Insights

Headline Speeches From AICPA SEC Conference

Dec. 12, 2014

The three-day 2014 American Institute of CPAs (AICPA) National Conference on Current SEC and PCAOB Developments concluded on Dec. 10. The speaker lineup was the traditional cast: chairs from the Public Company Accounting Oversight Board (PCAOB), Financial Accounting Standards Board (FASB), and International Accounting Standards Board (IASB); the Securities and Exchange Commission (SEC) chief accountant; and other representatives from the SEC, PCAOB, and FASB.

Several themes emerged from this year’s conference: the need for simplification in accounting standards, convergence, implementation challenges in the new revenue recognition standard, and continued improvement to internal control over financial reporting. This year’s conference also saw the return of the SEC Office of the Chief Accountant (OCA) staff speeches.

The following are notable messages from many of the headliners and links to their speeches. During the conference, Crowe Horwath LLP representatives tweeted comments, which are included here as well to provide high-level context.

From the SEC

James Schnurr

Chief Accountant, Office of the Chief Accountant (OCA)
In his remarks, Jim Schnurr addressed several “big-picture” issues. For the open question on whether the SEC will permit U.S. registrants to file under International Financial Reporting Standards (IFRS), Schnurr noted this is a priority for SEC Chair Mary Jo White. The SEC aims to provide that clarity sooner rather than later.


For the new revenue recognition standard issued in May, he shared that the implementation of the standard in the United States in a timely and consistent manner is and will continue to be a priority, citing comparability as “a hallmark of U.S. financial reporting.” If there is significant diversity in practice for similar transactions, it raises the question as to whether the principles in the standard are adequately articulated; and where significant diversity in practice exists, that diversity should be eliminated. He also noted that disclosure is not a substitute for comparability.


Turning next to independent accounting standard setting, Schnurr noted that since the 1970s, the FASB has been the private sector standard setter for the U.S. He said that a private sector standard setter is so important because it focuses on the objective of setting accounting standards that provide neutral, decision-useful information, free from political or other pressures or objectives. The Financial Accounting Foundation (FAF), which oversees the FASB, issued a press release demonstrating its agreement with Schnurr’s observations.

Schnurr concluded his remarks with comments on PCAOB standard-setting activities and SEC disclosure requirements for audit committees. On the latter, he noted those disclosures have not changed since 1999. The SEC is looking at its existing disclosure requirements and current audit committee disclosure practices to see if improvements are needed.

Brian T. Croteau

Deputy Chief Accountant, OCA
Brian Croteau, as the deputy of the OCA’s Professional Practice Group, covered matters relating to the external auditor in his remarks. He opened with comments on the SEC’s continued focus on auditor independence, specifically for broker-dealers.

SEC Deputy Brian Croteau covers auditor independence; SEC sanctions eight audit firms for violating rules.
– Crowe tweet from the conference
 

Turning next to PCAOB matters, Croteau encouraged quicker progress for improvements to auditor performance standards, specifically citing auditing estimates, including fair value measurements, and use of other auditors and specialists. Next, he praised the PCAOB for developing and implementing policies and practices to embed economic analysis more formally into the PCAOB’s rulemaking efforts. He also praised the PCAOB for the recent improvements made to the content of inspection reports, specifically the addition of references to specific paragraphs of PCAOB standards that are the subject of auditor performance criticisms.

As a follow-up to his remarks from the 2013 conference, Croteau concluded with a discussion of internal controls over financial reporting, questioning whether material weaknesses are being properly identified and disclosed. He said OCA will continue its close work with the Division of Corporation Finance (Corp Fin), the PCAOB, and the Division of Enforcement to address this area.

In closing, Croteau encouraged registrants to give consideration to new controls or redesigning existing controls as they implement the new revenue standard. However, he reminded companies to disclose material changes in internal control over financial reporting if changes are made in the current financial reporting period.

Dan Murdock

Deputy Chief Accountant, OCA
Dan Murdock opened his remarks with a discussion about staff speeches, noting that the objective in sharing these views is to provide transparency into some of the issues the staff has addressed. The objective is not to provide absolute answers, given that many of these issues are complex and will almost always depend on the individual facts and circumstances. He reminded conference participants that there is no substitute for a thoughtful, researched analysis that includes, when available, an understanding of what the standard setters sought to achieve – and the "Basis for Conclusions" in the standards are helpful to that end.

He then turned to segment reporting, noting that it is not a new topic but remains an important area for investors. He addressed the process of identifying the chief operating decision maker (CODM). The staff has observed registrants defaulting to the CEO as the CODM, which might not be the best choice, and he encouraged registrants to take a fresh look at this determination. He then turned to identifying operating segments, noting that looking only at the organizational chart or CODM report is not sufficient. He concluded with comments on aggregation of operating segments, noting that registrants should use reasoned judgment that is consistent with the objectives of the standard when determining whether the aggregation criteria have been met.


