Tag Archives: SOX

Do the Right Thing! – SEC Reminders for Auditors and Companies

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As they occasionally, (and at times frequently), do, the SEC has sent us a reminder to do the right thing.

 

This most recent reminder actually started with an action announced last September against a company that involved one of the classic financial fraud reporting areas, inappropriate revenue recognition. The complaint alleges significant self-dealing by officers and a variety of other inappropriate actions to fabricate financial results. The case was serious enough that the company’s registration was revoked. You can read the press release and find related documents here.

 

Whenever an action like this is announced, one of the questions we all ask is “where were the auditors?”

 

Usually an action against auditors happens separately from the related action against a company. Many times the two are hard to correlate. In this case the action against the auditor took almost nine months longer. It was formally announced on July 22, 2016. The SEC’s order against the auditor found that the auditor

 

“failed to perform sufficient procedures to detect the fraudulent sales in the company’s financial statements. (The Audit Firm) also failed to obtain sufficient audit evidence over revenue recognition and accounts receivable, identify related party transactions, investigate management representations that contradicted other audit evidence, perform procedures to resolve and properly document inconsistencies, and exercise due professional care.”

 

In the action the partner for this engagement paid a fine of $25,000 and was permanently suspended from practice before the SEC. This includes both auditing and working as a company accountant. The firm paid a $100,000 penalty and it can only begin accepting new public company clients again next year after an independent consultant certifies that the firm has corrected the causes of its audit failures. You can read the release and find related documents here.

 

As a final reminder about accountant’s and auditor’s role as gatekeepers the enforcement staff said:

 

“Auditors are supposed to act as gatekeepers to protect the integrity of our markets, but (The Audit Firm) failed to live up to their professional obligations”.

 

As always, your thoughts and comments are welcome!

More About S-3 and the Transition to the New Revenue Recognition Standard

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In a recent post we explored a very complex securities registration issue within retrospective application of the new revenue recognition standard. (The issue arises with any retrospective application, so it will also arise in the new leasing standard.) In a nutshell the registration issue comes up when you:

 

(1) Adopt the new revenue recognition standard as of January 1, 2018 (assume a December 31 year-end), then

(2) File your March 31, 2018 10-Q and then

(3) File an S-3 to register to sell securities.

 

The S-3 incorporates your 2017 Form 10-K by reference which includes 2015 financial statements. The 2015 financial statements would not normally be retrospectively adjusted for the new revenue recognition standard. In this case though that could be necessary. You can read all the technical details here.

 

This first post led to a really interesting question from a reader. What happens if you file the S-3 before you file your March 31, 2018 10-Q? We explored the issue in this post.

 

This then led to a really great comment from another reader. In our workshops we always emphasize building research skills and using all the relevant SEC resources, especially the CorpFin Financial Reporting Manual (FRM). This really astute reader found this section in Topic 13 of the FRM:

 

13110.2  In the case of a registration statement on Form S-3, Item 11(b)(ii) of that form would specifically require retrospective revision of the pre-event audited financial statements that were incorporated by reference to reflect a subsequent change in accounting principle (or consistent with staff practice, discontinued operations and changes in segment presentation) if the Form S-3 also incorporates by reference post-event interim financial statements. If post-event financial statements have not been filed, the registrant would not revise the pre- event financial statements in connection with the Form S-3, however, pro forma financial statements in accordance with Article 11 of Regulation S-X may, in certain circumstances, be required. In contrast, a prospectus supplement used to update a delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements. Rather, registrants must update the prospectus in accordance with S-K 512(a) with respect to any fundamental change. It is the responsibility of management to determine what constitutes a fundamental change.

 

 

Here there is at least some relief for the S-3 filed after year-end but before the Form 10-Q is filed! As a reminder S-X Article 11 contains this requirement:

 

  • 210.11-01   Presentation requirements.

(a) Pro forma financial information shall be furnished when any of the following conditions exist:

………………….

(Note: (1) to (7) omitted)

(8) Consummation of other events or transactions has occurred or is probable for which disclosure of pro forma financial information would be material to investors.

 

Some judgment will be required to make that decision! If the effect of the new revenue recognition standard is large enough, it could well be material to investors.

 

Similarly, for the S-3 shelf takedown S-K 512(a) includes this requirement (in bullet ii):

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.

 

Again, some judgment will be required to make that decision!

 

Thanks to both the readers who contributed to this discussion, and as always your thoughts and comments are welcome!

