Top 5 Meme(ories) from the 2016 AICPA National Conference
top-5-meme(ories)-from-the-2016-aicpa-national-conference

Top 5 Meme(ories) from the 2016 AICPA National Conference

We attended the 2016 AICPA Conference on Current SEC and PCAOB Developments held in Washington D.C. on December 5-7, 2016. This conference is an annual rite of passage for accountants, with a “Who’s Who” of regulators, standard setters, and partners from national accounting firms discussing issues relevant to financial statement preparers and auditors. Some of the themes at this year’s conference were:

  • Non-GAAP financial measures;
  • Internal controls over financial reporting (ICFR);
  • Revenue recognition and leasing;
  • Audit quality and audit independence; and
  • Use of technology.

In the coming days, accounting firms will publish lengthy documents that provide in-depth insights into these issues. We read them and highly recommend you do the same to gain a deeper understanding of the accounting and auditing issues regulators and standard setters focus on. However, if you’re looking for something a bit “lighter” and, dare we say, fun, we’ve prepared this holiday-themed post. Enjoy!

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“Every registrant in SEC-ville liked non-GAAP financial measures a lot. But the SEC who lived in D.C. did not!” Well, this isn’t exactly true. The SEC staff certainly understands the importance of non-GAAP financial measures to investors, but, quite frankly, they believe their use is getting out of control! While there have been relatively few enforcement cases involving non-GAAP financial measures, the speakers pointed to a recent case in September involving management of REIT improperly manipulating a key non-GAAP measure.

We’ve discussed non-GAAP financial measures in various blog posts throughout the year, including this post where we summarized SEC rules. In May, the SEC issued new guidance on non-GAAP financial measures in the form of Compliance & Disclosure Interpretations (C&DIs). In this guidance, the SEC talks about how certain practices might run afoul of SEC rules. For example, removing costs from a measure that are important for investors to measure company performance or disclosing non-GAAP measures more prominently than the comparable result under U.S. GAAP.

At the AICPA conference, the SEC staff stated they believe that when reconciling non-GAAP financial measures to GAAP, it is more appropriate to start with the GAAP measure versus the other way around. Wesley Bricker, Chief Accountant with the SEC, reminded participants that businesses operate in uncertain environments. “If non-GAAP adjustments replace that business reality with smooth earnings over time, accelerate unearned revenues, or defer incurred expenses, those adjustments and disclosures should be evaluated closely under the C&DIs.”

“Improper disclosure of non-GAAP measures,” he grinned (the Grinch, not Mr. Bricker) “are the first things to go!”

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“Well, obviously, something had to break the audit. Something had to cause the deficiency!” It probably was internal control over financial reporting (ICFR), which continues to be the leading cause of audit deficiencies and was a hot topic at the AICPA National Conference again this year.

“Investors believe that strong and effective internal controls and audits are an important component of the ability of companies to communicate credible financial reporting information,” said Wesley Bricker. “It is hard to think of an area more important than ICFR to our mission of providing high-quality financial information that investors can rely on.”

Marc Panucci, Deputy Chief Accountant with the SEC, reminded participants that:

  • Management is responsible for evaluating the severity of identified control deficiencies and disclosing identified material weaknesses in ICFR in a timely fashion.
  • It is important to maintain competent and adequate accounting staff, supplemented with qualified external resources, if necessary.
  • Management must take responsibility for its assessment of ICFR and cannot outsource this responsibility to third parties.

Updating and maintaining internal controls will be especially important as companies implement ASC 606 Revenue from Contracts with Customers, ASC 842 Leases, and ASC 326 Financial Instruments – Credit Losses over the coming years.

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“You feeling strong, my friend? Tell me you haven’t started your revenue recognition project one more time!”

Timely implementation of the new standard is important. A poll of conference participants indicated that over 50% either have not yet started, are still getting familiar, or are still performing their initial assessments. These results are consistent with a recent survey by PwC and the Financial Executives Research Foundation, which showed that, although 78% of companies have started analyzing the impact of the new standard, most haven’t completed their assessment. What are companies waiting for?

