GAAP Flash – PCAOB Inspection Reports, ASC 480, ASC 230, and ASC 740 – 04.22.16
gaap-flash-pcaob-inspection-reports-asc-480-asc-230-and-asc-740-04-22-16

GAAP Flash – PCAOB Inspection Reports, ASC 480, ASC 230, and ASC 740 – 04.22.16

What can we learn from PCAOB inspection reports? The PCAOB released a preview of its 2015 inspection findings and there is good and bad news for auditors. Did you know that the length of a 10-K has increased more than 50% from 1996? TMI! As a result, more companies are starting to think outside the box when it comes to financial reporting. Speaking of financial reporting, it seems that three common mistakes (ASC 480, ASC 230, and ASC 740) keep showing up in financial statements. In other news, the number of going-concern opinions issued by auditors of large accelerated filers is at its highest level since the financial crisis of 2008. Check out the details in this week’s GAAP Flash.

PCAOB Releases Staff Inspection Brief Previewing 2015 Inspection Findings(April 19, 2016) – PCAOB News (@PCAOB_News)

The staff of the Public Company Accounting Oversight Board (PCAOB) published an inspection brief that previews the results of their 2015 inspections. Good news! Preliminary results show that the overall number of audit deficiencies in 2015 decreased compared to the 2014 results noted in published PCAOB inspection reports. Why the improvement? The PCAOB believes it may have been the result of better monitoring of audit work performed. However, this is only for annually inspected firms.

The results were not so good for firms inspected every three years. For triennially inspected firms, the inspection staff observed an overall high number of audit deficiencies during 2015 inspections. The audit deficiencies noted are the same as prior years. Check out this blog post for the most frequent audit deficiencies noted in the 2014 PCAOB inspections reports.

“Auditors should take note of the matters discussed in this inspection brief in planning and performing their audits,” said Helen Munter, PCAOB Director of the Division of Registration and Inspections.”

Rethinking Disclosure (April 7, 2016) – CFO.com (@CFO)

Have you noticed that Form 10-Ks filed with the Securities and Exchange Commission (SEC) are becoming longer than most novels? You aren’t the only one. According to the article, written by Edward Teach (not the pirate, AARGH!), the number of words contained in a median Form 10-K has increased more than 50% from 1996 to 2013. The increase in length is primarily due to an increase in new compliance requirements including those surrounding fair value measurements, internal controls over financial reporting, and risk factors. Regardless of the reason, the increase in words is clouding the most important information and taking away from the purpose of financial reporting.

Some companies, such as General Electric, Target, and Intel are starting to take action and are implementing measures to decrease the length of their Form 10-K. These companies are utilizing charts, graphs, and tables, as opposed to words, to help the reader focus on the important information. These companies are hoping that making these changes will improve the effectiveness of their disclosures for investors.

The SEC must also believe annual reports are too long. In December 2013, they issued a staff report to Congress on its disclosure rules for public companies and began a disclosure effective project. The goal of the project is to comprehensively review the disclosure requirements and make recommendations on how to update them to facilitate timely, material disclosures by public companies and shareholders’ access to that information.

Three Stubborn Types of Mistakes Dog Financial Reporting (April 11, 2016) – WSJ CFO Journal (@CFOJournal)

Although financial revisions and corrections to financial statements have decreased nearly 60% over the last ten year, they are still occurring on a regular basis. In 2015, 663 U.S. companies filed corrections to their financial statements (financial revisions or restatements). More than half of the corrections involved the following issues:

  • Determining whether financial instruments issued by companies are debt or equity (ASC 480)
  • Classifying cash flows within the statement of cash flows and related disclosures (ASC 230)
  • Disclosing liabilities related to income taxes, especially related to foreign subsidiaries and uncertain tax positions (ASC 740)

It is important that companies implement strong internal controls over financial reporting (ICOFR) to help financial reporting mistakes before they happen! And, based on findings noted in PCAOB inspection reports, it is important that auditors properly test ICOFR.

These areas are discussed in the FASB Update course offered by KPMG Executive Education and facilitated by GAAP Dynamics. Sign up here.

Auditor warnings on large company solvency hit highest level since crisis (April 13, 2016) – MarketWatch (@MarketWatch)

According to SEC filings, last year marks the highest number of going-concern opinions issued for large accelerated filers since 2008. In 2015, ten large accelerated filers were issued a going concern opinion from their auditor. That’s still a lot less than in 2008 when twenty large accelerated filers received going-concern opinions.

A going-concern opinion means that there is a reasonable doubt that the company will continue to be in business in the foreseeable future. This is obviously a judgment call by the auditors, but can stem from ongoing net losses, low revenues, or liquidity concerns. Additionally, a going-concern opinion may indicate that the company is close to filing for bankruptcy.

However, a new rule by the FASB will shift the judgment from the auditors to management. ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires that each reporting period, management is required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued. This rule is effective for the annual reporting period ending after December 15, 2016, but early adoption is permitted.

PCAOB Inspection

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