You know, we accounting, auditing, financial reporting geeks were just so busy during the month of August, we barely had time to take notice of, let alone celebrate Geek Week 2013, sponsored by YouTube Aug. 4-10, let alone blog about it. In fact, did any accounting, auditing, or Securities Law writers have time to blog about it? I rest my case.
Although most of YouTube’s Geek Week, as shown in this video
, were focused on - or for - Geeks who worshipped (or passed their time as) SuperHeros, Gamers, and Anime Characters, (albeit one day was more focused on educational programming
); to me, just the theme of 'Geek Week' oozed what many of us have lived with for some time now in our particular area of specialization - and no longer view as a derogatory term but almost a term of endearment. (Somebody slap me!)
Seriously, over the past month or so, I couldn’t help but note some particularly ‘geeky’ developments of interest to recap for our readers; some, quite serious, others of the more humorous variety. So here we go.
- requiring auditors to report on Critical Audit Matters (CAMs),
- disclosing the auditor’s tenure with the client (as an apparent alternative to mandatory audit firm rotation, at least for the time being), and certain other proposed changes.
These proposed changes to the auditor’s report were unanimously proposed at PCAOB’s Aug. 13 meeting, with a comment deadline of Dec. 11, 2013.
Robert C. (Bob) Pozen, no stranger to readers of this blog, (hey, we have our own geeky videos, too!)
weighed in with the benefits of an alternative approach to those who had been calling for mandatory audit firm rotation, by suggesting in a Wall Street Journal Opinion column published on August 19
an alternative model of requiring the audit committees of public companies to have a mandatory Request for Proposal (RFP) – aka “bidding” or “tendering” process, once every 15 years, for the company’s audit. The currently engaged audit firm, proposes Pozen, would be allowed to be among those who bid.
Pozen pointed out in his WSJ column that among the benefits of his proposed mandatory 15-year RFP approach, vs. a mandatory audit firm rotation approach, would be that:
A newly appointed auditor must put forth a substantial investment to get up to speed on the complexities of a large public company. These costs, which are likely to be passed on to the company, would be incurred every six or seven years under mandatory auditor rotation. Under the RFP approach, the costs would occur at most every 15 years.
He continues by noting the cost-benefit equation heavily favors a mandatory RFP (vs. mandatory audit firm rotation) approach.
The RFP process itself would confer most of the benefits sought by advocates of mandatory auditor rotation. The likelihood that auditors will become too cozy with company management is reduced when they owe their continued tenure to independent directors.
They [the auditors] will have an incentive to tell the audit committee about all the significant accounting judgments embedded in the company’s financial statements – especially borderline accounting issues.
If they fail to do so, they may lose their contract. The possibility of another firm reviewing its work papers will make the current auditor more reluctant to bend the rules for management.
Audit firm concentration, and the need to widen the completion (and diversify the risk, although not specified by Pozen) even more beyond the “Big Four” audit firms (PwC, EY, KPMG and Deloitte), is another side benefit of his proposal, he claims.
Aside from rulemaking, in mid-August, the PCAOB issued its findings on independence issues and various violations it found in its inspections of audits of broker dealers
, and announced a series of forums for auditors of smaller broker-dealers.
FEI was also honored to host a webcast featuring PCAOB board member Jay Hanson on August 8. FEI's archived webcast can be accessed for free by the public
on FEI's website under Events, archived events, August 2013 webcasts.
The SEC was also been a happenin’ place in the month of August, with the swearing-in of two new Commissioners, Kara M. Stein
(filling the vacancy created as Commissioner Elisse Walter completed her term) and Michael S. Piwowar
(filling the vacancy created as Commissioner Troy Paredes completed his term).
When the U.S. Senate voted to confirm Stein and Piwowar as commissioners, they also voted to extend the term of SEC Chairman Mary Jo White
, who originally was appointed to serve out the remaining term of former Chairman and Commissioner Mary Schapiro.
Geek Week… Geek Month… .The Year of the Geek?
Looking back historically, former SEC Commissioner Norman Johnson focused on the importance of auditor independence in a speech he gave in February, 1999 entitled, The Year of the Accountant.
Perhaps the year 2013 will go down in history as a special year as well, as having not only a Geek Week and Geek Month of sorts, but may even one day be called “The Year of the Geek.” For so much has happened, not only on the PCAOB and SEC front, but also on the FASB and IASB front.
