Don Applegarth, audit shareholder at Schneider Downs, is attending this month's AICPA National Conference in Washington, D.C. Below, Don shares his notes from Day 1.
Greetings from the AICPA National Conference on Current SEC & PCAOB Developments (Monday December 6, 2010)
Nearly 2300 participants descended on Washington DC for the annual AICPA National Conference on Current SEC & PCAOB Developments. Preceded by a preconference workshop on Developments in Sustainability Reporting and Assurance on Sunday December 5, today’s conference agenda included opening remarks from the new AICPA Chairman Paul Stahlin, an update from Cynthia Fornelli of the Center for Audit Quality, and the SEC keynote address by SEC Chairman Mary Schapiro herself. The balance of the day was rounded out by remarks from the SEC Chief Accountant James Kroeker and his deputy accountants Paul Beswick, Brian Croteau and Mike Starr. In the afternoon, certain panelists from the SECs Office of Chief Accountant discussed current projects before Wayne Carnall and Meredith Cross of the SECs Division of Corporate Finance spoke about recent developments.
Paul Stahlin remarked on the annual AICPA survey on economic outlook. He commented that while 27% are optimistic about the economy, 61% say they wouldn’t see a return to pre-recession levels until after 2011.
Clearly the theme of the day was the impact of the requirements of the Dodd-Frank Act (DFA) and its various rules and studies required to be conducted by the SEC. The DFA imposes new regulations on broker dealers, investment advisers, as well as other financial institutions. The AICPA will serve as a valuable resource to the SEC, remarked Stahlin.
Convergence of FASB and IASB rules will also require significant work on the part of the SEC. The AICPA has various resources including www.ifrs.com and the convergence corner of its website with comment letters on convergence matters. Questions on IFRS will appear on the CPA exam for the first time next month, and the AICPA has worked hard to provide the resources to address convergence.
Environmental Sustainability Financial Reporting and XBRL are other areas that the AICPA has devoted time and attention to over the last year.
Cynthia Fornelli commented that the CAQ is in its 4th year of operation and is committed to enhancing investor confidence and public trust in global capital markets. She spoke of her work on an Anti Fraud Initiative and reference a Platform for Action developed via input from roundtable discussions conducted over the last year with over 100 key individuals. Determining and Detecting Financial Reporting Fraud, a related published document, focuses on the concept of the financial reporting supply chain and the constituents that all share in responsibility and the need to work together in detecting fraud. Management, the Board and Audit Committee, Internal Auditors, and External Auditors all must work together and communicate with each other in implementing an effective anti fraud program. The importance of tone at the top, keeping an appropriate degree of skepticism, and communication among the anti-fraud supply chain participants are key tenants of the document.
The CAQ has partnered with FEI, NACD, and the IAA in a first ever cross functional effort in this area. Collaboration will begin in 2011.
Cynthia also discussed the CAQ Research Initiative and covered the annual Main Street Investor Survey which showed a slight slide in confidence from 2009 to 2010 in the US capital markets and overseas capital markets. Confidence levels in audited financial statements and public companies remained constant though from 2009 to 2010. Other aspects of the research Initiative includes academic funding of 3 projects in 2010 versus 5 projects in 2009 and the conducting of the 2nd annual Auditing Symposium in 2010 “Where Audit Practice meets Audit Research” aimed at improving audit quality.
The SEC Keynote Address
The highlight of the day was the keynote address by SEC Chairman Mary Shapiro. Scandals that have shaken the public trust in the accounting profession have reinforced Chairman Shapiro’s view that the accounting profession plays an important role in the functioning of financial markets. Speaking on the response to the Maddoff scandal, surprise examinations by independent auditors are now required, new custody rules for broker dealers, and the establishment of a 21st century foundation for PCAOB oversight of Broker Dealer Audits has been laid. New information and tools have been developed and investor protection was in overdrive in 2010. Transparency in asset backed mortgage securities was a focus and new regulation over derivative captured the attention of the SEC. Also, structural changes were implemented to avoid the market meltdown of May 6, 2010.
Still, earlier this month, the SEC received its annual Performance and Accountability Report. Whereas the financial statements of the SEC received a clean opinion, the SEC did receive two material weaknesses in internal controls comments and has already begun to remediate those matters.
After battling a court case that challenged its very existence, the SEC lives on and is looking to fill two Board seats.
Additionally, Chairman Shapiro discussed convergence and the revamped SEC roadmap with staggered schedule for conversion. She referenced the SEC progress report issued in October 2010 which covered matters such as IASB funding, the role of the FASB, and potential methods of transition to IFRS. Whereas optimistic, a significant portion of the work plan is in process. She reminded the audience that contrary to popular belief, the June 2011 target is not a hard deadline for rendering a decision but did say a decision is likely sometime in 2011. She did comment that the increased burden on the SEC of the Dodd Frank Act would not likely impede the progress of the SEC relative to convergence and a decision on moving towards a single set of high quality global standards.
