Wednesday, December 12, 2018

Senior SEC accounting officials talk recent policy initiatives

By Amanda Maine, J.D.

Deputy accountants in the SEC’s Office of the Chief Accountant (OCA) engaged in a panel discussion about recent policy initiatives at OCA, the SEC, and the PCAOB, including the auditor’s reporting model, the implementation of new accounting standards, audit committees, and international issues. The officials spoke at the AIPCA’s recent conference on SEC and PCAOB developments in Washington, D.C.

CAMs. While the first phase of the PCAOB’s new standard on the auditor’s reporting model, including disclosure of auditor tenure, has already become effective, the more challenging part has yet to be implemented, said SEC Deputy Chief Accountant Marc Panucci. That phase is, of course, the disclosure in the audit report of critical audit matters (CAMs), which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. Communication of CAMs for audits of large accelerated filers will be required in audits of financial statements for fiscal years ending on or after June 30, 2019.

According to Panucci, there is a lot of momentum and effort behind “dry runs” in anticipation of CAMs. The staff is hearing that the dry runs have been successful and that audit committees and engagement teams are seeing benefits from these dry runs. Panucci said that the dry runs are helpful in taking the disclosure of CAMs from a theoretical debate to how it actually affects an individual engagement.

Panucci also remarked that the dry runs have not revealed pervasive issues about auditors disclosing original information about the company, which both the PCAOB final release and the SEC’s order of approval had warned against. Panucci explained that an auditor can disclose original information about the company regarding why a certain issue was a CAM, but original information should not be pervasive in the audit report.

Panucci mentioned some specific areas of interest raised by stakeholders regarding CAMs, including the interaction between CAMs and the new accounting standards for revenue, leases, current expected credit loss (CECL). According to Panucci, auditing firms are examining this interaction at multiple levels, from implementation to execution of the new polices.

Stakeholders are also studying the interaction between CAMs and “key audit matters” (KAMs), the international version of CAMs which predated the PCAOB’s standard. Panucci noted that there are similarities between CAMs and KAMs, but it is unknown how pervasive those differences will be. He requested that interested parties give feedback on the disclosure of CAMs and KAMs.

New accounting standards. Deputy Chief Accountant Sagar Teotia discussed the new FASB standards and progress regarding their implementation. Sagar praised the work on the new standard on revenue recognition, which became effective last year. Looking back 12 to 15 months ago, the profession has made a significant step forward in implementing the new standard, he said. He praised the commitment made by the profession to get the standard right and singled out in particular the time and effort that preparers and audit committees have expended in implementing the new standard.

The SEC and the FASB will monitor what is actually in the financial statements with regard to the new revenue recognition standard, but he noted that between the revenue recognition Transition Resource Group (TRG), industry groups, and SEC consultations, there has been progress.

The new standard on leases has also been a priority, Teotia said. Because there was no TRG on the leasing standard, the profession has to find other ways to flush these issues out, and he highlighted in particular the work of auditors and preparers. He also praised the FASB for its role in answering questions about implementing the leasing standard.

As for the SEC, Teotia remarked that earlier this year, he gave a speech delving into the new leasing standard and that the SEC has been vocal and mindful about what needs to be done. He encouraged people to ask the SEC questions about the new standard because it will help the agency become a better regulator.

International issues. Jenifer Minke-Gerard, interim deputy chief accountant in OCA’s international group, discussed the role of audit committees, in particular the work of the International Organization of Securities Commissions (IOSCO). Minke-Gerard described a recent IOSCO project tackling the issue of audit quality from the perspective of the audit committee. Under this project, IOSCO hopes to produce a report on good practices for audit committees and issued a consultation paper earlier this year.

Minke-Gerard advised that there are different practices in different jurisdictions when it comes to audit committees, including in their structure and the way they operate, which should be taken into consideration. For example, the audit committee of a subsidiary in another country may operate differently from the audit committee of the parent company, she explained. She recommended that audit committee members take a look at the “tone at the top” and the culture emanating from the subsidiary and examine how it impacts the external auditors.