Tag Archives: audit committees

Revenue Recognition – The Clock is ticking!

Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z10od3Z4k?ID=290619

Going Concern Reporting – The Gap in GAAP Versus GAAS- Part Three

By: George M. Wilson & Carol A. Stacey

 

Our first two posts in this series have presented an example of a company (Sears Holdings) and auditor reporting requirements for going concern issues as well as reviewed reporting requirements for companies. In this last post we review reporting requirements for auditors and explore the gaps in more detail.

 

Auditor Requirements

 

For auditors of public companies the PCAOB did not change existing GAAS when the FASB Issued ASU 2014-15. Auditors follow this guidance in section AS 2415 of the PCAOB’s auditing standards:

 

02        The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time). The auditor’s evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management’s assertions embodied in the financial statements being audited, as described in AS 1105, Audit Evidence.

 

02        The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time). The auditor’s evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor’s report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management’s assertions embodied in the financial statements being audited, as described in AS 1105, Audit Evidence.

 

The Gaps

 

There are gaps between what companies disclose and how auditors report. Two of the gaps are:

 

  1. The time period for going concern considerations, and

 

  1. The probability level for the company compared to the auditor for these disclosures

 

Time Period Gap

 

The auditor’s GAAS reporting requirement clearly states that the period over which going concern issues are evaluated is a “reasonable period of time, not to exceed one year beyond the date of the financial statements being audited”. The requirement under GAAP for companies is “within one year after the date that the financial statements are issued”. In practice, many auditors have actually used the period of one year after the financial statements are issued as their going concern disclosure threshold, but they are not strictly required to do this.

 

Probability GAP

 

The disclosure requirement for management in GAAP is that if it “is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued” then they must make disclosures. This threshold of “probable” has its roots in one of the earliest FASB standards (SFAS 5, now ASC 450) dealing with contingencies. This standard set out the definition of “probable” as:

 

“The future event or events are likely to occur”.

 

The auditor’s GAAS standard uses the probability threshold “substantial doubt”:

 

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time

 

So, what is the difference between “probable that an entity will not be able to meet its obligations as they become due” and “substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time”? This is of course a matter of judgment. Many practitioners would believe that probable is a higher threshold than substantial doubt. What is clear is that this is a subjective evaluation.

 

The PCAOB addressed this difference in their guidance about the new disclosure requirements. This language is from Staff Audit Practice Alert No. 13:

In evaluating whether the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework, including whether they contain the required disclosures, auditors should assess management’s going concern evaluation. In making this assessment the auditor should look to the requirements of the applicable financial reporting framework

In addition, auditors should continue to look to the existing requirements in AU sec. 341 when evaluating whether substantial doubt regarding the company’s ability to continue as a going concern exists for purposes of determining whether the auditor’s report should be modified to include an explanatory paragraph regarding going concern. The AU sec. 341 requirements for the auditor’s evaluation, and the auditor’s reporting when substantial doubt exists, have not changed and continue to be in effect. Under AU sec. 341, the auditor’s evaluation of whether substantial doubt exists is qualitative based 341.Accordingly, a determination that no disclosure is required under the ASC amendments or IAS 1, as applicable, is not conclusive as to whether an explanatory paragraph is required under AU sec. 341. Auditors should make a separate evaluation of the need for disclosure in the auditor’s report in accordance with the requirements of AU sec. 341.

 

This is of course another gap between GAAP and GAAS. Time will tell how the market reacts to this kind of presentation. And this explains why Sears Holdings disclosed their going concern uncertainty and their auditors did not modify their report.

 

There is one more interesting aspect to all this disclosure and auditor reporting discussion. What happens in a Form 10-Q where generally there is no auditor’s report?

 

The requirements in ASC 205-40-50 for interim periods are:

 

If conditions or events continue to raise substantial doubt about an entity’s ability to continue as a going concern in subsequent annual or interim reporting periods, the entity shall continue to provide the required disclosures in paragraphs 205-40-50-12 through 50-13 in those subsequent periods. Disclosures should become more extensive as additional information becomes available about the relevant conditions or events and about management’s plans. An entity shall provide appropriate context and continuity in explaining how conditions or events have changed between reporting periods. For the period in which substantial doubt no longer exists (before or after consideration of management’s plans), an entity shall disclose how the relevant conditions or events that raised substantial doubt were resolved.

