The FASB released two proposals (more formally, Exposure Drafts of proposed Accounting Standards Updates) on Friday, relating to investment companies and investment properties, respectively.
See:
The comment period ends on Jan. 5, 2012 for both proposals.
Monday, 24 October 2011
FASB Proposes Deferring OCI Reclass Adjustments
The Financial Accounting Standards Board voted on Friday to propose a deferral of certain requirements in ASU 2011-5, Comprehensive Income, issued earlier this year. Important: the only requirements in that standard which will be deferred - while FASB further deliberates those matters - are the requirements for presentation of ‘reclassification adjustments’ from Other Comprehensive Income (OCI); the remaining provisions of ASU 2011-5 will become effective as originally set forth in that standard (beginning with public companies, for fiscal years, and interim periods within those years, ending after Dec. 15, 2011; private companies are subject to a later effective date in the standard). The action was expected, as noted here.
Proposal Expected Soon; At Least 15-Day Comment Period
An AccountingLink Financial Reporting Alert, published by Ernst & Young on Friday was one of the first reports published in the board’s vote. According to E&Y,
“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”
Reclassification Adjustments aka ‘Recycling’
BNA’s Steven Burkholder, in an article entitled FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”
The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”
Current Disclosure Requirements In Force During Deferral Period
Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.
Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”
Watch for FASB’s proposal (and potentially a related press release) on their website, www.fasb.org.
Proposal Expected Soon; At Least 15-Day Comment Period
An AccountingLink Financial Reporting Alert, published by Ernst & Young on Friday was one of the first reports published in the board’s vote. According to E&Y,
“[FASB’s] tentative decision came in response to concerns raised by issuers and other stakeholders that the requirement would significantly increase the number of line items that would have to be displayed in arriving at net income. Issuers also cited challenges in identifying and summarizing certain reclassification adjustments that have been capitalized on the balance sheet before recognition in net income (e.g. pension-related items that are capitalized in inventory).The FASB plans to issue an exposure draft on the decision in the near term and will provide no less than a 15-day period for comment. The Board decided to include in the exposure draft a proposed requirement to disclose in the notes to the financial statements amounts reclassified out of OCI, consistent with the existing disclosure requirement in ASC 220, Comprehensive Income.The deferral, if finalized, would not change the requirement to present items of net income, items of other comprehensive income and total comprehensive income in either one continuous statement or two separate consecutive statements. This requirement is effective for fiscal years and interim periods beginning after 15 December 2011 for public companies and for fiscal years ending after 15 December 2012 and interim periods thereafter for non-public companies.”
Reclassification Adjustments aka ‘Recycling’
BNA’s Steven Burkholder, in an article entitled FASB to Defer Part of Rules On Presenting ‘Recycling’ Adjustments, in today’s BNA Daily Report for Executives, notes that the proposed deferral of “reclassification adjustments,” or “what accountants call recycling” is expected to be released for public comment “in early November.” Like E&Y, he notes the comment period will be “at least 15 days.”
The jist of the new standard (ASU 2011-5), as explained by Burkholder was, “elimination of the option in U.S. GAAP to present those OCI components in the statement of change in stockholders' equity.: He adds, “Accountants and rulemakers frequently refer to such items of OCI being “buried” in that statement of stockholders' equity. The improvements that FASB states the new standards introduce “will help financial statement users better understand the causes of an entity's change in financial position and results of operations.”
Current Disclosure Requirements In Force During Deferral Period
Burkholder added that, “board members noted that the footnote reporting requirements of current, pre-ASC 2011-5 GAAP relating to presentation of comprehensive income would be effective,” during the deferral period. He adds, “Those disclosure rules call for details on reclassification adjustments and amounts coming out of OCI, as Seidman noted. A staff accountant told FASB that she did not know how well companies were complying with those current disclosure requirements pertaining to recycling adjustments. [FASB Board Member Tom] Linsmeier suggested that the board should convey a message, to accompany the proposed deferral, that it expects that companies would comply with current disclosure requirements. Those requirements are in provisions of ASC 220 that were formerly part of FAS 130.
