By Anne Sherry, J.D.
SEC Chief Accountant Sagar Teotia emphasized the importance of engagement in his comments on the occasion of an AICPA conference.
In a statement in connection with the AICPA conference on SEC and PCAOB developments, SEC Chief Accountant Sagar Teotia discussed the SEC’s oversight of the FASB and PCAOB as well as the work of the Office of the Chief Accountant itself in providing staff guidance and fostering effective financial reporting. Engagement was a key theme of Teotia’s remarks, and he emphasized repeatedly that his office encourages consultation submissions. The past year saw over 200 meetings, round tables, speeches, and presentations by the Office, Teotia said.
Accounting standards. The Office of the Chief Accountant provides support to the Commission in its oversight of the FASB as independent standard-setter. With most registrants having implemented the new revenue standard, Teotia reflected on multiple factors that aided implementation. Engagement through formal feedback and informal discussions occurred early, and preparers gave themselves and their auditors enough time to tackle the areas of the new standards requiring judgment. Many preparers consulted with the Office to get the staff’s views, especially on unique fact patterns. Teotia added that the staff receives more questions on revenue recognition than on any other accounting topic.
Teotia also praised the implementation of the new leases standard, which became effective on January 1, 2019, for calendar year-end companies. The implementation benefited from collaboration, such as when entities identified complexities and costs with the FASB’s initial retrospective approach. The FASB took this feedback and offered an additional transition method. Finally, the Office is monitoring implementation of the new credit losses standard, which goes effective next year for many public companies, and is assisting by updating staff guidance and answering consultations.
Regarding the FASB’s current standard-setting agenda, Teotia noted that stakeholder concerns about the costs of an annual goodwill impairment test caused the Board to add this item to its agenda. He encouraged further stakeholder participation in the process. He also discussed a project on distinguishing liabilities from equity before turning to reference rate reform. A joint statement by the Office and several SEC divisions encourages stakeholders to identify and address the risks related to the impending transition away from LIBOR. For its part, the FASB issued a proposed Accounting Standards Update (ASU) on temporary optional guidance to help in accounting for contracts, hedging relationships, and other transactions. Teotia once again encouraged stakeholders to engage in consultations with the Office.
PCAOB oversight. The Office also supports the PCAOB’s view that a proactive approach to engagement will drive improvements in audit quality. It also encourages the PCAOB’s efforts to focus on prevention as it assesses and modernizes its regulatory activities. For example, recent guidance related to the implementation of critical audit matters (CAMs) included information aimed at various audiences and incorporated questions that arose during early dry runs. Moreover, the PCAOB is focusing on communicating actions auditors can take to meet their professional obligations, such as by publishing good practices and examples of effective procedures.
Teotia highlighted several efforts that demonstrate the PCAOB’s forward-looking mindset in the implementation of critical audit matters. The Board’s Office of the Chief Auditor reviewed certain firms’ CAM-related methodologies ahead of the effective date and provided its observations. The dry runs also provided an early opportunity for stakeholders to raise potential concerns and for the PCAOB to issue guidance.
International matters. Teotia was recently appointed co-chair of The Monitoring Group, a group of international financial institutions and regulators charged with advancing the public interest in international standard-setting and audit quality. In addition to dialogue with international standard-setters through the group, the Office also contributes to IOSCO and the IFRS Foundation Monitoring Board. Teotia also highlighted the specific issue of the PCAOB’s lack of access to audit firm work papers of U.S.-listed companies that operate in China. He believes that ongoing dialogue among the SEC, PCAOB, and the big four audit firms will emphasize the need for global oversight, including in emerging markets.
Other recent activities. Finally, Teotia summed up the Office’s recent efforts on auditor independence, internal control over financial reporting, independent audit committees, and technology and innovation. The Office recently revised the FAQs on auditor independence matters and contributed to the SEC’s work on auditor independence rules. Regarding ICFR, while some companies have improved, there is still room for improvement, Teotia said. In particular, issuers should leave themselves enough time to change ICFR when transitioning to a new accounting standard.
The chief accountant also emphasized the role of audit committees in the financial reporting system. He encouraged audit committees to continue to engage with preparers and auditors in implementing the new accounting and auditing standards. Committee members should challenge management and auditors, including in areas such as the impact that new requirements may have on financial statements. Finally, Teotia mentioned the Office’s collaboration with the Commission’s FinHub. This includes engagement on new developments such as blockchain and distributed ledger, digital marketplace financing, automated investment advice, artificial intelligence, and machine learning.
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