FASB, IASB’s Latest Activity
For example, as we previously reported, the FASB and IASB’s Revenue Recognition standards are moving closer to finalization, and the boards recently formed a joint resource group
The staff are drafting the final revenue standard. In the near future, the FASB staff will present an analysis of the FASB’s due process undertaken on the project. Please see the Current Technical Plan
for more information about the project timeline.
NOTE: According to the FASB’s “Current Technical Plan,” as of Aug. 5, FASB was slated to issue the Final Revenue Recognition Standard by the end of 3Q, 2013.
Learn more about the new model for Revenue Recognition, and get an update on all the other major FASB/IASB/SEC/PCAOB happenings, at FEI’s Current Financial Reporting Issues Conference (CFRI) Nov. 18-19 in NYC.
Want a deep dive into the new Revenue Recognition (Rev Rec) standard? Whether you are a CFRI attendee, or want to come in especially for a separate program on the new Rev Rec standard, check out the Post-Conference workshop (separate registration required) taking place on Wednesday, Nov. 20: Revenue Recognition: Guidance, Changes, and Implementation.
Be sure to also check out FEI’s popular black-tie Hall of Fame Gala
which takes place on Monday evening, Nov. 18 at Gotham Hall in NYC (separate registration required), at which this year’s inductees, Earnest Edwards, William Parfet, and Frederic Salerno, will be formally inducted into the FEI Hall of Fame.
Another of the FASB and IASB’s major convergence projects, the Leases project
, (FASB project summary updated as of Aug. 28); see also IASB’s Leases Project page
; currently has Exposure Drafts out for public comment, with the comment period for both board’s versions ending Sept. 13
. In addition to their review of the Leasing comment letters
, now numbering 53, the boards are holding joint public roundtables at various cities around the globe in September and October.
Separately, as the IASB continues its work on its Conceptual Framework project
, among others, the FASB, together with its Private Company Council (PCC
) has released a series of proposed Accounting Standards Updates (ASU) designed by the PCC, and endorsed by the FASB for release for public comment before final endorsement by FASB as a final ASU, which would permit alternative treatments under existing Generally Accepted Accounting Principles to allow exceptions and/or simplified treatments to be used by private companies resulting in more meaningful and/or useful information for the users of private company financial statements, while providing an improved cost-benefit ratio considering preparers and users interests.
Often the discussion of such issues involves the “backing out” of complex information that was requested at the behest of certain users of public company financial statements, but not used by, e.g., lenders to private companies, and by the time such information is compiled by , and audited on behalf of, private company preparers, only to be backed out by their bank lenders anyway, as “useless” information, that is where some such “exceptions” are being identified to make private company accounting more useful and cost-beneficial for both users and preparers of private company financial reporting. See a couple of our recent posts on some FASB –PCC issuances here
My two cents: let’s call this, Cent One (please see the Disclaime
r on the right side of this blog): Some of the relatively new additions to the world of accounting and auditing’s “alphabet soup” (PCC, etc.) may seem geeky, but have the makings of something truly substantive and even paradigm-shifting, when looking at the real differences in how financial reporting is used by the users of private company financial reporting vs. public company financial reporting (as described generically in the paragraph immediately above), and perhaps may even have a spinoff or knock-on effect in helping to drive a potential simplification of public company reporting as well, as described immediately below.
That is, the work of the PCC and the questions raised about the usefulness of certain complex financial reporting requirements may shine a light on the question of who the “users” of public company financial reporting are as well, and just how certain highly complex information is used, and the cost-benefits of the use of such information overall, (e.g., some may ask – are certain disclosure requirements called for in recent years, or being called for by certain constituents, essentially a transference of cost of preparing estimates of such disclosures, especially if they are based on data that is highly subject to judgment.. and are these disclosures essentially a transference of risk as well – transferring risk from a third party such as an analyst, to the preparer and auditor, by invoking the appearance of certainty of such amounts by having the preparer provide such estimates and the auditor either sign off on such amounts directly or indirectly (i.e. if the disclosed information is part of MD&A). These questions may be addressed for public companies as a spinoff of some of the exploration of issues by the PCC, as the FASB and IASB move further into their projects on the Disclosure Framework
Why It’s Important to File Comment Letters – on any Proposed Standard
My two cents – let’s call this, Cent Two – on why it’s important to participate in the comment letter process, whether it be for accounting or regulatory standard setters: (please see the disclaimer on the right side of this blog).