Burkholder also cites FASB Project Manager Patricia Donoghue as explaining at the board meeting that ASU 2011-05 makes U.S. GAAP “more convergent’ with IFRS, “but not completely convergent.”
Watch for FASB’s proposal (and potentially a related press release) on their website, www.fasb.org.
Friday, 21 October 2011
SEC FRS Kicks Off With Nov. 8 Roundtable On Measurement Uncertainty; FASB To Meet On Future Scope of Risks and Uncertainties, Going Concern Project
Earlier today, the SEC announced it will hold the inaugural program in its Financial Reporting Series (FRS) on November 8; the focus of the initial roundtable will be Measurement Uncertainty. As we reported in June, the SEC’s FRS will consist of a series of roundtables focused on “the early identification of risks to the financial reporting system.”
In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.
The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS.
SEC FRS vis-a-vis FASB, PCAOB
Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.
As stated on the SEC’s webpage on the FRS, the objectives of the FRS are as follows:
Briefing Paper Outlines Issues; Public Comment Sought
As noted on the SEC webpage on Upcoming FRS Roundtables, the focus of the inaugural roundtable will be on:
The SEC formally invites public comment via Release No. 34-65602 published yesterday, “Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”
As noted in the briefing paper:
The SEC’s webpage on the FRS states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at FRS@sec.gov or on the FRS webpage.”
More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”
My Two Cents
A couple observations (please see the disclaimer posted on the right side of this blog).
Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern).
FASB recently discussed this project during an Education Session, and as shown in FASB’s calendar and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):
As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.
Francine McKenna, managing editor of Re:TheAuditors has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 Going, Going, Gone.
Of course, the subject of Going Concern is not to be confused with the popular ‘accounting tabloid,’ Going Concern.
Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see my earlier post from Sept. 2009.
In related news, the FASB is slated to discuss at a board meeting next week the future scope of its project on risks and uncertainties and going concern.
The SEC's FRS is under the aegis of the SEC's Office of the Chief Accountant, in coordination with the Division of Corporation Finance, and SEC Deputy Chief Accountant Mike Starr (Deputy Chief Accountant for Policy and Market Risk) has been charged with coordinating the FRS.
SEC FRS vis-a-vis FASB, PCAOB
Importantly, as relates to accounting and disclosure matters, some level of coordination with FASB and the PCAOB will take place.
As stated on the SEC’s webpage on the FRS, the objectives of the FRS are as follows:
- to provide SEC staff, the Financial Accounting Standards Board ("FASB"), and the Public Company Accounting Oversight Board ("PCAOB") with useful information about matters affecting the financial reporting system;
- for OCA to work closely with both Boards to ensure that they consider the appropriate actions to address emerging issues and changes in the business environment; and
- for OCA, in coordination with the Division of Corporation Finance (and, where appropriate, other SEC offices or divisions), to consider whether changes to Commission rules and regulations would be appropriate.
Briefing Paper Outlines Issues; Public Comment Sought
As noted on the SEC webpage on Upcoming FRS Roundtables, the focus of the inaugural roundtable will be on:
- where uncertain measurements provide investors with useful information and how those measurements should be recognized in the financial statements,
- the information investors need to understand and assess uncertainties,
- the need for additional guidance on the disclosures associated with uncertainties, and
- the auditor’s role and responsibility for reporting on uncertainties.
The SEC formally invites public comment via Release No. 34-65602 published yesterday, “Inaugural Roundtable of the Financial Reporting Series Entitled “Uncertainty in Financial Statements: How Much to Recognize and How Best to Communicate It”
As noted in the briefing paper:
- Uncertainty exists in financial statements where measurements “to a large extent…are based on estimates, judgments, and models rather than exact depictions.” As the level of uncertainty increases, challenges may exist for:
- financial statement preparers to estimate the future outcome of the uncertainties inherent in many business transactions,
- auditors to verify the subjective judgments about those uncertainties, and
- investors to understand those uncertainties and assess their potential impact on future earnings or cash flows.