 

Sears Holdings’ Form 10-Q for the first quarter of F/y 18 includes this disclosure:

 

We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a loss in the first quarter of 2017, when excluding significant items noted in our Adjusted Earnings Per Share tables, and were required to fund cash used in operating activities with cash from investing and financing activities. We expect that the actions outlined above will further enhance our liquidity and financial flexibility. In addition, as previously discussed, we expect to generate additional liquidity through the monetization of our real estate, additional debt financing actions, and potential asset securitizations. We expect that these actions will be executed in alignment with the anticipated timing of our liquidity needs.

 

We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximize the value of our Home Services and Sears Auto Centers businesses, as well as our Kenmore and DieHard brands through partnerships or other

means of externalization that could expand distribution of our brands and service offerings to realize significant growth. We expect to continue to right-size, redeploy and highlight the value of our assets, including monetizing our real estate portfolio and exploring potential asset securitizations, in our transition from an asset intensive, historically “store-only” based retailer to a more asset light, integrated membership-focused company.

 

We believe that the actions discussed above are probable of occurring and mitigate the liquidity risk raised by our historical operating results and satisfy our estimated liquidity needs during the next 12 months from the issuance of the financial statements. The PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.

 

If we continue to experience operating losses, and we are not able to generate additional liquidity through the actions described above or through some combination of other actions, while not expected, then our liquidity needs may exceed availability under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to our outstanding second lien debt) falls below the principal amount of such second lien debt plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for such debt on the last day of any two consecutive quarters, it could trigger an obligation to repurchase or repay second lien debt in an amount equal to such deficiency.

 

No more use of the term “substantial doubt”. It might be helpful if the change from year-end to quarter-end was explained in more detail.

 

As always, your thoughts and comments are welcome!

Going Concern Reporting – The Gap in GAAP Versus GAAS- Part Two

By: George M. Wilson & Carol A. Stacey

 

In our last post, we looked at Sears Holdings’ disclosures about its going concern issues and saw that the company used the language “substantial doubt exists related to the Company’s ability to continue as a going concern” in the footnotes to their financial statements. We also saw that Sears Holdings’ auditors did not mention this issue in their report.

 

While this might seem like a bit of a disconnect, it turns out that there is a gap between the disclosure requirements for companies and the reporting requirements for auditors. (Actually, there are multiple gaps!)

 

This post reviews the GAAP requirements of ASU 2015-15, which became effective for companies for years ending after December 15, 2016.

 

In the third and last post of this series we will explore the auditor’s reporting requirements and the “gaps” between company requirements and auditor’s requirements.

 

Company Requirements

 

Here is a brief summary with some excerpts from the requirements for companies in ASC 205-40-50:

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management shall evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

 

……………………………..

 

Management shall evaluate whether relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The evaluation initially shall not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued).

 

……………………………..

 

When relevant conditions or events, considered in the aggregate, initially indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (and therefore they raise substantial doubt about the entity’s ability to continue as a going concern), management shall evaluate whether its plans that are intended to mitigate those conditions and events, when implemented, will alleviate substantial doubt about the entity’s ability to continue as a going concern.

 

……………………………..

 

With this as the general requirement for an evaluation, the disclosure requirement comes with a binary determination about the impact of management’s plans:

 

Disclosures When Substantial Doubt Is Raised but Is Alleviated by Management’s Plans (Substantial Doubt Does Not Exist)

 

ASC 240-40-50-12

 

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is alleviated as a result of consideration of management’s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):

 

  1. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

 

 

 

Disclosures When Substantial Doubt Is Raised and Is Not Alleviated (Substantial Doubt Exists)

 

ASC 240-40-50-13

 

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:

 

  1. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

An interesting difference between these two levels of disclosure is that there is no requirement to use the terminology “substantial doubt” when management’s plans alleviate the uncertainty.

 

The language Sears Holdings used was:

 

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.

 

 

The company used the term “substantial doubt” even though they believed their plans mitigated this “substantial doubt”. Their disclosure went beyond the requirements of the standard.

 

In our next post, we will explore how this interacts with GAAS for auditors.

 

As always, your thoughts and comments are welcome!

