Insights

Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments

Dec. 11, 2017

The three-day 2017 American Institute of CPAs (AICPA) Conference on Current SEC and PCAOB Developments concluded on Dec. 6. The speaker lineup included the chairman of the U.S. Securities and Exchange Commission (SEC), the chief accountant of the SEC, board members from the Public Company Accounting Oversight Board (PCAOB) and Financial Accounting Standards Board (FASB), and additional representatives from those organizations and the audit and accounting profession.

Themes heard throughout the speeches delivered at this year’s conference include:

  • Implementation matters for new accounting standards
  • Cybersecurity
  • Capital formation simplifications

In light of recent legislation, the impact of tax reform also made its debut this year as a topic.

Following are highlights from many of the headliners and links to their speeches. In addition, Crowe Horwath LLP live tweets from the conference are shared here.

From the SEC

SEC Chairman and Office of the Chief Accountant (OCA) Panel Discussion

Jay Clayton
Chairman, SEC

Wesley R. Bricker
SEC Chief Accountant, OCA

Julie Erhardt, Jenifer Minke-Girard, Marc Panucci, and Sagar Teotia
Deputy Chief Accountants, OCA

In a change of format this year, the SEC chairman and the chief accountant participated in a panel discussion. The chief accountant and deputy chief accountants from the SEC’s OCA participated in a separate panel discussion. To supplement the panel, Wesley Bricker released a statement to describe matters discussed.

Jay Clayton and Bricker covered the importance of audit committees, audit quality, cybersecurity, and the need for capital formation simplifications.

Clayton provided commentary on some guiding principles for the capital markets. He recommended that disclosure be written so that “Mr. and Mrs. 401(k)” can understand it. He also stated that regulation of the market should match the reality of today. He noted that audit committees are a good thing, and we should maximize their value rather than diluting their value by overloading them.

Regarding capital formation, Clayton stated that it does not bother him that the U.S. has robust private capital markets, and the SEC does not intend to impede those private markets. However, it does bother him that the private markets are expensive for retail investors as compared to the public markets for those investors, and he would like to find efficient ways for Main Street investors to invest. Bricker added that the role of audited financial statements is important to both the private and public capital markets.

In addition, Bricker mentioned the following items are capturing audit committee interest going into year-end:

  • Implementation of generally accepted accounting principles (GAAP) standards
  • Understanding other sources of change for public companies, such as the auditor’s reporting model (ARM) changes, which eventually will include communication of critical audit matters (CAMs)
  • Other external items affecting the financial statements, such as potential tax law changes and cybersecurity
SEC Chief Accountant Bricker offers Y/E thoughts for audit committees: adoption GAAP major standards (rev rec is effective 2018); for PCAOB auditors reporting model (ARM), consider a dry-run; financial reporting implications from tax law changes & cyber #AICPASEC

SEC Chair Jay Clayton message to auditors: Audit quality is high in the profession & that comes with high level of responsibility; auditors are gatekeepers; continue to discharge your responsibilities with integrity & focus. #AICPASEC
– Crowe tweets from the conference
 

The chief and deputy chief accountants discussed OCA’s responsibilities and current priorities including the implementation of new GAAP standards on revenue recognition, lease accounting, credit losses, financial instruments recognition and measurement, and hedge accounting. Bricker provided a reminder about the importance of transition disclosures for the major accounting standards. The panel shared other thoughts on the major standards:

  • The revenue recognition standard will require new information, and internal controls over that information should be developed.
  • The SEC continues to stress the need to start now on implementing the lease accounting standard rather than waiting until after revenue has been adopted.
  • The panel included a reminder that the SEC is an official observer of the FASB’s transition resource group (TRG) on credit losses, and the TRG continues to be forum to address challenging implementation issues.

The panel addressed the PCAOB’s recent standard on the auditor’s reporting model – specifically, the disclosure of CAMs that will be included in the second phase for large accelerated filer audits of fiscal years ending on or after June 30, 2019. Auditors will be required to give their unique perspective on each CAM for the benefit of investors, and company management as well as audit committees will have a role to play in the implementation of this audit standard. In the public statement, Bricker provides examples of questions for the audit committee to consider for this new audit standard during the transition period.

