Thursday, September 22, 2016

Office of the Chief Accountant personnel offer updates at AICPA banking conference

By Jacquelyn Lumb

Staff from the SEC’s Office of the Chief Accountant provided updates at the AICPA’s annual conference on banking and savings institutions, which included the areas of internal control over financial reporting, auditor independence, non-GAAP financial measures, and revenue recognition. Deputy Chief Accountant Wesley Bricker said the staff is involved in the implementation discussions with respect to all of the key priorities that have been completed by FASB and the IASB, including revenue recognition and leases, the impact of which will extend beyond any particular industry group. Bricker warned that aggressive interpretations of the new standards, aimed at a specific outcome, will not be well-received.

Implementing new standards. The transition reporting group has been a critical forum for addressing implementation issues as they arise, according to Bricker. The industry must identify these issues in order for TRG to provide the appropriate resolution. Bricker encouraged companies to set the right tone at the top to ensure the formulation of the sound judgments required by the new standards, and to engage in investor outreach and education to assist in their understanding of the new requirements.

Bricker acknowledged that auditors may be asked to provide feedback on the implementation of the new standards. Auditors may freely discuss the new requirements, he explained, but they must retain their commitment to independence and recognize the boundaries of their involvement, which cannot include decision-making that would lead to auditing their own work. With respect to the new standard for reporting credit losses on financial instruments, Bricker said it reflects a significant enhancement that will provide more decision-useful information. It will not prevent the next financial crisis, he said, but it will provide more timely information about potential losses.

Non-GAAP financial measures. Bricker responded to a question about the publicity surrounding the use of non-GAAP financial measures and noted that, when their use is consistent with the rules, they can provide high quality content to investors. The SEC is not trying to eliminate the use of non-GAAP financial measures, he said, but only in those instances when they are presented more prominently than GAAP measures or are misleading.

Bricker cited a survey by the Wall Street Journal in which roughly half of the Fortune 500 companies admitted that they had challenges with respect to the prominence of the non-GAAP information they had provided. After the staff issued compliance and disclosure interpretations on the use of non-GAAP financial measures, the percentage fell to 20 percent, so Bricker said the strategy is working. The SEC’s work in this area is continuing, he advised, and it is an all-agency approach.

Differing interpretations. Bricker was asked how to respond when there are differences of opinion on loan loss reserves among registrants, auditors, the SEC, and the banking agencies. He said the continuing dialog during the transition will promote a better application of the standard, and it is better to have that discussion before the financial statements are presented to investors. He added that the staff has healthy and constructive discussions with the banking regulators and the standard setters. If a registrant finds that differing points of view seem irreconcilable, it should continue to escalate the issue, he said. The staff has a consultation protocol to assist in these situations.

Internal control concerns. Professional accounting fellow Michal Dusza talked about some of the industry’s concerns that the PCAOB’s inspectors have expectations beyond the requirements of the internal control over financial reporting standard. The SEC staff engaged with industry representatives and with the PCAOB and provided its views at last year’s conference, he noted. Overall, the staff encouraged greater engagement between the auditors and audit committees and timely discussions about risk assessments. If this hasn’t occurred by now with respect to this year’s audit, Dusza encouraged auditors and audit committees to begin the discussions promptly.

Auditor independence. He also spoke about auditor independence as a shared responsibility and highlighted the threat of scope creep in which an otherwise permissible non-audit service becomes impermissible. He cited a no-action letter to Fidelity Management & Research Company in which certain loan provisions within an investment company complex led to non-compliance with the independence standard. The staff granted the no-action relief but on a temporary basis and advised that it may not renew its assurances with respect to enforcement action 18 months after the June 20, 2016 no-action relief was granted.