Around the office, you can feel the hum of excitement as we emerge from our “busy season” and gear up to hit the road for our “travel season.” We’re going out to facilitate courses for auditors at public accounting firms all around the country. So, to celebrate, we’re dedicating this week’s issue of the GAAP Flash to the auditors.

This week’s GAAP Flash includes articles about some of the biggest headlines facing public accounting today, like big data and innovation, fraud, and auditing intangible assets and other accounting estimates.

Watch for these Errors on Intangible Assets (May 17, 2016) – Accounting Today (@AccountingToday)

This article reviews just a few of the many reasons that make accounting for intangible assets acquired in business combinations a difficult task, such as insufficient expertise. For instance, the company may just assume that the entire “excess” purchase price above the fair value of any tangible assets can just be allocated to goodwill and will not separately identify and value intangible assets acquired. Another common error is assuming that the fair value of tangible assets is equal to their book value.

How It’s Relevant: The accounting for intangible assets acquired in a business combination isn’t just tricky for the companies…it’s also an area where audit firms have received comments from inspections performed by the Public Company Accounting Oversight Board (PCAOB). It’s critical that any auditor understand the accounting rules for the area they are auditing. How else will you know if something has not been recorded correctly?

In accordance with ASC 350 and ASC 805, intangible assets acquired in a business combination must be recognized at fair value if they are:

1. Separable, or
2. Arise from contractual or other legal rights

Note there is some relief for private companies based recent guidance issued by the FASB’s Private Company Council (ASU 2014-18) which permits private companies to elect not to recognize certain intangible assets acquired as part of a business combination separately from goodwill.

Audit Innovation Helps Private Companies Improve Performance (May 24, 2016) – Accounting Today (@AccountingToday)

Speaking of hot topics in audit practice today, how about innovation? The Big Four firms are appointing chief innovation officers and are constantly posting about how their firm can help you innovate and how the audit practice as a whole is undergoing a period of innovation.

This article talks about some of the ways that firms are innovating, for instance, using tablets with software to help with inventory counts. Associates can take pictures, use voice-to-text features, etc. to help streamline what was once a very manual process. This makes the auditors happy. Technology also enable auditors to offer their clients better insights into their businesses, through analyzing data and trends, than they could even a few years before.

How It’s Relevant: Whatever the implications may be for future auditors, the audit process is changing. And so far, the changes have been positive. The increased use of technology has revitalized the audit practice and promotes higher quality audits. Auditors are able to spend less time doing menial, labor intensive tasks and are able to spend more time in the subjective areas of the audit. We believe technology will continue to shape and transform this industry for the better, including knowledge sharing both within the firm, between the firm and clients, and between the firm and the world.

Swift CEO Surprised by Extent of Cyberattacks (June 2, 2016) – The Wall Street Journal (@wsj)

According to this article, the possibility of cybercrime is the one thing that keeps Gottfried Liebbrandt, CEO of Swift, the world’s largest interbank funds transfer system, awake at night – and with good reason! There have been a recent smattering of breaches at banks around the world that use Swift to transfer funds.

And of course, Swift is not the only name in the news for cyber security breaches. Cyber security, or lack thereof, is everywhere you look.

How It’s Relevant: Auditors play an important role in helping ensure the cybersecurity of our clients. Through our procedures performed as part of our tests of controls or even through our substantive work, we are required to obtain an understanding of the processes in place at the entity, including the IT environment. Through controls testing, we can help identify gaps that could lead to a potential cybersecurity breach if not remediated. Not only that, but we may also need to consider the adequacy of management’s disclosures in light of cyber attacks or the potential thereof.

In fact, our role can be so important, the Center for Audit Quality (CAQ) released this document to explain how the auditors fit into the evaluation of the cybersecurity environment.

From $4.5 Billion To Nothing: Forbes Revises Estimated Net Worth Of Theranos Founder Elizabeth Holmes (June 1, 2016) – Forbes (@Forbes, #ForbesBillionaires)

Just last year, Forbes was proclaiming that Elizabeth Holmes, founder of blood-testing company, Theranos, was worth a whopping $4.5 billion. On June 1 of this year, Forbes revised that estimated net worth to nothing. The article cites several reasons for the revision, including pending litigation and even just general uncertainty about the company’s future.

How It’s Relevant: So what does this fascinating article have to do with us as auditors? Everything! This article epitomizes why auditing accounting estimates is so difficult. Making estimates is tricky business, as Forbes demonstrated, but auditing these estimates can be just as hard as there is no one right answer. In fact, the audit of accounting estimates has been one of the most frequently commented upon areas in PCAOB inspection reports in the past few years.

Lawsuit questions Oracle's accounting. Stock dives(June 2, 2016) CNN Money (@cnnmoneyinvest)

In this article, a formal Oracle employee is alleging that Oracale knowingly and illegally inflated its sales numbers for its cloud business. Granted, the cloud business only represents 8% of Oracle’s revenue, but that still equates to $735 million. According to the former employee, she claims she was instructed to add millions of dollars in accruals to the financials, with no concrete billing to support the numbers.

How It’s Relevant: While fraud certainly isn’t a new topic, it is still a tried-and-true hot topic! Today’s digital world can give a leg-up to the fraudsters. In fact, a recent KPMG study found that the fraudsters do indeed have the advantage. The audit practice must make sure we keep pace so that our procedures can detect abnormalities like this. Auditors should work closely with their IT specialists to make sure there are no gaps in our controls testing procedures.