Going Concern Reporting – The Gap in GAAP Versus GAAS – Part One

By: George M. Wilson & Carol A. Stacey

 

This is the first of three posts about an interesting conundrum in reporting that arose last year. The FASB, with ASU 2014-15, now requires disclosures by companies about going concern issues. However, there can be gaps between what companies are required to disclose and impact of going concern issues on the auditor’s report.

ASU 2014-15 added subtopic 205-40 “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” to the Accounting Standards Codification. This update became effective for periods ending after December 15, 2016. Previously there was no specific requirement for management to make these disclosures. (This is of course Generally Accepted Accounting Principles, or GAAP).

Auditors have had guidance in this area for many years courtesy of the PCAOB’s standard in AU section 341, which is now section AS 2415 in the PCAOB’s reorganized auditing standards. (This is Generally Accepted Auditing Standards, or GAAS).

 

To explore the gap between GAAP for companies and GAAS for auditors when reporting going concern issues we are going to present a series of three posts:

 

This first post will present an example of a going concern disclosure by a company and whether or not the auditor’s report was modified. (Spoiler – there was no mention in the auditor’s report!)

 

The second post will explore company disclosure requirements.

 

The third and last post will review auditor’s reporting requirements and detail the gaps between company and auditor reporting.

 

Sears Holdings, the retailer that owns Kmart and Sears, provided an example of this gap in their Form 10-K for the year ended January 28, 2017. In their financial statements Sears Holdings included this language:

We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported a loss in 2016 and were required to fund cash used in operating activities with cash from investing and financing activities. We expect that the actions taken in 2016 and early 2017 will enhance our liquidity and financial flexibility. In addition, as previously discussed, we expect to generate additional liquidity through the monetization of our real estate and additional debt financing actions. We expect that these actions will be executed in alignment with the anticipated timing of our liquidity needs. We also continue to explore ways to unlock value across a range of assets, including exploring ways to maximize the value of our Home Services and Sears Auto Centers businesses, as well as our Kenmore and DieHard brands through partnerships or other means of externalization that could expand distribution of our brands and service offerings to realize significant growth. We expect to continue to right-size, redeploy and highlight the value of our assets, including our real estate portfolio, in our transition from an asset intensive, historically “store-only” based retailer to a more asset light, integrated membership-focused company.

 

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.

 

If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency.

 

Sears Holdings used the term “substantial doubt”, but indicated that they believed their plans mitigated this “substantial doubt”.

 

This was the report of Sear’s Auditors:

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sears Holdings Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

No mention of a going concern issue at all in the auditor’s report! What is an investor to think? Historically, when the only concrete guidance was in GAAS, it was very rare to see this issue not discussed in both the financial statements and the auditor’s report.

 

This is, of course, part of the gap between GAAP and GAAS. In our next post we will begin to explore the space in this gap!

 

 

As always, your thoughts and comments are welcome!

Breaking News: Late last week, the PCAOB voted to make a significant change in auditing standards:

 

“The standard will create the first significant change to the standard form auditor’s report in 70 years, according to PCAOB Chairman James Doty.”

http://www.journalofaccountancy.com/news/2017/jun/pcaob-expands-auditor-reporting-duties-201716790.html

 

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PLI will highlight this significant event at our upcoming live program next Monday (June 12th)   in New York City  “Audit Committees and Financial Reporting 2017”

Representatives from the PCAOB and SEC will be on hand to discuss the new standard.

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Audit Committees and Financial Reporting 2017: Recent Developments and Current Issues

Co-Chairs: Catherine L. Bromilow – Partner, Governance Insights Center, PwC Linda L. Griggs – Consultant John F. Olson – Gibson, Dunn & Crutcher LLP

Join PLI on June 12 for a look at the rapidly changing responsibilities of the audit committee. Our expert faculty of government regulators, public company directors, audit committee members, lawyers and CPAs will give you the information and tools you need to successfully perform and meet the many challenges facing audit committees and boards today. You will benefit from their practical advice and real-world experience.

 

New York City and Live Webcast – June 12, 2017

Groupcast Locations: Atlanta, Boston, Cleveland, Philadelphia, Pittsburgh and Mechanicsburg – June 12, 2017

Key Topics Will Include:

  • The most important developments in the past year for audit committees, including SEC and PCAOB developments
  • Implications of the Trump administration on regulations implementing Dodd-Frank
  • Key accounting developments: important changes and GAAP/IFRS convergence update
  • How to build and maintain strong compliance programs
  • Ethical issues arising when advising audit committees

Special Feature:

  • Up to one hour of Ethics CLE credit

Credit Information: CLE, CPE, CPD and CFE Credit

Register Now!