Further, the SEC states that the inaugural roundtable “will bring together investors, preparers, and auditors to provide input about those measurements (and associated disclosures) where the outcome depends on future events that by definition are presently unknown.” Issues of focus will include:
- Measurement and recognition — whether measurements that involve uncertainty provide investors with useful information.
- Disclosure — the information that investors find important to understand and assess measurement uncertainties and the challenges or impediments that preparers face in providing that information.
- Auditability — the auditor's role and responsibility for reporting on financial statements with measurement uncertainties.
- Please provide feedback on any topics where the extent of uncertainty is less useful to investors and why a more certain measurement would be preferable. Likewise, provide comments on those topics where a measurement with uncertainty gives investors more useful information and why it is preferable to a more certain measurement.
- For those topics where uncertain measurements are useful to investors, how should the uncertainties be incorporated into the measure? Please explain the reasons for the measurement method(s) you selected.
- What information do investors utilize to understand uncertainty? Please describe why such information is useful and, if it is not disclosed in the financial statements, indicate its source.
- What are the challenges for investors in understanding the nature and extent of measurement uncertainty?
- As measurement uncertainty increases, please explain whether (and how, if applicable) it changes the investor’s expectation of preparers and auditors.
- For preparers, what are the challenges in or impediments to providing investors with information to understand the nature and extent of measurement uncertainties?
- What are the challenges for auditors in evaluating management’s judgments related to measurement uncertainties?
- Please provide comments on whether (and how) a change in the auditor’s responsibility or role would enhance the investor’s understanding of the nature and extent of measurement uncertainties.
- Please provide any additional comments or suggestions pertinent to how much uncertainty to recognize and how best to communicate it.
The SEC’s webpage on the FRS states that “Suggestions for topics are strongly encouraged and may be submitted via email to the FRS mailbox at FRS@sec.gov or on the FRS webpage.”
More formally, the SEC states that topics of future FRS roundtables may come from :”public comments, matters arising from OCA research and interaction with capital market participants; and input from the FASB, the PCAOB, and other offices and divisions of the SEC.”
My Two Cents
A couple observations (please see the disclaimer posted on the right side of this blog).
Cent one: the SEC briefing paper lists a number of prior studies, articles, and related material under “Additional Resources;” I was surprised there was no link (or reference elsewhere in the documents cited above) to one of FASB’s current projects: Disclosures about Risks and Uncertainties and the Liquidation Basis of Accounting (Formerly Going Concern).
FASB recently discussed this project during an Education Session, and as shown in FASB’s calendar and reported in yesterday’s FASB Action Alert, the FASB board is scheduled to discuss the following at its board meeting next week (Wed. Oct. 26):
“The Board will discuss whether to continue with the project as it is currently designed or modify the scope to provide guidance on assessing an entity’s ability to continue as a going concern.”
As reported by Dena Aubin of Reuters in the run-up to the Ed session, in her article FASB Weighs ‘Going Concern’ Self-Test for U.S. Firms the role of management vs. the auditor in assessing and/or attesting to a ‘going concern’ status of an entity is one issue that has been the subject of debate in the profession.
Francine McKenna, managing editor of Re:TheAuditors has her own view on going concern opinions during the financial crisis, e.g. see her post from Jan., 2009 Going, Going, Gone.
Of course, the subject of Going Concern is not to be confused with the popular ‘accounting tabloid,’ Going Concern.
Cent two: A key group of sometimes contrasting objectives is the triad cited in the SEC briefing paper, noted above: that is, the desire for additional disclosures relating to items with sometimes significant measurement uncertainty, and the ‘auditability’ of the information. This gets to the age-old, but still relevant, ‘relevance’ vs. ‘reliability’ debate with respect to accounting and disclosure. ‘Reliability’ historically incorporated verifiability within FASB’s Conceptual Framework; although the concept of verifiability is seen by some as having been watered down in more recent iterations of the conceptual framework, which to some overly deemphasized verifiability and reliability in favor of ‘representational faithfulness.’ These ‘concepts’ have real impact and cost real dollars, when they impact reporting and auditing requirements of the FASB, SEC, and PCAOB; for preparers, auditors, corporate counsel, directors and others in fulfillment of those requirements, and in the usefulness of the resulting information. If you’d like to read more about the importance of ‘concepts’ in navigating the waters of relevance vs. reliability (and cost-benefit) see my earlier post from Sept. 2009.