 

Disaggregation – Comment Letters and the New Revenue Recognition Standard

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How often do you think of disaggregation in your financial statements? Generally, companies don’t present a lot of line-item details in their financial statements. Recently this issue has come up for us in two separate places.

 

If you have attended one of our large Midyear or Annual Forums you have had the fun of listening to Carol do an in-depth analysis of the comment letter process. She usually picks an interesting letter for a specific company and reviews both the overall process as well as the specific comments in the company’s letter.

 

In this year’s May and June Midyear Forms, Carol’s example letter included this interesting and “deep in the weeds” comment:

Consolidated Balance Sheets, page 33

  1. Please tell us how you have complied with Rule 5-02.20 of Regulation S-X. In this regard, we note your quantified disclosure of insurance liabilities and construction accruals. Please tell us whether there are any additional items included in other current liabilities that exceed five percent of total current liabilities.

The big theme here is of course disaggregation. Regulation S-X Article 5 has requirements about disaggregation for areas such as other current assets, other assets, other current liabilities and other liabilities. Generally, the requirements are that any individual account over 5% of the relevant total must be separately disclosed. Here is one example:

  • 210.5-02   Balance sheets.
  1. Other current assets. State separately, in the balance sheet or in a note thereto, any amounts in excess of five percent of total current assets.

There is also a similar requirement for components of revenue over 10% of total revenues:

  • 210.5-03   Income statements.

…………

(b) If income is derived from more than one of the subcaptions described under §210.5-03.1, each class which is not more than 10 percent of the sum of the items may be combined with another class. If these items are combined, related costs and expenses as described under §210.5-03.2 shall be combined in the same manner.

As you can see, the consistent theme is to provide appropriate detail so readers can understand appropriate issues in the F/S.

 

This theme of disaggregation is a topic of discussion in the FASB’s financial statement presentation project and also is an important issue in the disclosure requirements in the new revenue recognition standard:

Disaggregation of Revenue

ASC 606-10-50-5

An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. An entity shall apply the guidance in paragraphs 606-10-55-89 through 55-91 when selecting the categories to use to disaggregate revenue.

This new revenue recognition disclosure requirement will require substantial judgment to determine how much detail a reader will need to understand how the “nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors”. This is really the opposite of the S-X disclosure requirements above based on mechanical, quantitative 5% and 10% thresholds. The overall theme is the same though, be sure to consider how much detail readers really need to understand your financial condition, results of operations and cash flows.

 

As always, your thoughts and comments are welcome!

A Really Good Question – Form S-3 and the New Revenue Recognition Standard

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In a recent post we discussed a potential complication in the registration process and Form S-3 in particular if you retrospectively implement the new revenue recognition standard. You can review the post here. The issue arises if you file an S-3 in 2018 after you adopt the new revenue recognition standard but before your 10-K for 2018 is filed. The 2018 Form 10-K will have annual financial statements for 2018, 2017 and 2016 retrospectively applying the new standard. However, if you file an S-3, or have an S-3 shelf registration in place, before you file the 2018 Form 10-K, your S-3 would be required to have three fiscal years, now 2017, 2016 and 2015 that apply the new standard.

Thus, you could be required to report an extra year, 2015, on the new revenue recognition standard if you want to access the capital markets with an S-3, or an S-3 shelf registration, during 2018.

Whether or not the SEC can or will have any relief from this issue is not finalized. So stay tuned!

In our post we set up the example with an S-3 filed after the first-quarter 2018 form 10-Q is filed.

This all lead to a really great question from a reader:

 

In the hypothetical, if an issuer were to file an S-3 in the first quarter of 2018 (before its 3Q financials go stale and before the 2018 10-Q is filed), does Item 11 of Form S-3 require the company to file an 8-K with its recast 2015 financials reflecting the full retrospective adoption of the new standard before the issuer may take-down securities?

The answer to this question? Well, there is not a detailed rule anywhere that deals with the issue.

We researched the question and the closest guidance we could find was in the CorpFin Financial Reporting Manual Topic 11:

“Companies may transition to ASU No. 2014-09 and IFRS 15 (collectively, the “new revenue standard”) using one of two methods:

Retrospectively to each prior period presented, subject to the election of certain practical expedients (“full retrospective method”). A calendar year-end company that adopts the new revenue standard using this method must begin recording revenue using the new standard on January 1, 2018. In its 2018 annual report, the company would revise its 2016 and 2017 financial statements and record the cumulative effect of the change recognized in opening retained earnings as of January 1, 2016.