Julie A. Erhardt

Deputy Chief Accountant, OCA
During her remarks, Julie Erhardt shared her observations related to international financial reporting, providing her insights focusing on three parties – investors, issuers, and securities regulators – that would be affected by potential IFRS alternatives.

OCA Staff Speeches

For the past several years, speeches posted to the SEC’s website were reserved for the chief accountant, the deputy chief accountants from OCA, and the staff from Corp Fin. This year, the staff from OCA returned to the podium. Here are their topics and links to their speeches.

  Topics Addressed  
T. Kirk Crews
Professional Accounting Fellow
  • Statement of cash flows
  • Mortality assumptions (for benefit plans)
  • Accounting for amendments to or exchanges of preferred stock
 
Speech
Steve Mack
Professional Accounting Fellow
  • Principal versus agent
  • New revenue recognition standard
 
Speech
Christopher Rogers
Professional Accounting Fellow
  • Consolidation
  • Definition of a joint venture
 
Speech
Hillary Salo
Professional Accounting Fellow
  • Impact of derivative novations on hedge accounting
  • Allocation of proceeds when the fair value of a liability required to be measured at fair value exceeds the net proceeds received for a hybrid instrument
 
Speech
Kevin Stout
Senior Associate Chief Accountant
  • Internal control over financial reporting (ICFR)
 
Speech
Carlton Tartar
Associate Chief Accountant
  • Spinoff accounting
  • Goodwill impairment testing date
  • Blackline expense presentation
 
Speech

From Corp Fin

Speeches from Corp Fin typically are not posted to the SEC’s website. However, there were some interesting snippets from the remarks.

Update from Corp Fin: this year, over 4k filings were reviewed, representing 90% of market cap.

Update from Corp Fin: SOX 408 requires SEC to review every company every 3 yrs.

Corp Fin dispels 3 myths: #1 info must stand alone and be repeated; no, staff encourages cross referencing.

Corp Fin dispels 3 myths: #2 when comment is written staff have already made up their minds; no, staff views process as a dialogue.

Corp Fin dispels 3 myths: #3 any changes to prior disclosures will trigger a comment; no, the staff does not track & compare
– Crowe tweets from the conference
 

From the FASB and IASB

Russell Golden

Chairman, FASB
During his remarks, FASB Chair Russell Golden focused on what the board is doing to improve U.S. generally accepted accounting principles (GAAP) by reducing complexity. The FASB has reassessed its priorities and added new projects to deal with complexity issues. First, it has foundational projects that define long-term standard-setting goals to focus on those critical issues most important to stakeholders. As such, two conceptual framework projects – one that considers measurement concepts and one that considers presentation concepts – have been added to the agenda.

In addition, the FASB has added short-term simplification projects that target immediate areas of improvement. These are narrow-scope agenda projects identified by stakeholders as opportunities to simplify GAAP in a relatively short time period, improving or maintaining the usefulness of the information reported to investors. He noted that stakeholders have identified more than 70 areas in GAAP where complexity could be reduced.

FASB – Received 70 ideas to simplify while maintaining usefulness of information, some too broad, making progress on others.
– Crowe tweet from the conference
 

He discussed costs and benefits analyses with each standard – which is accomplished by evaluating the benefits expected to result from a proposed standard compared with the costs expected to be incurred.

Golden then turned to revenue recognition, noting the establishment with the IASB of the joint revenue recognition Transition Resource Group (TRG). The group’s mission is to discuss implementation questions raised by stakeholders so that the boards can decide if additional action is necessary. Based on TRG discussions, the staff is researching three areas for possible standard setting: 1) intellectual property transactions; 2) determination of certain performance obligations; and 3) guidance related to gross versus net presentation.


He also touched on international cooperation, noting the FASB’s objective to collaborate and cooperate with the IASB and national standard setters with an eye toward agreeing on and adopting standards that either are converged or have the fewest possible differences. Golden concluded with comments on “economic impact” of new standards – and the FASB’s objective to provide economically neutral information for investor decision-making.

Ian Mackintosh

Vice Chairman, IASB
Consistent with Hans Hoogervorst’s views expressed during prior conferences, Mackintosh shared his perspective on why IFRS is important to the U.S. In his remarks, Mackintosh noted that at last count, 114 jurisdictions had adopted IFRS, 12 more permit its use, two require IFRS for financial institutions, and 10 are in process of moving to IFRS. Mackintosh also noted that American investors currently hold more than $7 trillion in debt and equity securities of companies from IFRS jurisdictions. He closed by acknowledging a joint responsibility to protect the body of convergence that has been reached and to minimize differences in the future; he said the IASB looks forward to continuing to work closely with the FASB.