The panel disclosed that an OCA team is monitoring the recent tax reform legislation and will be prepared to answer GAAP-related questions when (or if) tax reform happens.

Also, the panel covered technology advancement, including how to think about technology and commerce innovations such as the distributed ledger or blockchain technology and their implications for accounting and financial reporting.

SEC Chair Clayton: SEC is focused on bitcoin; they consider bitcoin transactions equivalent to cash settlement so cash reporting regulations apply. #AICPASEC
– Crowe tweet from the conference
 

OCA Staff

Following are the current topics addressed by OCA staff and professional accounting fellows with links to their speeches.

The speeches related to revenue recognition, lease accounting, and credit losses contemplate fact patterns for consultations between SEC staff and registrants during implementation of those new accounting standards.

Speaker Topics Addressed Link
Barry Kanczuker
Associate Chief Accountant
  • Revenue recognition (Topic 606)
    • Principal versus agent considerations
    • Shipping and handling expense classification in the absence of guidance
     
 
Speech
Joseph R. Epstein
Professional Accounting Fellow
  • Revenue recognition (Topic 606)
    • Pre-production arrangements
    • Identification of performance obligations
     
 
Speech
Michael P. Berrigan
Professional Accounting Fellow
  • Lease accounting (Topic 842)
    • Lessee’s minimum rental payments in transition for operating leases
    • Lessee’s incremental borrowing rate in transition
    • Importance of implementation planning
     
 
Speech
Robert B. Sledge
Professional Accounting Fellow
  • Credit losses (Topic 326)
    • Expected credit losses for collateral-dependent loans
    • Scope of purchased credit impaired (PCI) and purchased credit deteriorated (PCD) models
     
 
Speech


Governance-related topics in the staff speeches related to internal control over financial reporting (ICFR), international standard setting, and enforcement programs.

Speaker Topics Addressed Link
Michal P. Dusza
Professional Accounting Fellow
  • ICFR
 
Speech
Nigel J. James
Associate Chief Accountant
  • The Monitoring Group’s (an international collaboration on audit quality and audit standards) consultation paper
 
Speech
Ryan Wolfe
Senior Associate Chief Accountant
  • Enforcement cases and the need to take responsibility for and follow through on identified problems
 
Speech

 

Great observation by SEC staff: Internal Control Over Financial Reporting is not just compliance exercise, strong ICFR offers improved information and efficiency for better decision-making. #AICPASEC
– Crowe tweet from the conference (during Michal P. Dusza’s speech, see table)
 

Division of Corporation Finance (Corp Fin) Panel

During the Corp Fin panel discussion on day two of the conference, Corp Fin Director William Hinman, Chief Accountant Mark Kronforst, Deputy Chief Accountant Craig Olinger, and Associate Director Cicely LaMothe discussed confidential treatment for draft registration statements, recent pay ratio rule guidance, revenue recognition, non-GAAP measures and cybersecurity, among other topics.

SEC Corp Fin on revenue recognition: They will respect reasonable judgments made in the adoption; they will issue comments if application or disclosure seems inappropriate; they plan to work closely with SEC’s Office of the Chief Accountant. #AICPASEC

Kronforst on Non-GAAP measures: “We are in a better place since the Compliance and Disclosure Interpretations were issued in [5/16]; comment letters have dropped to pre-guidance levels; we are still looking at non-GAAP measures because that is what the market looks at.” #AICPASEC
– Crowe tweets from the conference
 

Kronforst and Hinman remarked that the non-GAAP disclosure issues that the staff focused on in the May 2016 guidance and filings reviewed since then are largely cleaned up. However, Hinman acknowledged that his office might end up speaking about non-GAAP measures related to tax reform next year.

Regarding the recent tax reform legislation, Hinman mentioned that disclosures will be important with respect to the impact of tax reform, particularly in management’s discussion and analysis (MD&A), if it happens.

Hinman is hopeful that next year they can talk about cybersecurity disclosure having been cleaned up. He remarked that after he was installed as Corp Fin’s director, the SEC chairman directly asked him what he thought of current Corp Fin cybersecurity guidance, and he answered that it worked well because it is principles based. Much of the content in Corp Fin Disclosure Guidance Topic 2 is still relevant, but the staff is considering refreshing it. One way to do so would be to issue new guidance at the commission level (versus at the Corp Fin division level), which might be appropriate given the significance.