Saturday, 15 October 2011
Get The Latest FASB, SEC, IASB Updates At FEI CFRI; Consider Hall of Fame, IFRS Boot Camp
If you’re a regular reader of this blog, or you otherwise are tasked with following developments at, and/or implementing changes in accounting and financial reporting rules emanating from the FASB, SEC or IASB, you won’t want to miss this year’s FEI Current Financial Reporting Issues conference.
Set to take place November 14-15 at the Marriott Marquis Times Square hotel in New York City, this is the 30th year of FEI’s CFRI conference. Included among the speakers will be FASB Chairman Leslie Seidman, IASB Vice Chairman Ian Mackintosh, and SEC Chief Accountant Jim Kroeker.
While you are in NYC for CFRI, consider attending FEI’s Hall of Fame Gala Monday night November 14, or the post-conference IFRS Boot Camp on November 16. The Hall of Fame and IFRS Boot Camp are available by separate registration (they are not part of the CFRI program).
The Hall of Fame Gala, taking place at Gotham Hall in Manhattan, will celebrate the induction of this year’s Hall of Fame inductees: Robert C. Butler, Judy C. Lewent, and David B. Rickard. Proceeds of the Hall of Fame Gala benefit the Financial Executives Research Foundation (FERF).
Read more about all three events in this FEI press release; or visit the related webpages on agenda, speakers, and registration info for: CFRI, Hall of Fame, and IFRS Boot Camp.
Set to take place November 14-15 at the Marriott Marquis Times Square hotel in New York City, this is the 30th year of FEI’s CFRI conference. Included among the speakers will be FASB Chairman Leslie Seidman, IASB Vice Chairman Ian Mackintosh, and SEC Chief Accountant Jim Kroeker.
While you are in NYC for CFRI, consider attending FEI’s Hall of Fame Gala Monday night November 14, or the post-conference IFRS Boot Camp on November 16. The Hall of Fame and IFRS Boot Camp are available by separate registration (they are not part of the CFRI program).
The Hall of Fame Gala, taking place at Gotham Hall in Manhattan, will celebrate the induction of this year’s Hall of Fame inductees: Robert C. Butler, Judy C. Lewent, and David B. Rickard. Proceeds of the Hall of Fame Gala benefit the Financial Executives Research Foundation (FERF).
Read more about all three events in this FEI press release; or visit the related webpages on agenda, speakers, and registration info for: CFRI, Hall of Fame, and IFRS Boot Camp.
FASB Releases Proposed 'Technical Corrections' To Codification
On Friday, October 14, the FASB released a 214-page set of proposed technical corrections to the Accounting Standards Codification.
The proposed changes, which cover a wide variety of areas. Included among the proposed changes are include certain ‘conforming’ changes to reflect FAS 157, Fair Value Measurement, in certain parts of the Codification that were not previously updated (e.g. to change certain references from ‘market value,’ or ‘mark to market’ to ‘fair value.’)
According to the board, the proposed changes to the Codification are aimed at being ‘technical’ in nature, vs. ‘pervasive’ or ‘substantive.’ As explained in FASB’s press release (reformatted into bullets)
However, it is possible that certain proposed amendments may result in a change to existing practice.
The effective date of the proposed amendments would be determined after the Board considers comments on the proposal.
The comment deadline is Dec. 13, 2011.
The proposed changes, which cover a wide variety of areas. Included among the proposed changes are include certain ‘conforming’ changes to reflect FAS 157, Fair Value Measurement, in certain parts of the Codification that were not previously updated (e.g. to change certain references from ‘market value,’ or ‘mark to market’ to ‘fair value.’)