Ian Mackintosh, IASB – #AICPASEC is Woodstock for accountants; IFRS in/coming to 138 jurisdictions; U.S. investments > $7T in IFRS companies
– Crowe tweet from the conference
 

On Revenue Recognition

Given the pervasive impact of the joint standards on revenue recognition, the topic was discussed several times during the conference. Sue Cosper, FASB technical director, discussed the FASB/IASB joint TRG. On the FASB website, interested parties can find a page with Summary of Submissions to the TRG, Next Steps for Issues Discussed at Previous TRG Meetings, TRG Discussion Summaries, and TRG Discussion Papers.


Jim Dolinar, chair of the AICPA’s Financial Reporting Executive Committee (FinREC), explained how the AICPA is helping with implementation of the revenue recognition standard. The AICPA has formed 16 industry task forces to help develop a new accounting guide on revenue recognition that will provide helpful hints and illustrative examples for how to apply the new standard.

Revenue recognition panel: Jim Dolinar, chair of AICPA FinREC, discusses AICPA industry task forces.

Revenue recognition panel: There are the 16 industry task forces; 10 have A&A guides.

Jim Dolinar, chair of AICPA's FinREC, says first batch of rev rec issues to be posted to AICPA website by 1Q15
– Crowe tweets from the conference
 

The AICPA has a page on its website containing resources for stakeholders.

From the PCAOB

James R. Doty

Chairman
James Doty opened his remarks by noting some PCAOB accomplishments, including adopting a new standard on auditing related party and significant unusual transactions; issuing staff guidance for auditors of SEC-registered brokers and dealers; and holding forums to seek public comment on auditing fair value and other management estimates as well as potential improvements to the auditor's reporting model.

He then turned to assurance services, discussing the importance of maintaining public confidence. He cited two examples: (1) the public wants assurance that environmental, safety, social, and consumer standards are adhered to; and (2) state and local governments want assurance that infrastructure projects are free of corruption and on budget. Next, Doty turned to PCAOB initiatives to enhance the audit’s relevance and reliability. The PCAOB has an analytic framework to evaluate the economic implications of standard-setting projects. Also, the PCAOB has established the Center for Economic Analysis, which conducts economic research on the role of auditing in capital markets and capital formation. In addition, the PCAOB is looking closely at its standard-setting process for efficiency and effectiveness. To assist audit committees, the PCAOB aims to better equip them with information about the audit, their inspection reports, and the auditor's strengths and weaknesses.

Other Developments

On Dec. 8, the PCAOB announced newly appointed and reappointed members for its Standing Advisory Group (SAG). The SAG advises the PCAOB on the development of auditing and related professional practice standards.

PCAOB announces 15 new Standing Advisory Group members
– Crowe tweet from the conference
 

Jay D. Hanson

Board Member
During his remarks, Jay Hanson offered his perspective on relevance, reporting, remediation, and root cause. Opening with relevance, he noted that audit quality is not yet where it should be, but, in order for the PCAOB to remain effective and relevant, it is important to continually scrutinize its work and its results, which will allow the PCAOB to evolve and continue to contribute to the improvement of the audit profession even as conditions change.

For reporting, he said the PCAOB is issuing inspection reports in a more timely manner, and they now include detailed references to the auditing standards that give rise to the deficiencies. However, he said he believes more should be done to make the individual reports more meaningful and easier to understand, including providing more context related to PCAOB findings.

On remediation, Hanson discussed staff guidance issued last year that set forth a series of criteria used by the staff to formulate its recommendations to the board – and that is intended to help firms better tailor their remediation efforts to the PCAOB's expectations.

For root-cause analysis, he noted forthcoming information from research being performed by the PCAOB’s Office of Research and Analysis, which should help auditors perform effective, high-quality audits on a consistent basis as well as equip audit committees, investors, and others with information to aid in their audit evaluations.

Helen A. Munter

Director
During her remarks, Helen Munter from the Division of Registration and Inspections covered audit quality, root cause analysis, global cooperation, outreach, and communication. She also covered audit areas in need of attention and provided her view of 2015.

From the Center for Audit Quality (CAQ)

Cynthia Fornelli

Executive Director
During her remarks, Cynthia Fornelli discussed the CAQ’s in-depth study, “Financial Restatement Trends in the United States: 2003-2012,” which found that the number of U.S. restatements declined significantly from 2006 to 2012 – and the number of accounting issues underlying each restatement also dropped, as have the number of reporting periods restated. She then turned to positive results of “The CAQ’s 8th Annual Main Street Investor Survey,” which examines confidence measures pertaining to capital markets. This year’s survey results show that 73 percent of Main Street investors expressed confidence in U.S. capital markets – which is the highest level since 2009.

Fornelli also discussed CAQ initiatives underway including audit quality indicators and anti-fraud initiatives. She noted the importance of audit committee collaboration with the CAQ and reminded participants about the CAQ’s publication “Enhancing the Audit Committee Report: A Call to Action,” which encourages audit committees to increase the effectiveness of their disclosures.

Mark Your Calendars

The 2015 AICPA National Conference on SEC and PCAOB Developments will be held again at Marriott Wardman Park in Washington, D.C. The dates are Dec. 9-11, 2015.




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