Even with some spirited opposition (doesn’t the opposition always seem ‘spirited’?) to any particular standard, whether your own position is one of support or constructive criticism, all genuine and thoughtful feedback filed in the public record helps standard-setters move the ball forward, and that is the ultimate end goal, not that a particular theory necessarily wins the day, but that all constituents views are heard and fulsomely considered, deliberated, and redeliberated by the FASB and IASB boards, or the SEC or PCAOB.
That is the heart of due process.
But the only way for that due process to take place is for YOU – the constituent – to read, analyze, understand, and try to apply a proposed accounting standard update – on any topic – to your current and projected situation, and file a comment letter with the respective accounting standards board(s) to inform them of your view as to
- how well the proposed standard will reflect economic reality,
- what the practical impact would be on your company (or on you in your role as an investor, auditor, audit committee member, etc.),
- how useful the resulting information would be to your company in terms of management decision making, and
- how useful the resulting information would be to the users of your company’s financial statements - and the term user can and should be defined broadly enough to include actual users, investors and lenders.
- In some cases, e.g., a "preparer" is also a "user" of financial statements of a subsidiary, or potential acquisition.
I may be oversimplifying here, but that is how I would put the general goals of the comment letter process into plain English.)
More change at FASB: Looking back, it is no surprise that key members of the Pozen Committee, mentioned further above, (aka the SEC Advisory Committee on Improvements to Financial Reporting), had an all-star support team back in 2007, including “FASB Senior Advisor to the Committee Chairman” then-FASB senior staff member Russell Golden
, who more recently was appointed FASB Chairman earlier this year, and then-SEC Chief Accountant Jim Kroeker, who served as the “Designated Federal Officer” of The Pozen Committee (formed as a Federal Advisory Committee); Kroeker
was appointed a FASB board member and Vice Chairman of the FASB earlier this summer, and began his term at FASB as of September 1.
Any discussion about geekery in 2013 would not be complete without a shout-out to COSO.
Why? Because COSO, aka the Committee of Sponsoring Organizations of the Treadway Commission, is a broad-based organization whose founding members include the AICPA (auditors), AAA (academics), FEI (senior financial execs), IIA (internal auditors) and the IMA (management accountants). COSO was founded to develop guidance to help reduce financial reporting fraud through improved internal control, as well as to publish studies and research on fraud, publish guidance on enterprise risk management, and publish thought papers in related areas of governance, risk and compliance. COSO's guidance also has a reputation of being - let's say - very thorough.
The key to solving the implementation puzzle, in my personal view (let's perhaps call this My "Three" Cents - Cent Three - once again, please see the disclaimer on the right side of this blog), is to scaling COSO's many-paged guidance and to use it on the principles based mode by which it was intended, so that it is applied using a common sense approach. I would personally suggest that folks refresh themselves on the most current definition of internal control and what constitutes "effective" internal control in COSO: 2013, the definition of the five core components of internal control, the definitions of the seventeen principles of internal control, set forth in COSO: 2013, and go from there in terms of talking with a core team from your company - including your internal auditors, and then reaching out to your audit committee and external auditors, about the extent to which your current system of internal control matches up with the system described by the 17 principles in COSO: 2013. Companies needn't do more than is necessary, but probably don't want to be caught on Dec. 15, 2014 having an impossible game of catch-up.
A few years ago, COSO put together a team led by PwC,
(one of whose predecessor firms, Coopers and Lybrand, authored the original 1992 COSO Internal Control-Integrated Framework), to work under the oversight of the COSO board
and a wide-ranging COSO project task force including member representatives from the COSO organizations, as well as representatives of other major accounting firms, and other experts, to put together Exposure Drafts of an update to COSO’s 1992 Internal Control framework for public comment, review comment letters, with the goal of issuing an updated framework.
In May, 2013, COSO issued COSO: 2013
which included various updates reflecting changes to the business environment, and included 17 principles further articulating the five core components of internal control stated in the original 1992 COSO framework. The five core components are carried forward into COSO: 2013, along with the 17 principles, a refined definition of determining the effectiveness of internal control over financial reporting, and additional points of focus that support the 17 principles.
