The American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) held its first day of the Current Securities and Exchange Commission (SEC) and Public Accounting Oversight Board (PCAOB) Developments Conference in Washington D.C. on December 12, 2022.
The conference included notable speakers, including the SEC Commissioner, Acting Chief Accountant from the Office of the Chief Accountant (OCA) of the SEC, PCAOB Board Members, and others. The first day of the conference discussed the key roles that the profession plays in society through the communication of relevant and reliable information to investors while also stressing the importance of independence (in both mind and appearance) and ethical behavior to instill confidence in investors when making decisions.
Matters on the mind of regulators and standard-setting bodies include reporting on disaggregation of financial information, digital assets, and Environmental, Social and Governance (ESG) efforts. At its heart, accounting is a communication profession that takes complex transaction events and communicates the matters to investors in a concise and transparent manner so that investors can make informed decisions. In an effort to increase focus on information that is relevant to investors, standard setters have narrowed their focus on the disaggregation of financial information, such as further disaggregation of cost of sales on the income statement, segment reporting, income taxes paid to include amounts paid in various jurisdictions, and cash flow data. Similarly, with the rising popularity and volatility of digital assets, the OCA has seen a rise in the number of consultations associated with accounting for these types of arrangements. With an expansive permutation of arrangements, there is a lack of authoritative guidance that points to the appropriate accounting; however, interpretation of other sections of the codification by analogy has been permitted. Future regulation is expected to gain traction in the upcoming years.
Next, the SEC has received a significant number of comment letters surrounding ESG reporting, which are currently in the process of being reviewed. The speakers discussed the proactive steps that public entities should be taking today in order to be ready for the inevitable reporting requirements coming down the pike. The first recommended step was for entities to establish a governance figure to oversee the process. Once a governance body over ESG has been established, the next step is to identify the entity’s current capabilities to report ESG metrics and identify gaps as an internal readiness assessment. Entities should begin developing an overall level of comfort and understanding of how data is being accumulated. Entities should not underestimate the level of effort that compliance with ESG reporting requirements will take. One speaker noted that some of the complexities associated with implementation, modeling and reporting can make derivative accounting look simple. Entities should consider establishing cross functional teams to ensure that information is adequately documented in a SOX-like environment, so this information is auditable for external auditors. This is where serious rigor and discipline in internal controls, along with collaboration between accounting and operational teams, will be essential to meeting future reporting requirements.
The first day of the conference wrapped up with discussions related to significant estimates and uncertainties, and cybersecurity matters. In terms of the current state of the economy, the inflationary economic environment, rising interest rates, labor shortages and supply chain challenges have posed challenges to entities when thinking about an entity’s internal control environment and the development of significant estimates. As a result, there is heightened risk of management bias over those estimates, including the impact on financial reporting and disclosures. Auditors should assess these economic uncertainties and document the potential fraud risks associated with these significant estimates to maintain good audit quality and protect the interests of investors with the reporting of reliable information.
Cybersecurity defense is still trying to keep up with the pace of change in technology over recent years. Entities should ensure that there are sufficient policies and procedures in place to serve investor needs. Entities should also ensure that they provide sufficient disclosures to allow investors to make informed decisions and “price for risk” when making investment decisions, particularly if a breach occurs. Stay tuned for our future updates on Day 2 of the conference!
About Schneider Downs Public Company Assurance Services
Schneider Downs provides audit, assurance and consulting services to publicly traded businesses in a wide range of industries. Schneider Downs is the independent auditor of record for operating companies in various industries and has experience with IPOs, IPO readiness, secondary offerings and underwriting diligence. We work proactively with management and the audit committee to develop an audit plan that effectively manages a registrant's risk in an increasingly complex regulatory environment, delivering on our promise of "Big Thinking, Personal Focus." For more information on the conference or interest rate reform, please contact a member of the Schneider Downs SEC and Public Company Industry Group.
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