 

Whither the Auditor’s Report?

By: George M. Wilson & Carol A. Stacey

 

Would you expect to find this language in an auditor’s report?

“We performed a full scope audit on seven components representing 99% of the Group’s revenue, 90% of the Group’s profit before tax and 90% of the Group’s net assets.

 

During our first year as auditor of the Group, we visited all significant locations. For our second year, we have implemented a rotational approach to these visits.”

Or how about a discussion of materiality such as this?

“We determined materiality for the Group to be £30 million.

We reported all audit differences in excess of £1 million.

 

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced.”

This language may sound like it is from the auditor’s internal conclusion memoranda, but in fact it is from the Deloitte report on the 2016 financial statements of an English company, Marks and Spencer.

Their annual report contains the expanded auditor’s report now required by UK Auditing Standards. The report is on pages 78 to 85 (Yes, it is that long!). It also enumerates several “Key Audit Matters”, describing how each such issue was dealt with in the audit.

While this might seem like an extreme example, there has been movement in international audit standard setting towards more tailored, descriptive audit reports. Here in the US the PCAOB began consideration of changes to the auditor’s report over 7 years ago.

In a May 24, 2017 news release the PCAOB announced that on June 1, 2017 they will consider adopting a new Standard on the auditor’s report. The proposal would eliminate the existing standardized form auditor’s report and replace it with a more tailored report which would include discussion of audit specific issues such as “Critical Audit Matters”. Also to be considered at the meeting are new standards about auditing estimates and using the work of specialists.

You can read about the auditor’s report project and review the most recent proposed version of the standard here.

 

As always, your thoughts and comments are welcome!

Audit Committees and Financial Reporting 2017: Recent Developments and Current Issues

The role of the audit committee is constantly changing. Recent regulations from the SEC and guidance from the PCAOB impact how audit committees, their advisors and those who prepare public company disclosures function. If you are a member of an audit committee, advise audit committees, or are responsible for corporate reporting on financial reporting and controls, you need to have the latest information and stay on top of current updates that occurred over the past year including SEC and PCAOB developments. Register today for PLI’s June 12th live program and webcast, Audit Committees and Financial Reporting being held in New York City.

http://www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z10o1a?fromsearch=false&ID=306520

CPE-Eligible On-Demand Programs Now Available from PLI

Practising Law Institute is pleased to announce that CPE credit is now available On-Demand to accountants, CPAs and other professionals. PLI’s CPE-Eligible On-Demand programs allow individuals to earn CPE credit online at their convenience and according to their schedule.

Samples of initial offerings include:

  • Evolving Expectations for Audit Committees, Including Audit Committee and Company Communications
  • Partnership Mergers and Divisions
  • SEC Reporting Foundations: A Primer to Key SEC Corporation Finance Concepts and Guidance
  • IRS and Treasury’s New Guidance Issued Under Sections 7874 and 385

For a complete and growing selection of PLI NASBA QAS approved CPE On-Demand programs, follow this link: http://www.pli.edu/products/by_promotion.aspx?t=RHQ4_CPEOD

 

 

 

 

 

Audit Committee Learning Opportunity

In a constantly changing world Audit Committee members know they need to be continuous learners to fulfill their responsibilities. To help them in this process PLI offers a variety of programs, and in June we will present:

Audit Committees and Financial Reporting 2016: Recent Developments and Current Issues.

The program is on June 21, 2016 and will be presented live in New York and via webcast.   You can find details here. The program features industry and SEC speakers, including Jim Schnurr the Chief Accountant.   The agenda includes:

SEC Developments You Need to Know About PCAOB Developments: What’s Happening in the Auditing Arena? Evolving Expectations for Audit Committees, including Audit Committee and Company Communications Financial Reporting Developments: What Audit Committees Need to Know Networking Break Risk Management & Compliance: What Audit Committees Need To Know Evolving Ethical and Liability Challenges for Audit Committee Advisors: 2016 Edition
As always, your thoughts and comments are appreciated!

Lots Happening at the PCAOB!

