SEC Chief Accountant Wesley Bricker, in remarks at a recent financial reporting conference, cautioned companies about devoting more resources to the new revenue recognition standard than the other new standards on leases, financial instruments, and credit losses. The revenue recognition standard has the earliest adoption date of the new standards, but Bricker said concurrent implementation planning may be more effective than sequential planning given the number of complementary activities and coming effective dates. In addition to the new GAAP standards, Bricker talked about the PCAOB’s role in financial reporting, international collaboration, internal control over financial reporting, and auditor independence.
New auditor’s report. Bricker mentioned the PCAOB’s recent adoption of a new auditor’s reporting model, which must be approved by the SEC before it becomes effective. Once the SEC publishes the notice of the proposed standard, he encouraged interested parties to comment. Comments are very important to the standard setting process, he advised. The standard includes a requirement to disclose the year in which an auditor began its service for a company. Bricker pointed to the release’s note that existing research on the relationship between an auditor’s tenure and either audit quality or independence has varied conclusions.
Revenue recognition. With respect to the new accounting standards, Bricker addressed a few specific areas. The new revenue recognition standard will benefit from an audit committee that understands management’s implementation plan and its progress, he said, including any required updates to internal control over financial reporting. The auditor’s role is to communicate with the audit committee any concerns about the application of a new accounting pronouncement that may have a significant effect on future financial reporting.
Bricker also emphasized the importance of disclosures about the new standard, which may include updates to existing processes and controls. Some companies have early adopted the standard, as permitted, he added, but for those that plan to apply the standard as required in 2018, he called for robust transition disclosures as outlined in Staff Accounting Bulletin 74 and the staff guidance that was issued in September 2016.
The new credit losses standard, effective in 2020, crosses industries, Bricker noted. He encouraged companies to evaluate the scope paragraphs in these standards to identify relevant transactions and provide transition disclosure about the effect of the new standards. This early scoping exercise will be one of the key steps in determining the work necessary to implement the standard, he explained.
Internal controls. Updating and maintaining internal controls will be particularly important over the next few years as companies implement the new accounting standards, according to Bricker. Companies’ implementation activities will require careful planning, execution, and sound management judgment, he advised. He reminded companies which use the COSO framework for assessing the effectiveness of ICFR that each of the five components of the framework must be present and operating to conclude that ICFR is effective.
Bricker reported that there are benefits in disclosing the remediation of material weaknesses. He cited a number of studies which show that this disclosure tends to be followed by improved financial reporting quality, reduced cost of capital, and improved operating performance. Investors tend to respond favorably to the disclosure of the remediation of material weaknesses in company registration statements, he said, but if left unidentified or unaddressed, these deficiencies could lead to lower quality financial reporting, higher financial reporting restatement rates, and a higher cost of capital.
Auditor independence. Bricker reported that audit committees have become more active in bringing auditor independence issues to the staff. The staff may contact an audit committee to learn more about an independence matter that has been submitted for its consideration, he said. Bricker reviewed some of the considerations that an audit committee may face when selecting a successor auditor to ensure its independence and said the staff is available to consult on these matters.
Audit planning. Bricker also talked about the importance of establishing reasonable deadlines and audit fees, particularly in light of the new accounting standards that are going into effect. He emphasized the need for proper audit planning to prevent the types of manipulations of financial results that typically occur near the end of a reporting period. Bricker urged firms to maintain systems of quality control to recognize the organizational and individual pressures in today’s audit environment and to address them appropriately.
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