Retrospectively with the cumulative effect of initially applying the new revenue standard recognized at the date of adoption (“modified retrospective method”). A calendar year-end company that adopts the new revenue standard using this method must begin recording revenue using the new standard on January 1, 2018. At that time, the company must record the cumulative effect of the change recognized in opening retained earnings and financial statements for 2016 and 2017 would remain unchanged. The standard also sets forth additional disclosures required by companies that adopt the new standard using this method.

That language sure sounds like if you file after January 1, 2018, you need three years, 2015, 2016 and 2017 based on the new standard.

That said, stay tuned, we will all continue our research! And what is more fun than a really deep SEC research question?

As always, and especially with this one, your thoughts and comments are welcome!

Brexit and your Second Quarter 10-Q

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In the massive press coverage about “Brexit” one of the most frequently used words is “uncertainty”. While the impact of Brexit will differ from company to company it is important, as we come to the end of the June 30, 2016 quarter (or whenever your next quarter end will be), to think about whether the vote and the resulting uncertainty should be dealt with in your SEC reporting.

 

The two most straightforward issues are likely risk factors and MD&A known trends.

 

The risk factor disclosure in Part II Item 1A of 10-Q refers back to S-K 503(c) and requires disclosure of what makes owning your company’s securities “speculative or risky”. Companies should consider whether the uncertainties and already known impacts of Brexit increase risk and deserve mention in risk factors.

 

When a risk factor becomes more probable of having a material impact the risk factor should transmogrify into an MD&A “known trend” disclosure. This disclosure is required when there are “known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” (S-K Item 303). There are similar known trend disclosures for liquidity and capital resources. If you could be affected by market uncertainty, reasonably possible changes in exchange rates or other impacts of Brexit this disclosure may be necessary in MD&A. Lots of judgment here.

 

It is always important to remember that the “reasonably expects” probabilistic test in FR 36 requires disclosure if you cannot say the trend is “not reasonably likely” to come to fruition. (Sorry for the double negative, but it is in the test!). So if there is a 50/50 chance of a material impact, disclosure should likely be made.

 

Lastly, beyond these two issues there are a wealth of other possible accounting and disclosure ramifications, ranging from issues such as possible elevated risk of impairment to tax consequences, depending on your circumstances.

 

As always, your thoughts and comments are welcome.

Comment of the Week – Be Consistent in All Communications

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One of the themes we discuss in our workshops is how the SEC does not limit their review process to information in a company’s SEC filings. Here is an example of a comment (which also deals with known trends and uncertainties, another favorite topic) that demonstrates how the Staff finds issues by looking in places such as earnings releases, conference call recordings and web pages:

 

Results of Operations, page 23

 

  1. Please expand your discussion to address any known trends or uncertainties that are reasonably expected to have a material impact on revenue, cost of revenue, or income from operations. For example, we note that during your 2015 fourth quarter and full year earnings call on February 11, 2016, your management quantitatively described the volume increase, as well as discussed your customer mix changes by segment and certain trends in 2016. In addition, disclosure appearing on page 11 of your filing on Form 10-K under your risk factors indicates that extended periods of low fuel prices can also have an adverse effect on your results of operations and overall profitability, as well as on the valuation of inventory to the extent your hedges are not effective at mitigating fluctuations in fuel prices. However, you have not provided a discussion in your filing with respect to an analysis of known material trends, demands and uncertainties.

 

Refer to Section III of Financial Reporting Release No. 72, codified in FRC §501.12 and Item 303 of Regulation S-K.

 

It is important to assure that all the vehicles you use to communicate with your shareholders and the rest of the public are consistent and that issues raised in one place are appropriately dealt with across all communication channels.

 

As always, your thoughts and comments are welcome!

Comment of the Week – Critical Accounting Estimates

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It has been a while since we posted about critical accounting estimates. While this is now a normal part of MD&A it is surprising how many folks in our workshops don’t know where the “official” guidance for this disclosure is found.

 

There is a bit of confusion in the history of this disclosure. It all started in the post-Enron period with concerns about the quality of accounting principle selection discussed in FR 60 (the FRs are Financial Reporting Releases, interpretations that are approved by the SEC Commissioners). This release addressed the aggressive use of accounting principles and required disclosure in plain English of “Critical Accounting Policies”. FR 60 did not describe in great detail exactly what a critical accounting policy was or what disclosures should be made. You can find this brief FR, for perhaps historical purposes, here.