Since its inception with the Sarbanes-Oxley Act the PCAOB has faced many challenges in fulfilling its responsibilities to establish GAAS for public company audits, inspect audit firms and enforce when auditors do not fulfill their responsibilities. As the PCAOB has evolved one important lesson we have all learned is that their activities and agenda do not affect just auditors. All public company reporting participants have a stake in what they do. For example, the recent audit standard about related party issues was important not just for auditors, but companies needed to assure they would have the information the new standard required auditors to obtain. Some companies even modified their D and O questionnaires in this process.

To help us be aware of where the PCAOB’s activities could impact us all, here are a few items of note going on at the PCAOB right now.

  1. Auditor’s Involvement in non-GAAP Measures

If you use non-GAAP measures in an earnings release, MD&A or other communication vehicles you will want to follow the events of the May 18-19, 2016 meeting of the PCAOB’s Standing Advisory Group. A significant part of the first day’s agenda is a discussion of “Company Performance Measures and the Role of the Auditor”. The meeting will include breakout discussion sessions and a report of the breakout discussions on day two of the meeting. You can find the agenda and how to access a webcast at:

pcaobus.org/News/Releases/Pages/SAG-meeting-agenda-May-18-19.aspx\

  1. Anticipating and Avoiding Accounting and Auditing Problems

The PCAOB inspections staff has published a “Staff Inspections Brief” which provides a preview of their observations from 2015 inspections. Interestingly the number of audit deficiencies identified for annually inspected firms, those with over 100 public clients, has decreased. For firms with less than 100 public clients, who are inspected every three years, the inspection staff found “an overall high number of audit deficiencies”. Areas with frequent deficiencies were:

Auditing internal control over financial reporting

Assessing and responding to the risk of material misstatement

Auditing accounting estimates, including fair value

Audit areas affected by economic risks, including factors such as oil prices

 

The report also discussed several financial reporting issues including business combination accounting, the statement of cash flows, revenue recognition and income taxes.

 

Auditor independence continued to be a problem area, particularly for triennially inspected firms.

You can read the whole Staff Inspection Brief at:

pcaobus.org/News/Releases/Pages/staff-inspection-brief-2015-issuer-inspections.aspx

 

  1. A Board Member’s Perspective on Inspections, Enforcement and Standard Setting

This speech, delivered by Board Member Jeanette Franzel, is a wide ranging summary of “progress in audit oversite” and has some interesting perspectives on changes that could be in store for the inspection process. She comments that inspections of large firms are showing fewer audit deficiencies but that at smaller firms there are still some that “just don’t get it”. She also provides summaries of the enforcement program and standard setting at the PCAOB.

You can read the speech at:

pcaobus.org/News/Speech/Pages/Franzel-progress-in-audit-oversight-Baruch-5-5-16.aspx

 

  1. A “Darker” Staff Practice Alert

The PCAOB inspectors continue to see enough instances of auditors making changes after audit workpapers are supposed to be “locked down” that they have issued a Staff Practice Alert to remind, or perhaps warn, auditors not to make changes inappropriately in advance of an inspection. You can read the Alert at:

pcaobus.org/News/Releases/Pages/staff-audit-practice-alert-improper-alteration-of-documents-4-21-16.aspx

Interestingly, the last section of the new release has a link to the PCAOB’s tip line……

 

  1. Re-proposed Changes to the Auditor’s Report?

The Board met on May 11, 2016 to consider re-proposing changes to the standard auditor’s report. The current pass/fail model would be retained, but the original proposal and the potentially revised proposal hope to provide additional information to make the report more relevant and informative. Stay tuned for updates on the results of the meeting; in the meantime you can read about the meeting, the revised proposal and related original proposal at:

pcaobus.org/News/Releases/Pages/PCAOB-5-11-16-open-meeting-announcement.aspx

 

  1. Naming the Audit Partner is a Done Deal and the PCAOB’s Standard Setting Agenda

 

Last, as you may have heard, the SEC has approved the PCAOB’s new Auditing Standard requiring disclosure of the names of audit partners and information about other firms involved in an audit beyond the principal auditor. To learn about that change and to see what else is on the horizon, here is a link to the PCAOB’s current rulemaking agenda:

pcaobus.org/Standards/Pages/Current_Activities_Related_to_Standards.aspx

Clearly, the PCAOB is busy!

As always, your thoughts and comments are welcome!