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! Here are a few articles, blog posts, and publications designed to help increase business acumen in the profession.
Intuit Manages a Big Accounting Change (July 23, 2015) – CFO.com (@cfo)
In 2014, a major shift for Intuit’s products led to a significant accounting change regarding a very popular topic in accounting circles these days: revenue recognition. As the desktop software industry has changed to keep up with increasingly “online” demands for consumers, Intuit decided this change to “software-as-a-service” types of products needed a similar shift in its accounting policy, along the lines of a recurring revenue model.
How It’s Relevant: Significant accounting policies are required disclosures under U.S. GAAP and any changes to these types of policies also need to be communicated to users of the financial statements! As this article shows, changes in accounting can be driven by operational decisions as well so it is always important to understand what impact business decisions may have on a company’s – or your client’s – reporting schedules! Also, changes now to revenue recognition are especially important to analyze and communicate across your organization given the impending changes to applicable U.S. and international standards. Even though new revenue recognition guidelines will not be effective for a few more years, decisions being made today can have a much different impact than you would expect down the road if you don’t consider these accounting changes!
Three Mergers, But One Isn’t Tax Free (July 24, 2015) – The Wall Street Journal (@WSJ)
During July, three major mergers were announced: Cigna’s purchase of Anthem, Aetna’s combination with Humana, and the merger of ACE and Chubb. While all of these M&A activities look similar, there is one small provision that makes the exchange of shares non-taxable for the health care entities, while the investors of insurance companies ACE and Chubb will be facing additional taxes on their stock swap!
How It’s Relevant: Whether you are concerned with tax accounting or financial reporting, the details matter! This article provides a real world example of the implications with the structure and provisions of business combinations. The technical wording can make all the difference in accounting, and it’s important that your stakeholders are aware of the impact that deal structures can have – either to their own tax books or to the company’s financial position!
Sudden Drop in Crude-Oil Prices Roils U.S. Energy Firms’ Rebound (July 26, 2015) – The Wall Street Journal (@WSJ)
A continued slump in oil prices signals danger for U.S. oil and gas companies. Most survived during a tumultuous first half of 2015 but hedging programs are expiring without renewed hope for higher gas prices that could buoy the domestic energy companies. There are concerns in the market that over-supply of oil and gas internationally may not end soon and that these low prices could continue through 2016 and beyond.
How It’s Relevant: Your clients may be directly or indirectly affected by this downturn in this economics sector. Do any of your client’s lend to oil and gas companies? How would this affect collectability? Do you audit energy companies that would be affected by such lowered prices? How would this affect the recoverability of real or intangible assets? All these questions, and more, should be considered during the planning and execution of your audits. If that weren’t incentive enough, the PCAOB has recently pegged falling oil prices as an area where proper risk assessment is critical. Make sure you respond to these risks – in writing! – and show how the nature, timing and extent of your procedures are reflective of these economic conditions!
Toshiba Must Adjust Operating Profit Down by $1.2 Billion (July 20, 2015) – The Wall Street Journal (@WSJ)
Toshiba recently underwent an investigation of accounting irregularities that resulted in the overstatement of operating profits by more than $1 billion from 2008 to 2014. A report from an outside panel revealed that a poor internal control environment and tone at the top of the organization allowed for this magnitude of misstatement. The news since forced the resignation of its Chief Executive and a reorganization of its Board of Directors.
How It’s Relevant: Leadership is a key driver of the financial success of any company, and in this case, tone at the top led to sever financial missteps that have left the share price reeling and investor confidence shaken. This article is a timely reminder that aggressive executives can create a culture of fraud that is hard for workers under their leadership to ignore. It also raises the importance of the effectiveness of internal controls. Perhaps a stronger set of control activities could have prevented the perpetrated fraud from occurring? Do not underestimate the importance of control environment when going through risk assessment and response procedures!
SEC Charges Mead Johnson Nutrition With FCPA Violations (July 28, 2015) – SEC (@SECNews)
An investigation by the SEC on improper payments in violation of the Foreign Corrupt Practices Act (FCPA) led to a $12 million settlement. A weak internal control environment was cited in the findings as a reason that this violation was allowed to occur.
How It’s Relevant: Here is another example of the consequences of ineffective systems of controls! In this case, operational risks translated into financial misrepresentation as a slush fund was kept off the books and allowed improper payments over a multi-year period. Again, understanding risks and controls that monitor those risks are important!
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