SEC Chief Accountant
James Kroeker remarked on the need for integrity and independence in the accounting profession. He was generally supportive of requiring public accounting firms to disclose information relative to fees derived from various service lines. Although it is embedded in training and culture in the way public firms refer to them, he also expressed his personal belief that one of the fundamental changes in terminology is to change the way a firm refers to registrants as “clients”. “A firm’s “clients” are the investing public”, Mr. Kroeker remarked.
The Deputy Chief Accountants (DCA) expressed their views. One DCA expressed concern about the leadership of the profession to address issues. He cited fraud, communications (e.g. the auditor’s report), and the auditor’s objectivity as the three areas that must be addressed. He commented that there is a demand for more in terms of the auditor’s report, and the profession should make changes to expand the responsibilities of the auditor (and the reporting) to meet that demand. Referring to it as the elephant in the room, he questioned if independence and objectivity could be achieved when auditors are hired and compensated by those on which they opine.
One DCA discussed the methods used to incorporate IFRS into their standards. While few look to the IASB, many look to adopt IFRS but with exceptions because of local or jurisdictional preferences or legal matters. Whereas the US has taken a convergence approach thus far, an endorsement approach may not be the best method for adopting IFRS. The DCA commented that a quasi approach may be a way forward. Current joint projects of the FASB and IASB would be completed, US GAAP would continue , and the FASB would participate in International Standard setting.
The SEC’s work on interpreting the new consolidation model for Variable Interest Entities (VIE) was discussed which basis consolidation on the power to direct activities of the VIE and control of the entity. One recommendation was to make sure that consideration is given to the group of activities, not just a single activity when performing the evaluation with a focus on the nature of the rights (participating versus protective rights) of all parties involved. On the matter of evaluating whether and entity controls another, a weighting of rights and obligations should be undertaken as there are no bright lines in determining what party is most significant.
Another DCA discussed the differing auditing standards and the potential to bring together the standards of the ASB and the PCAOB, a form of Codification of Auditing Standards to make it simpler and easier to follow. Another discussion point was the need for some rules on independence when a non public entity may consider an IPO or issue public debt in the future. Consideration should be required of future go to market consequences if the public accountant is asked to provide assistance in bookkeeping, financial statement preparation, or income tax provision assistance.
Additionally, the importance of independence in fact and appearance was discussed and the need to monitor to ensure affiliates of a public accounting firm does not impair the Firm’s independence.
SECs Office of Chief Accountants (OCA)
A panel discussion of the DCAs discussed the structure of the OCA which included the Accounting Group which has very broad objectives of assisting registrants with getting the accounting right the first time. The Professional Practice Group (PPG) is involved with PCAOB standard setting oversight as well as has input on the PCAOB s budget. Additionally, some programmatic inspections are conducted by the SEC on the PCAOB, and the PPG also is charged with addressing auditor consultations on independence related matters. The International Group shares its views and experiences with the International Organizations of Securities Commissions and reaches out to international bodies on matters such as IFRS.
It was clear that the message of the OCA was that they work together and collaborate on issues.
It was further relayed that the OCA is interested in receiving more questions from small to medium size firms. They are open for informal comment and if needed, a formal process is available which is deliberative, consultative, and rigorous. The OCA will report to the FASB on trends in order to let the FASB know where additional attention or clarification may be warranted.
The OCA indicated that the process is as important as the conclusion. A well documented and thoughtful application of literature is an appropriate way to engage the OCA. All the facts surrounding the substance of the matter or transaction, alternative accounting treatments with analysis of inputs and assumptions, rejection of GAAP and basis for such rejections, discussions with external auditors, judgments, and conclusions should be supplied to the OCA in any consultation.
Division of Corporate Finance (Corp Fin)
Meredith Cross recited developments and progress over 2010 including proxy projects, Asset backed security disclosures, climate change disclosures, and new short term borrowing disclosures in MD&A. Loss contingency disclosures are a focus of Corp Fin and Dear CFO letters in 2010 focused on foreclosures and REPOs. There was also a focus on consistency in non GAAP measures.
Corp Fin has also undertaken work of the IFRS work plan including reviewing filers that report under IFRS as well as non filers. Wayne Cornell jokingly said that Corp Fin has refrained from issuing comment letters on non filers but wanted to let them know if they do file, their review by Corp Fin is already completed.
Other accomplishments included the requirement to meet the Corp Fin SOX review mandate which stipulates that all filers reports must be reviewed at least once every 3 years. Corp Fin continues to look at ways to improve the process from an efficiency and effectiveness perspective. Once such initiative is an enhanced continuing review that some filers are subject to.
The Dodd Frank Act has saddled the SEC in general with the need to write new rules and perform new studies. Corp Fin has plenty of rules to write including Say on Pay, Compensation Committee standards, Pay Equity ratio disclosures, Clawback rules for impact of restatements on incentive compensation payouts, and specialized rules on disclosures surrounding conflict minerals.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.