According to the board, the proposed changes to the Codification are aimed at being ‘technical’ in nature, vs. ‘pervasive’ or ‘substantive.’ As explained in FASB’s press release (reformatted into bullets)
- Periodically, the FASB updates the Codification for technical corrections and clarifications that are deemed necessary.
- The amendments included in this proposed Update cover a wide range of Topics and are generally nonsubstantive in nature.
- Many of the proposed amendments update terminology to conform with Topic 820 (Fair Value Measurement).
- The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.
The Board does not anticipate that the amendments in this proposed Update would result in pervasive changes to current practice.
However, it is possible that certain proposed amendments may result in a change to existing practice.
The effective date of the proposed amendments would be determined after the Board considers comments on the proposal.
The comment deadline is Dec. 13, 2011.
FASB To Meet This Week on Deferring Certain Aspects of ASU 2011-05: Comprehensive Income
The FASB board is set to meet Friday, October 21, to discuss “whether to defer the effective date of the presentation requirements for classification adjustments in Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The information about the board meeting – set to take place on Friday, following a series of FASB-IASB joint board meetings taking place on Wednesday and Thursday – appears in FASB’s calendar.
The addition of this matter to the board’s agenda was announced on Thursday by FASB chairman Leslie Seidman.
The particular aspect of ASU 2011-05 which the board will consider delaying is the requirement for separate presentation of items reclassified from other comprehensive income [OCI] to net income. Additional information on this matter can be found in KPMG’s Defining Issues.
The addition of this matter to the board’s agenda was announced on Thursday by FASB chairman Leslie Seidman.
The particular aspect of ASU 2011-05 which the board will consider delaying is the requirement for separate presentation of items reclassified from other comprehensive income [OCI] to net income. Additional information on this matter can be found in KPMG’s Defining Issues.
Tuesday, 11 October 2011
PCAOB Proposes Disclosure of Engagement Partner, Other Firms In Audit
Earlier today, the Public Company Accounting Oversight Board voted to release proposed amendments to its standards to require disclosure of the name of the audit engagement partner, and disclosure of certain other persons and firms associated with the audit. The PCAOB’s press release and related documents are linked at the bottom of this post.
The proposal follows from a recommendation of the U.S. Treasury Advisory Committee on the Auditing Profession published in 2008, and a PCAOB Concept Release issued in 2009, including consideration of comment letters received on that Concept Release, and input received by the PCAOB by its Standing Advisory Group, Investor Advisory Group, and others. For background, particularly regarding the move to require ‘disclosure’ vs. ‘signature’ by the engagement partner, and a discussion about potential liability issues arising from such disclosure or signature, see our earlier blog post.
PCAOB Chief auditor Marty Baumann outlined today’s proposal as requiring disclosure of the:
· Name of the engagement partner [to be disclosed], in the audit report
· Name of the engagement partner, [to be disclosed] in the annual report filed by each registered audit firm with the PCAOB [Form 2]
· Names, locations, and extent of participation of other persons and firms who took part in the audit
Disclosure Of Engagement Partner For Most Recent Audit Period Only
Dima Andriyenko of the PCAOB staff said disclosure of the engagement partner signature would be required by adding the following sentence to the auditor’s report: "The engagement partner responsible for the audit for the period ended [date] was [name of engagement partner]."
He also noted that while the audit report relates to financial statements of more than one year; based on comments received on the earlier Concept Release, the PCAOB’s current proposal recommends disclosure of the engagement partner for the most recent period’s audit only.
3% Threshold For Disclosure of Other Audit Firms, Persons
Lisa Calandriello of the PCAOB staff explained the scope of the proposed requirement to disclose the names and locations of other independent accounting firms or persons who participated in the audit, and how that determination is to be made with respect to considerations relating to contractual relationships with those other persons/firms, and with respect to taking responsibility as the “principal audit firm” for work performed by other audit firms/persons as described in AU 543, Part of Audit Performed by Other Independent Auditors, or in a supervisory role as specified in AS 10, Supervision of the Audit Engagement.
