporting of reliable and relevant financial information that investors can use to make informed investment decisions.”

Chairman White’s speech was dedicated to the shared responsibilities and challenges for each of us, separated by:

• Preparers
• Auditors
• Audit committees
• Standard setters
• Regulators

She concluded by noting the financial reporting area will continue to be a high priority for the SEC enforcement program. Investors depend on comprehensive and accurate financial reporting, so “our fundamental objective is to raise the bar of compliance by issuers and their auditors and we will use all of our tools to do so.”

Remarks of the SEC Chief Accountant – James Schnurr, Chief Accountant, SEC

Mr. Schnurr began by stating that the accounting profession “must remain focused on one overarching goal, which is to provide investors with high-quality, decision-useful information,” which begins with information that is relevant and credible. This preparation of relevant and credible information begins with management, which is dependent on the design and effectiveness of internal control over financial reporting (ICFR).

Additionally, he stated that the credibility of financial reporting also depends on thorough and objective audits. Mr. Schnurr reported that the Office of the Chief Accountant has heard from some audit committee members that, in their opinion, the quality of independent audits has never been higher. That being said, he then reminded auditors of important issues such as attestation of ICFR and auditor independence, both areas of recent enforcement actions.

He then discussed the role of audit committees, noting that the following audit committee attributes can further enhance quality financial reporting:

• Qualified
• Committed
• Independent
• Tough-minded

Mr. Schnurr stated that strong, independent standard setters also play a critical role, noting investors must have confidence in how accounting and auditing standards are set. “Open due process, including thoughtfully and objectively considering the input and views of those who participate and play a role in our capital markets, is critical to the work of standard setters,” said Schnurr. He encouraged the FASB and IASB to continue to work together to converge financial accounting standards, citing the new revenue recognition standard as a great example.

With continued movement towards more principle-based accounting standards, Mr. Schnurr noted that companies need to “asses and continually reassess” the impact to their existing competencies and make adjustments, as appropriate, to their training, retention, and recruitment programs, and/or retention of qualified service providers. He then went on to talk about recent enforcement actions, noting that the SEC is paying particular attention to the role and work of external auditors and audit committees.

He concluded his remarks discussing:

• Disclosure effectiveness and the use of accounting judgments
• Proper oversight of the audit committee
• Standard setting projects and priorities of the PCAOB

Keynote Address – James Doty, Chairman, PCAOB

Mr. Doty reiterated that the PCAOB’s mission is to protect the investing public’s interest in informative, accurate, and independent audit reports, focusing on auditors in their role as gatekeepers. The PCAOB does this through:

• Inspections,
• Investigations and disciplinary proceedings,
• Outreach, and
• Economic analysis.

According to emerging research from our Center for Economic Analysis, Mr. Doty noted that when the PCAOB notes a deficiency, they see a significant increase in effort by the engagement partner and quality reviewer and a significant decrease in restatement risk. Conversely, when we inspect an audit and find no significant deficiency, the PCAOB tends to see a statistically significant decrease in effort and increase in the restatement rate.

Mr. Doty discussed the recent standard-setting activities of the PCAOB, as well as future standards including:

• Audit transparency
• Auditor’s reporting model

Mr. Doty concluded his remarks stating that maintaining public confidence is the key to expanding the demand for assurance services, noting that it is an exciting, yet challenging time to be in the audit profession.

FASB Chair Address – Russell Golden, Chairman, FASB

Mr. Golden discussed the new revenue recognition standard, which takes effect for public companies in 2018 and for private companies in 2019. He talked about the success of the Transition Resource Group (TRG) put in place by the FASB and IASB to help them manage implementation issues. While most of the issues discussed at the TRG have not resulted in standard-setting action, this discussion has helped to educate stakeholders about the new standard.

Mr. Golden then moved on to the new impairment standard that will require a forward-looking “current expected credit loss” – or CECL – model instead of the “incurred loss” approach in effect today. The CECL model uses a single “expected credit loss” measurement objective for the allowance for credit losses, requiring the balance sheet to reflect the net carrying amount of a financial asset (net of allowance for credit losses) at the amount an organization expects to collect. The Board expects to publish the final ASU on credit losses in early 2016.

He addressed the following four misconceptions or concerns being circulated about the impairment standards:

1. The new standard will require businesses to develop and install costly, complex new systems
2. Bank examiners will take a more conservative view
3. The credit crisis involved only large banks
4. The standard takes an unrealistic view of the economics of loan financing

He then briefly discussed other important FASB projects that are nearing completion, which included:

• Disclosure framework
• Hedging
• Definition of a business
• Leases

According to a survey of the members of the FASB’s principal advisory group, the Financial Accounting Standards Advisory Council, ranked the following five projects as top priorities for the Board:

1. Financial performance reporting
2. Improving cash flow classification
3. Pensions and other post-retirement benefits
4. Liabilities and equity
5. Intangible assets

It is interesting that segment reporting was in first place for investors, but last place for preparers.

Mr. Golden then discussed the importance of the FASB being independent from political and special interest influence. He said independent standard setting is important because “we are not in the business of picking winners and losers,” but rather to set standards “that promote the reporting of useful information to those who make decisions that drive our capital markets.”

IASB Chair Address – Hans Hoogervorst, Chairman, IASB

Mr. Hoogervorst began his remarks discussing the strides that the IASB has made in improving the quality of IFRS, noting that the new revenue recognition standard and the leasing standard are expected to be published in early January 2016. The revenue recognition standard was noted as a success of converged accounting standards and, although not completely converged with U.S. GAAP, the new leasing standard is converged in its main objective, namely to put most operating leases on the balance sheet.

With 116 jurisdictions around the world already requiring the use of IFRS, the IASB made significant progress during the current year in Asia, most notably Japan, India, and China. Although not required in the United States, Mr. Hoogervorst noted that companies are permitted to use IFRS when listing here in the U.S., noting the recent listing by Ferrari as an example.

Although the IASB is happy with the still-growing IFRS family, Mr. Hoogervorst discussed the challenges of keeping all the members of the diverse IFRS community happy. He said that is actually impossible and that perhaps “the best thing the IASB can do is to distribute unhappiness as evenly as possible around the world.”

He noted one of the challenges for the IASB is to ensure that IFRS further strengthens its relevance in an ever-changing world. The world of financial statements needs to be the anchor of trust for investors, rather than the sugar-coated realm of non-GAAP measures.

Next week we will publish our top takeaways from the AICPA National Conference on Current SEC and PCAOB Developments. Stay tuned!