As announced by COSO when the updated framework was issued earlier this year, COSO: will supersede COSO 1992 on Dec. 15, 2014. As also stated by COSO, during the interim period, companies required to make external assertions about the effectiveness of their systems of internal control (e.g., for purposes of Sarbanes-Oxley Section 404(a) – the management report on internal control, or Sarbanes-Oxley Section 404(b) – the auditor’s report on internal control) are guided by COSO to disclose which COSO framework they have evaluated their system of internal control by – i.e., the 1992 framework, or the 2013 framework.
What's New in The Tabloid For Accounting Geeks? ---And the Need to Maintain Resilience
In other news on the geek front Going Concern
, launched a few years ago by Caleb Newquist as an Accounting Tabloid (yes accounting geeks, there’s even a tabloid for us!!!) provided some Labor Day weekend fun with a column by Adrienne Gonzalez entitled “Let’s Play Another Round of: Accountant/Not an Accountant.”
This game really is fun, and you don’t even have to be an accountant to enjoy it!
If you’re in need of some more convincing reasons to date an accountant, check out another geeky YouTube video, If I Were an Auditor
, the first of the FEI blog’s music videos, produced by the Maryland Association of CPA’s (MACPA
) on CPA Island in Second Life (let’s hear it for the avatars!!!) Actually, Second Life is used, very effectively, for educational purposes, and we enjoyed and appreciated MACPA’s generous leadership – led by CEO Tom Hood – in producing this video. Also check out the cameo appearances of some of our blogger friends Dave Albrecht
, Colleen Cunningham
, Michelle Golden
, Mark Jankowski
, Gail Perry
, Tom Selling
, Bill Sheridan
, and Darla Sycamore
Of course I would have loved to have had my BBF Francine McKenna
take part in that "music video" (even as an avatar), but some other consulting gig took precedence at the time. And in addition to blogging, several other writing gigs, and being enrolled at the Univ. of Chicago, FM is on the speaking circuit more and more, which is exciting, because she's one of those folks who who speaks her mind, so that makes her remarks, in particular when appearing on a panel, all the more likely to generate some "lively" panel discussion and Q&A. Because I know her outspokeness causes people to be very opinionated about her, I will say once again our views quite often do not align, but among the things I admire about her is she encourages auditors to speak up when they sense something is wrong, and when she first started her blog, there were times that auditors, particularly junior or first year auditors, wrote to her when they had no one else they felt comfortable speaking to. I would say Francine could easily pass for a non-geek, especially in her trademark stilettos, although being a college student now, and speaking at more events,she may have tamed down some.
As entrepreneurs, a key skill that helps us weather the ups and downs in our businesses is “resilience.” Resilience is being able to bounce back quickly in negative conditions, and it’s a skill you can build like a muscle.
Practicing being grateful for the satisfied clients you have can help to build our resilience muscle. It’s really as simple as being more intentional about it.
Leyva suggests accountants [others can try this at home or the office, too]:
“Try building an appreciation corner [e.g., with cards from clients, happy customers, ‘chatchkes’ commemorating the completion of successful deals/projects, etc.] that you can cherish and gain perspective from [to energize you for] the next time you need a resilience boost.”
Hmmm… where is it that I’ve seen talk a lot about ‘resilience’ over the past year or so?
Oh yes, on PwC’s website, under Resilience
, you can find all the videos by the firm’s leaders released over the past couple of years on that topic, and written thought leadership on the subject as well.
If “Resilience” isn’t a geeky word, do you have a better one? (And check out this recently posted page in the Resilience grouping, which features the sidebar: Question everything. Be ready for anything.
If that doesn’t appeal to the would-be Superhero geeks among us, I don’t know what does.)
But in all seriousness, take a look at how PwC defines Resilience
, and how that definition may relate to your life both inside and outside of work:
- Resilience means being prepared – in the deepest sense.
- Prepared not only for the risks that accompany change and crisis – but for the opportunities as well.
- Even (or especially) when you cannot predict which events may occur, or where, or when.
As we enter the post-Labor Day, post summer-time season, and many of our readers or potential readers
gear up for third quarter, followed by year-end close, whether it’s the close of the books or the close of year-end standard-setting or rulemaking, or preparing for the start of busy season -- or for those of you who are Professors, hold other positions in academia, or are going back to school as full- or part-time students yourselves, best wishes from your friends at the FEI blog
, who thrive on bringing you the best in geeky accounting, auditing and financial reporting news (sometimes even to music! And watch for our next music video, now in the ‘concept stage’
. (Dear FASB and IASB: No, it’s not about the Conceptual Framework.)