Calandriello described a 3% threshold for determining whether another audit firm/person needed to be disclosed: "If the percentage of total audit hours [performed by another person or audit firm] attributed to the audit … is 3 % or more, then this firm or person [would be] disclosed separately. [The proposal], would not require separate disclosure of firms or persons whose participation is below3%, such firms or persons would either be disclosed as a group, or disclosed separately, as determined by the audit firm issuing the audit report."
Unanimous Vote; 90-Day Comment Period
The board voted unanimously in favor of releasing for public comment the proposal on disclosure of the engagement partner and certain other firms/persons involved in the audit. The staff recommended, a 90-day comment period, noted Calandriello; ending Jan. 9, 2012.
Comment Sought On Legal Liability, Disclosure Of Additional Parties
The board members’ opening statements, and in particular, the Question and Answer period between the board members and staff, highlighted a number of issues on which there is still some uncertainty and/or the board is specifically seeking comment in the proposing release.
Will disclosure of the engagement partner, as required in the proposing release (or an engagement partner signature, as still preferred by board member Steve Harris, although he concurred with issuing the proposing release) increase the personal liability of the engagement partner? Matters specifically discussed in the Q&A, particularly in questions posed by board member Dan Goelzer (a lawyer) and board member Jay Hanson (an auditor, who asked for a ‘plain English’ explanation of the legal issues), and in responses provided by the PCAOB’s General Counsel, Gordon Seymour, centered on liability as enforced by the SEC under Securities Act Section 7 and Section 11, and liability under the anti-fraud provisions of Section 10b, particularly in light of the recent Janus decision [Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011)], as to who the ‘maker’ of a statement is.
Here is an excerpt from the discussion re: engagement partner liability: GOELZER: Let’s turn to liability, the elephant in the room. Treasury ACAP said signature should not impose any greater liability on the partner than they would otherwise have; ACAP went on to discuss possibility of the SEC offering a safe harbor; does the [PCAOB] staff believe the switch from [considering requiring an engagement partner] signature to disclosure [of the name of the engagement partner] would obviate the need for a safe harbor? PCAOB GC GORDON SEYMOUR: ACAP referred to the possibility of a safe harbor regarding Section 11 of the Securities Act of ’33. The SEC administers Section 11, [and the SEC] would have to decide if … [disclosure of the engagement partner] would subject that individual to Section 11 liability, which raises in turn whether the SEC would promulgate a safe harbor; yes, that’s an issue, we’ve had discussions with the SEC, as to their willingness to promulgate a safe harbor, [it is not yet determined], we’ll continue to have discussions with the SEC staff. GOELZER: Section 11 is under the SEC’s control, whether or not they’ll accept a Section 7 consent, that will drive Section 11 liability. …
SEYMOUR [later, in response to question posed by board member Jay Hanson]: There are two provisions in the Federal Securities laws, that could be enforced b y regulatory, and private actions, Section 7 and 11 work in tandem, Section 10b is another, 10b is a fraud based claim, the recent decision in Janus clarifies who the ‘maker’ of a statement is; at the time of [the board’s 2009] Concept Release on an [engagement partner] signature requirement, the law was more uncertain, predated Janus, many commenters thought a signature requirement would make the signer the ‘maker’ of the statement; , we have questions whether there are implications post-Janus on signature requirement; Section 7 and 11 [of the Securities Act] relates to securities offerings, companies [e.g. audit firms] named in a registration statement have to file a ‘consent’ and therefore have potential liability for statements potentially false in the that registration statement; the issue is whether the SEC would require a Section 7 consent; it is clear today an audit firm would be such an expert and face that potential liability, the only issue here is whether the SEC would also see that individual as an ‘expert’ if they are seen [disclosed] in that audit report, therefore that individual could face liability [under Section 11] if they couldn’t show they acted with due diligence. The SEC could issue a safe harbor rule, we understand ACAP recommended [that].