 

FR 60 was issued as a “quick fix” and the SEC planned to follow it with a formal rule for this disclosure. The rule was proposed, but it was never actually finalized. Instead the SEC dealt with this disclosure in FR72. If you scroll to Section V towards the end of FR 72 you will find the requirements for disclosure of critical accounting estimates.

 

www.sec.gov/rules/interp/33-8350.htm

 

(As you read this FR, note the evolution in terminology from Critical Accounting Policies to Critical Accounting Estimates.)

 

Don’t forget to look at the most recent Staff guidance in this area in FRM Section 9500, which gives guidance on disclosure of critical accounting estimates in the area of goodwill impairment.

 

Here are a few key issues about disclosure of Critical Accounting Estimates:

 

  1. Critical accounting estimates are not the same as significant accounting policies, and this part of MD&A should not simply duplicate this information from the financial statements. The focus should be on estimates and assumptions used in GAAP that have a material impact on financial condition and operating performance and on comparability over time.
  2. This disclosure should focus on why the estimate is “critical” and what is challenging about the estimate. Why is it difficult to make this estimate and what creates uncertainty about the precision of the estimate?
  3. Most companies won’t have that many of these “critical” estimates. Most companies start with a few and build from there. Often, lessons from past changes in estimates can help your identification process.
  4. The staff sometimes will ask about the quantified sensitivity analysis discussed in the last part of FR 72, so if information is available and will help investors understand the significance of the estimate and its uncertainty, consider disclosing it.

 

To help understand this disclosure, here is a recent comment from the SEC:

Critical Accounting Policies and Estimates

  1. In future filings please provide a more robust discussion of your critical accounting policies and estimates to focus on the assumptions and uncertainties that underlie your critical accounting estimates rather than duplicating the accounting policy disclosures in the financial statement footnotes. Please quantify, where material, and provide an analysis of the impact of critical accounting estimates on your financial position and results of operations for the periods presented. In addition, please include a qualitative and quantitative analysis of the sensitivity of reported results to changes in your assumptions, judgments, and estimates, including the likelihood of obtaining materially different results if different assumptions are applied. If reasonably likely changes in inputs to estimates would have a material effect on your financial condition or results of operations, the impact that could result given the range of reasonable outcomes should be disclosed and quantified. Please refer to SEC Release No. 33-8350. In your response, please show us what your disclosure would have looked like if these changes were made in your most recently filed Form 10-K.

 

 

As always, your thoughts and comments are appreciated!

Form S-3 and the New Revenue Recognition Standard

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The new revenue recognition standard allows for two transition methods. One is a kind of hybrid “retrospective with a cumulative effect” approach, where in the year of adoption a company records the cumulative effect and goes forward (with some significant “old GAAP” disclosures). The other is full retrospective implementation.

The full retrospective implementation comes with a lot of baggage beyond the amount of work it might require.

One question is what about the five-year summary? In Form 10-K is it necessary to retrospectively adjust the two earliest years in the five year summary along with the three years in S-X audited financial statements? The SEC staff has addressed this question and said this is not necessary. The CorpFin Financial Reporting Manual now states:

11100 REGISTRANT FINANCIAL INFORMATION

 

11100.1 Selected Financial Data

 

Question

A registrant elects to adopt the new revenue standard using the full retrospective approach. Must it apply the new revenue standard when reporting selected financial data (S-K Item 301)) for periods prior to those presented in its retroactively-adjusted financial statements?

 

Answer

No, but registrants must provide the information required by Instruction 2 to S-K Item 301 regarding comparability of the data presented.

This second question is a lot more intricate. What if a company does an S-3 after the first quarter of implementation? To set this issue up, here is a fact set:

Company year-end: December 31

Revenue Recognition Standard adoption date: January 1, 2018

Full retrospective method of adoption is used. In this method, for the 2018 Form 10-K the years 2016, 2017 and 2018 would be presented using the new revenue recognition standard.

Now assume that in 2018 (thus before the December 2018 Form 10-K is filed), the company reports for the first quarter of 2018 and files Form 10-Q on April 30, 2018. If the company then files an S-3 to raise capital on May 31, 2018, the previous Form 10-K for the year ended December 31, 2017, would be incorporated into the Form S-3. That Form 10-K would have financial statements for 2017, 2016 and 2015. The financial statements for 2015 are the key issue here, as they would not be required in the December 31, 2018 Form 10-K. But, since they are incorporated into the S-3 and the company has adopted the new revenue recognition standard, Item 11(b) in Form S-3 will apply (emphasis added):

 

Item 11. Material Changes.