According to Hinman, a couple of things not addressed in prior guidance were the integration of cybersecurity risks into disclosure controls and procedures and the interaction of disclosure obligations and law enforcement obligations. Regarding controls specifically, Hinman provided insight primarily in the form of questions:

  • Are cybersecurity matters appropriately identified and elevated to those that think about disclosures? (In addition, later in his discussion, he mentioned that the SEC expects registrants to integrate the identification of cybersecurity breaches into insider trading policies to ensure people are not trading on inside information.)
  • Are the right people digesting the cybersecurity issues?
  • Are IT and businesspeople talking about disclosure implications – including materiality and types of information exposed?

Related to the interaction of disclosure and law enforcement obligations, he acknowledged that constraints remain on what you can disclose, and knowledge of information will evolve over time. He provided the following insight:

  • The staff does not expect disclosure in a Form 8-K will be ready to go on the day of a security breach.
  • It is possible to make the disclosure sufficient without compromising the investigation or providing a road map for other breaches.

On the topic of capital formation simplifications, Kronforst reminded the audience of the opportunity to submit waiver requests under Rule 3-13 of Regulation S-X and reiterated Corp Fin’s suggestion that registrants should submit a written request or call the Corp Fin staff to see how the staff would approach a particular issue. Anecdotally, Kronforst mentioned that over the years, Corp Fin has granted most waiver requests – somewhere upward of 90 percent.


Panel Discussions With SEC and Other Professional Representatives


Comment Letter Themes

SEC comment letters top areas through 7/31/17: 1) non-GAAP measures, although expect that to decline given registrants making improvements; 2) MDA – historically had top billing;… #AICPASEC

…SEC comment letters top areas continued: 3) FV disclosures, 4) segments; 5) revenue recognition; other topics in top 10 include business combinations, goodwill, intangibles & income taxes. #AICPASEC
– Crowe tweets from the conference
 

Disclosure Effectiveness

Interesting panel on disclosure effectiveness: FASB’s disclosure framework project has 2 prongs: 1) FASB’s decision process to put a framework in place to evaluate what disclosures should be required;... #AICPASEC

... Interesting panel on disclosure effectiveness: FASB’s disclosure framework project has 2 prongs: 2) entity’s decision making process with the goal to provide discretion; goal is not checklist mentality. #AICPASEC
– Crowe tweets from the conference
 

From the FASB

Russell G. Golden
Chair, FASB


In his speech, Russell Golden summarized the FASB’s agenda for 2018: “In 2018, we will fully focus our attention to help you implement what’s already out there – as well as looking at how we can help preparers and auditors reduce cost and uncertainty while providing investors more and better information.” Then, he noted activities of the board from 2017 and discussed the process for completing those activities.

Sue Cosper
Technical Director, Emerging Issues Task Force Chair

During her speech, Sue Cosper addressed implementation of the revenue recognition and credit losses standards, among other topics.


FASB’s Sue Cosper on Revenue Recognition: Impact on income statement will vary across industries; one area impacted for all will be the disclosures, including the required disaggregation; ... #AICPASEC

(continued regarding rev rec).. 108 submissions to FASB: 72 went to the FASB’s #RevRec Transition Resource Group (TRG); the remaining 36 were answered by the FASB staff. #AICPASEC

Sue Cosper on Credit Losses: We haven’t received a lot of Q's but it's still early. The AICPA’s Depository Institutions Expert Panel has been helpful thus far given it represents both preparers and auditors – it’s a useful mechanism to identify implementation issues. #AICPASEC

There have been lots of requests to amortize goodwill. FASB’s Sue Cosper says project has been reactivated, although still in research. FASB dialogue scheduled in 1Q2018. When FASB consideed 2-3 years ago, investor views were mixed. #AICPASEC
– Crowe tweets from the conference
 

Regarding the recent tax reform legislation, Sue disclosed that the FASB has a dedicated team following Congress, and the team is trying to understand how tax reform interacts with current GAAP in Topic 740. So far, it seems like Topic 740 will cope pretty well, but the FASB is still analyzing. Also, the FASB is monitoring timing since GAAP requires the change in tax law to be reflected in the period of enactment, that is, the date it is signed into law. Furthermore, in the spirit of simplification for income tax disclosures, the FASB is waiting to see what changes will happen before taking further action.