The top 5 “issues” with respect to implementing the new standard are:

  1. Identify the performance obligations (Step 2)
  2. Determine the transaction price (Step 3)
  3. Recognize revenue when (or as) the entity satisfies a performance obligation (Step 5)
  4. Assess scope
  5. Present and prepare disclosures

Is your implementation lagging? If so, Wesley Bricker recommends that you “discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information.” We recommend that you view this post, a compilation of helpful resources to help you with implementation.

The quote of the conference came from Brian Allen, partner with KPMG, in response to a hypothetical scenario where a company assessed believed the standard was immaterial without doing the proper due diligence:

“You can run through a dynamite factor with a lit match and survive, but you’re still an idiot.”

“Oh, you’re an angry auditor!”

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Andrew Ceresney, Director, Enforcement Division, SEC discussed two prominent independence cases brought against a Big 4 audit firm. We won’t get into the specifics, but you can read about them here. Both cases involved audit partners getting “too close” to their clients on a personal level, thereby violating rules that ensure firms maintain their objectivity and impartiality during audits.

“Auditors play a vital role in the capital markets,” says Wesley Bricker “because of their impartial and objective judgment about financial reporting – reinforced by their independence.” Mr. Bricker reminded the audience that auditors must follow the “general standard”. Auditors must be independent “in fact” and “in appearance.” With respect to the latter, an auditor is not independent if a reasonable investor, with knowledge of all relevant facts and circumstances, would conclude that the auditor is not capable of exercising objective and impartial judgment.

Marc Panucci informed the audience that there has been an uptick in questions concerning relationships and/or services not specifically prohibited in Rule 2-01(b) and (c) of Regulation S-X, but which require consideration under the general standard and the underlying principles described in the preliminary note to the independence rule. He reminded everyone that consideration should be given to whether any relationship or service to be provided by an auditor:

  • Creates a mutual or conflicting interest with its audit client;
  • Places the auditor in a position of auditing their own work;
  • Results in the auditor acting as management or an employee of the audit client; or
  • Places the auditor in a position of being an advocate for the audit client.

Auditors should be mindful of these rules if engaged to help their clients implement the new accounting standards.

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Does the Burgermeister Meisterburger remind you of some people you know? The central villain in Santa Clause is Comin’ to Town, he declares toys “illegal, immoral, and unlawful,” forcing the kids to work instead of playing. By not embracing technology, that’s exactly what you’ll be doing…A LOT OF WORK!

Julie Erhardt, Deputy Chief Accountant of the SEC, talked about how technology is used in the financial reporting process such as in the:

  • Preparation and distribution of financial statements by management;
  • Presentation of financial statements to investors by management; and
  • Presentation of financial information by others to investors.

Technology is everywhere! That’s why it is vital that companies maintain proper internal controls over financial reporting.

And technology is not just limited to companies. Have you heard of “big data?” Auditors, both internal and external, are using technology to pick out anomalies in massive amounts of data that would otherwise be undetectable. This gives them the ability to test larger sample sizes, or in some instances, the entire population. Regulators are also using technology to spot errors in financial reporting and support enforcement actions.

But for all the good that technology brings to the world, unfortunately, there’s the bad too. Technology enables the “bad guys” to hack into systems and steal personal information, or even possibly influence elections! There is no way to totally prevent a cyber-attack, but companies need to be proactive, having a plan in place not only to prevent or deter attacks, but also a backup plan in case their data is breached.

Cindy Fornelli, Executive Directors with the Center for Audit Quality, discussed the role the auditing profession might play with respect to providing objective evaluations of cybersecurity risk management programs at companies. She also discussed something that sounded eerily familiar to internal control testing under Sarbanes-Oxley, including a management assertion and auditor opinion.

“Why are we going done this road again, Todd?”

“I don’t know Margo!”

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Do you get a bit sappy during the holidays? I do, especially listening to Linus explain the true meaning of Christmas in A Charlie Brown Christmas. Watch at the 1:07 mark when Linus drops his security blanket when He says “Fear Not.” Linus is reciting Luke 2: 8-14 and it’s a good reminder of the reason for the season.

“Then the Grinch thought of something he hadn’t before! What if Christmas, he thought, doesn’t come from a store? What is Christmas…perhaps…means a little bit more?!” – Dr. Seuss, How the Grinch Stole Christmas!

From our family to yours, we wish you a Merry Christmas!

 
PCAOB Inspection

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