Another issue discussed in the Q&A at the board meeting, on which the PCAOB specifically seeks comment in the proposing release, is whether disclosure of any additional partners should be required, specifically, the Engagement Quality Review [EQR] partner, or the ‘Appendix K’ review partner. As explained by Deputy Chief Auditor Jennifer Rand: “there are certain exceptions to disclosure of other firms or persons, EQR is one, Appendix K review [is another, as well as], specialists, internal audit, use of work of others. Lisa also talked about the construct of disclosure in 1 of 2 buckets: those firms you take responsibility for under AU 543, the other is under AS10 [which] the board issued a year ago…. [In contrast] Engagement quality review is intended to be an objective look at the audit; outside the audit, that person does not perform audit procedures, not involved in role of performing audit work; [but] making sure the opinion was appropriately issued; we thought under construct of AU 543 and AS10, EQR didn’t meet that construct, the release includes questions whether eng quality reviewer should be disclosed.” In response to a question from Chairman Jim Doty on why the ‘Appendix K’ review partner was excluded, Rand replied: “Appendix K is a requirement the board adopted in 2003 from the AICPA’s SEC practice section, which had requirements that went to its member firms; Appendix K requires firms that had been members of the SEC Practice Section to have filings reviewed of foreign affiliated firms before it comes into the US market, to have someone knowledgeable about U.S. rules [conduct a review].” She said the reasoning behind not requiring disclosure of Appendix K review partner was similar to that in not requiring disclosure of the EQR partner.
3% threshold for disclosure of other firms or individuals (outside the principal audit firm) performing part of the audit: In response to a board member’s question, Baumann noted that the 3% figure was arrived at after the staff concluded there should be a threshold, and they determined the 3% threshold to be reasonable for this purpose. Staff pointed out the 3% threshold differs from the board’s 20% threshold which determines which audit firms must be registered with, and inspected by, the PCAOB (firms performing 20% or more of audits of a public company). Therefore, some nonregistered audit firms may be disclosed under this proposals 3% threshold, and some registered audit firms involved in less than 3% of the work on a particular audit may not necessarily be disclosed in that particular audit report.
Information will be searchable: in response to a question from Goelzer, PCAOB staff member Mary Peters said that the names of engagement partners as disclosed in PCAOB’s Form 2 will be searchable on the PCAOB website.
Will Enhanced ‘Accountability’ Mindset Drive Increase In Audit Procedures, Cost?
Also during the Q&A , board member Daniel Goelzer raised a specific line of questions on the subject of cost-benefit, centering on whether changes in attitude (i.e., a presumed enhanced sense of ‘accountability’ on the part of an engagement partner whose name was disclosed) would lead to changes in behavior, and specifically to changes in audit procedures – which could in turn potentially drive increased costs. Although PCAOB staff said ‘no new procedures’ were required under this proposal (which could potentially be used to assert no additional costs were likely to arise), the potential for the engagement partner to drive increased procedures that result in simply covering their liability, but do not add to audit quality, and the potential for increased audit procedures that actually increase audit quality, is certainly there, and is something that commenters may want to consider.