From the PCAOB


James R. Doty
Chair, PCAOB

In his remarks, James Doty shared his views on the importance of the audit in the capital markets and the PCAOB’s initiatives that are designed to bolster investor confidence.

Martin Baumann
Chief Auditor, PCAOB

On the second day of the conference, Martin Baumann delivered his address. He discussed the new auditor’s reporting model and notified the audience of webinars that the PCAOB will host on Dec. 12, 2017, and Jan. 10, 2018, to assist with implementation of the new audit report.


PCAOB Chief Auditor Marty Baumann covers PCAOB standard on the Auditor’s Reporting Model (ARM) – it’s the most significant change since 1940’s and will include Critical Audit Matters (CAMs) in the auditor’s report. #AICPASEC
– Crowe tweet from the conference
 

Among other topics, Baumann covered the PCAOB Staff Audit Practice Alert 15, “Matters Related to Auditing Revenue From Contracts With Customers”; proposals on the board’s agenda; and changes in technology, including the creation of a Standing Advisory Group (SAG) Task Force to focus on changes in the use of data and technology.


Jeanette M. Franzel
Board Member, PCAOB

Also on the second day of the conference, Jeanette Franzel delivered her speech in which she covered audit quality, including audit deficiencies and quality control at audit firms as well as the use of audit quality indicators (AQIs) by audit committees. She also spoke about the increased use of technology-based tools by auditors.


Helen Munter
Inspections Leader, PCAOB

On the third day of the conference, Helen Munter addressed audit quality and audit practice internal controls.


Helen Munter, PCAOB Inspections leader, indicates audit quality has improved, but is troubled by an improvement trend that seems to have “plateaued” and that audit deficiencies are still too high. #AICPASEC

... Helen Munter, PCAOB Inspections leader: firm internal controls over their audit practice may need more attention to restore the trend. #AICPASEC

Helen Munter: “There is no such thing as a “general” fraud risk.” Fraud risks are specific, and if identified, should be subject to specific testing.” #AICPASEC
– Crowe tweets from the conference
 

From the Center for Audit Quality (CAQ)


Cindy Fornelli
Executive Director, CAQ


In her remarks, Cindy Fornelli offered advice on how the audit and accounting professions can maintain investor confidence, and she presented recent activities by the CAQ supporting that effort.


Hot off the press! CAQ just released tool for audit committees on PCAOB final standard to expand the external auditors report, commonly referred to as auditors reporting model (ARM). http://ow.ly/Tgi330h3pWg #AICPASEC
– Crowe tweet from the conference
 

Revenue Recognition


James Dolinar
Chair, AICPA Financial Reporting Executive Committee (FinREC)

James Dolinar discussed the AICPA’s involvement with the industry’s application of the new revenue recognition guidance through the industry task forces and revenue recognition working group. In addition, among other topics, he addressed the AICPA’s implementation guidance for the definition of a public business entity (PBE) contained in the AICPA PBE technical question-and-answer (TQA) document.


From Jim Dolinar, Chair of AICPA Financial Reporting Executive Committee (FinREC) – First update is revenue recognition. #AICPASEC

Jim Dolinar offers perspective on the most complex areas for RR: It really depends on the industry but areas would include identifying performance obligations, addressing variable consideration and principal versus agent. #RevRec #AICPASEC
– Crowe tweets from the conference
 

Mark Your Calendars

The 2018 AICPA Conference on SEC and PCAOB Developments is scheduled for Dec. 10 through Dec. 12, 2018, Monday through Wednesday, at the Marriott Wardman Park in Washington, D.C.

The #AICPASEC conference is close to wrapping up – very informative as always! We hope you’ll mark your calendars to join us next year – Dec. 10-12, 2018 (Mon-Wed) back at the Marriott Wardman in Washington, DC
– Crowe tweet from the conference
 


Staci Shannon contributed to this article.

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