During Day 2 of the Current Securities and Exchange Commission (SEC) and Public Accounting Oversight Board (PCAOB) Developments Conference, some themes carried over from Day 1 such as digital assets, ESG, the importance of auditors and other standard setting bodies, and ensuring that investors are receiving the information necessary to make informed decisions.
Members of the Division of Corporation Finance continued the discussion surrounding digital assets. While there are no new disclosure requirements at this time related to digital assets, the Division has provided some examples of disclosures based on existing requirements that focus on the direct and indirect impact of recent events (i.e., exposure to counterparties, risk to a company’s liquidity, a company’s ability to obtain financing, and legal impacts). In terms of accounting for digital assets, the Division has seen several methodologies applied by issuers. The appropriate accounting depends on several factors including the terms and conditions of the assets being offered, the rights of the holder & obligation of the issuer, vesting terms, conversion features, etc. The FASB noted that they are accelerating the standard setting for these assets.
While ESG standards were not a primary focus today, the Center of Audit Quality (CAQ) noted that they support the continued enhancement of disclosures related to ESG to meet investor priorities. They plan to phase in these requirements both by registrant type and disclosure type.
Both the PCAOB and CAQ spent time discussing audit quality, the importance of our audits and meeting investor needs. The members from the PCAOB emphasized the mission of their board, which is to serve and protect public interest. CAQ discussed audit quality and resources for audit committees. Audit quality is a shared responsibility between the external auditors, management, and members of the audit committee. The CAQ has seen an overall increase in audit quality over the past decade, primarily due to the implementation of SOX, and evidenced by the results of audit inspections. As technology has been used to enhance audits and firms continue to invest in technology, data analytics have enhanced the precision of audit quality and have allowed auditors to focus on higher-risk areas. One member noted that audit committees are often the “kitchen sink” of boards, taking much of the leftover responsibilities of boards. They encouraged audit committee members to revisit and possibly refresh their missions and responsibilities. Several resources for audit committees were mentioned, even including a tool committees can use to evaluate their external auditors.
The CAQ has also placed an emphasis on reaching a more diverse range of students, particularly Black and Hispanic high school students, to the accounting field, as it is a field that many of those students are not aware of as a possibility. They have created an initiative titled Accounting Plus and involved a diverse group of successful individuals in both industry and public accounting and even social media influencers to reach the widest range of students as possible.
Another recurring topic discussed related to the disaggregation of information on the income statement, segment reporting and income tax disclosures. The Division of Corporation Finance touched on the identification of reportable segments and encouraged management, auditors, and the audit committee to ensure that consideration is given to business lines separated and analyzed by chief operating decision makers (CODM) as individual reportable segments. This identification is important as it directly impacts the financial statement disclosures. The FASB noted that the disclosure of segment expenses, assets and profit/loss may be required on an interim basis as well as in the annual 10K.
Some new topics arose as well, such as non-GAAP measures, areas of focus and agenda items of the PCAOB and FASB, and a general economic update.
The Division of Corporation Finance placed significant emphasis on ensuring that undue prominence is not placed on non-GAAP measures (i.e., inclusion of tables/graphs and other ratios derived from non-GAAP information). They noted that this type of information can be misleading to users of the financial statements. They also reiterated that items included in the non-GAAP schedule must be non-recurring items disclosed as such.
The Division of Corporation Finance members noted a couple of items that issuers should be considering throughout the process of preparing their 10Ks this upcoming reporting season. They noted that issuers’ disclosures surrounding critical accounting estimates should be revisited to ensure that they clearly show investors why the estimates are critical and the related uncertainties. Management’s analysis surrounding these items should become more robust in these times of uncertainty when judgment becomes more material. Issuers should also consider revisiting their disclosures of potential future risks in light of the current inflation, labor shortages, increased interest rates, etc.
The PCAOB staff discussed the proposed quality control (QC) standard. They noted that it will require, among other things, the involvement of independent individual(s) in firm governance (for firms that audit more than 100 issuers), require firms to report on the effectiveness of their QC systems to the audit committees of every issuer they audit and to the PCAOB directly, and expand their responsibilities to correct deficiencies identified through PCAOB inspections.
Both the PCAOB and FASB have many different projects in their pipelines. A few of the PCAOB’s more prominent projects include updates to the guidance on confirmation procedures, noncompliance with laws and regulations, going concern, substantive analytical and fraud procedures, and independence standards. Items on their research agenda include firm/engagement performance metrics and the usage of data and technology in audits. The FASB is currently in their post-implementation review process of the revenue recognition, lease, and current expected credit loss standards. This process includes getting feedback from stakeholders and improving the process of implementing significant, future standards. The FASB discussed their four standards released during 2022 (and the two more to come before the end of 2022). They are working on guidance to standardize accounting for digital assets.
The Economic update panel noted that 2023 will be a challenging year for the US and global economies with slow growth, high-interest rates, high energy costs, and overall tight financial condition. Throughout 2022 we have already seen a spike in the default rate, it is the highest it has been since the 1980s. One member mentioned that financial crises (almost) never originate in the same place as the most recent crises, so he doubts that we will see a significant residential real estate crisis in the US. At this point, the residential housing supply cannot keep up with the demand. Additionally, consumers have accrued a decent cushion of equity over the past three years that is still available for use. The members also discussed a structural shift in global trading, specifically the pharmaceutical and medical industries moving away from using suppliers in China and moving to other countries instead.
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