 

(a) Describe any and all material changes in the registrant’s affairs which have occurred since the end of the latest fiscal year for which certified financial statements were included in the latest annual report to security holders and which have not been described in a report on Form 10-Q (§249.308a of this chapter) or Form 8-K (§249.308 of this chapter) filed under the Exchange Act.

 

(b) Include in the prospectus, if not incorporated by reference therein from the reports filed under the Exchange Act specified in Item 12(a), a proxy or information statement filed pursuant to Section 14 of the Exchange Act, a prospectus previously filed pursuant to Rule 424(b) or (c) under the Securities Act (§230.424(b) or (c) of this chapter) or, where no prospectus is required to be filed pursuant to Rule 424(b), the prospectus included in the registration statement at effectiveness, or a Form 8-K filed during either of the two preceding years:

 

(i) information required by Rule 3-05 and Article 11 of Regulation S-X (17 CFR Part 210);

 

(ii) restated financial statements prepared in accordance with Regulation S-X if there has been a change in accounting principles or a correction in an error where such change or correction requires a material retroactive restatement of financial statements;

 

(iii) restated financial statements prepared in accordance with Regulation S-X where one or more business combinations accounted for by the pooling of interest method of accounting have been consummated subsequent to the most recent fiscal year and the acquired businesses, considered in the aggregate, are significant pursuant to Rule 11-01(b), or

 

(iv) any financial information required because of a material disposition of assets outside the normal course of business.

 

This would seem to require that the new revenue recognition standard be applied to the year ended December 31, 2015.

Not a happy outcome!

This question has come up in earlier accounting standard transitions, and the SEC Staff is clearly aware of this issue. Wes Bricker, Deputy Chief Accountant, said this in a recent speech:

“I am also aware that registrants have expressed concern about the requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting adoption of the revenue standard. This requirement to restate the financial statements means that companies that adopt the revenue standard under a full-retrospective transition approach would be required to restate an additional year in its Form S-3 to show the effect of the new revenue standard on that earlier period.

While this issue is not specific to the new revenue standard, the pervasive impact of the new revenue standard amplifies the issue.

To this, I would observe the transition provisions in the new revenue standard reference existing GAAP, which provides for an impracticability exception to retrospective application if, for example, a company is unable to apply the requirement after making every reasonable effort to do so. OCA is available for consultation if a registrant believes that, based on its facts and circumstances, a retrospective application of the new revenue recognition standard to all periods required to be presented in a Form S-3 is impracticable.”

The actual language he refers to in the excerpt above is from ASC 250:

250 – 10 – 45 – 5

An entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.

And:

Impracticability

250 – 10 – 45 – 9

It shall be deemed impracticable to apply the effects of a change in accounting principle retrospectively only if any of the following conditions exist:

  1. After making every reasonable effort to do so, the entity is unable to apply the requirement.
  2. Retrospective application requires assumptions about management’s intent in a prior period that cannot be independently substantiated.
  3. Retrospective application requires significant estimates of amounts, and it is impossible to distinguish objectively information about those estimates that both:
  4. Provides evidence of circumstances that existed on the date(s) at which those amounts would be recognized, measured, or disclosed under retrospective application
  5. Would have been available when the financial statements for that prior period were issued.

That’s where this issue is for now, and this could well be a problematic issue for any company raising capital in the year of adoption of the new revenue recognition standard!

As always, your thoughts and comments are welcome!

Cybersecurity’s “Evilution”

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In our tech involved world the risk of cyber attack is constantly transmogrifying into ever more complex and evil modes. From phishing to ransomware to who knows what next, this risk is constantly changing.

 

To help you keep up-to-date with regulatory issues concerning this risk and to help make appropriate disclosures PLI is presenting a new One-Hour Briefing: Cybersecurity in the Age Of Regulators Gone Wild

 

You can read all about the briefing at:

 

http://www.pli.edu/Content/Seminar/Cybersecurity_in_the_Age_of_Regulators_Gone/_/N-4kZ1z10qbc?Ns=sort_date%7c0&ID=286898

 

 

As always, your thoughts and comments are welcome!

 

Lots Happening at the PCAOB!

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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!