Following are some excerpts from the Q&A during today’s PCAOB board meeting, regarding cost-benefit of the proposal for disclosure of the name of the engagement partner: GOELZER asked Baumann to describe the ‘specific behavioral changes the staff expects from a signature or disclosure requirement. ‘ BAUMANN replied that the staff ‘expect it would enhance a sense of accountability; ….inspection results show there is room for substantial improvement in professional skepticism and other areas, and the enhanced accountability from a disclosure of the engagement partner is expected to [be helpful].” ANDRIYENKO added that ‘the proposal does not require any additional audit procedures.’ GOELZER: “Do you plan to do a cost/benefit analysis, if people are going to perform audits differently, I think there has to be some analysis of the costs.” BAUMANN: “On the surface, inclusion of [engagement partner] signature would require no cost; whether the auditor suddenly feels he or she has to perform more procedures just because their name is there, … as to the assertion we heard from the [audit] firms that they already felt accountable signing the audit firms’ name, whether additional procedures [in some cases are necessary].. that would be a positive benefit; additional costs are not quite known. We are looking for input on this proposal on issues of cost and benefit.” GOELZER: [As referenced earlier in the meeting and in the proposal] the EU requires signature of [engagement partner]natural person on audits, do you know if there has been behavioral research on changes from that? BAUMANN: audit quality is a very hard thing to define; measuring improvements in audit quality is a difficult thing, a period of time is needed to assess improvements, there isn’t a lot of history whether engagement partner signature [in the EU] has changed audit quality; one study showed no apparent change, but those researchers used ….. things that are not necessarily linked to audit quality. “ANDRIYENKO : “One study on the effect of engagement partner signature in one European country; failed to document any relationship in audit quality based on parameters of the study; however, [the study also] failed to unconditionally conclude there is no relationship between audit quality, changes in audit quality, and [the EU] requirement for engagement partner signature.” GOELZER: It seems to me there are several things going on, one is whether they [the engagement partner] would feel more accountable, one is whether they would act differently, .. whether they are doing self protective things that wouldn’t improve audits, staff should [look at that]. The other is disclosure/transparency matter; [for example] you know who [a public company’s] directors are, officers, a lot of information required to be disclosed about people involved with public companies, do you know if the SEC has ever considered requiring disclosure of the names of engagement partners? PCAOB staff: “The SEC staff talked about some matters staff was considering, they had not presented it to the commission, I am not aware if that has advanced to the commission; not aware of other activity.”
The proposal follows from a recommendation of the U.S. Treasury Advisory Committee on the Auditing Profession published in 2008, and a PCAOB Concept Release issued in 2009, including consideration of comment letters received on that Concept Release, and input received by the PCAOB by its Standing Advisory Group, Investor Advisory Group, and others. For background, particularly regarding the move to require ‘disclosure’ vs. ‘signature’ by the engagement partner, and a discussion about potential liability issues arising from such disclosure or signature, see our earlier blog post.
PCAOB Chief auditor Marty Baumann outlined today’s proposal as requiring disclosure of the:
· Name of the engagement partner [to be disclosed], in the audit report
· Name of the engagement partner, [to be disclosed] in the annual report filed by each registered audit firm with the PCAOB [Form 2]
· Names, locations, and extent of participation of other persons and firms who took part in the audit
Disclosure Of Engagement Partner For Most Recent Audit Period Only
Dima Andriyenko of the PCAOB staff said disclosure of the engagement partner signature would be required by adding the following sentence to the auditor’s report: "The engagement partner responsible for the audit for the period ended [date] was [name of engagement partner]."
He also noted that while the audit report relates to financial statements of more than one year; based on comments received on the earlier Concept Release, the PCAOB’s current proposal recommends disclosure of the engagement partner for the most recent period’s audit only.
3% Threshold For Disclosure of Other Audit Firms, Persons
Lisa Calandriello of the PCAOB staff explained the scope of the proposed requirement to disclose the names and locations of other independent accounting firms or persons who participated in the audit, and how that determination is to be made with respect to considerations relating to contractual relationships with those other persons/firms, and with respect to taking responsibility as the “principal audit firm” for work performed by other audit firms/persons as described in AU 543, Part of Audit Performed by Other Independent Auditors, or in a supervisory role as specified in AS 10, Supervision of the Audit Engagement.
Calandriello described a 3% threshold for determining whether another audit firm/person needed to be disclosed: "If the percentage of total audit hours [performed by another person or audit firm] attributed to the audit … is 3 % or more, then this firm or person [would be] disclosed separately. [The proposal], would not require separate disclosure of firms or persons whose participation is below3%, such firms or persons would either be disclosed as a group, or disclosed separately, as determined by the audit firm issuing the audit report."
Unanimous Vote; 90-Day Comment Period
The board voted unanimously in favor of releasing for public comment the proposal on disclosure of the engagement partner and certain other firms/persons involved in the audit. The staff recommended, a 90-day comment period, noted Calandriello; ending Jan. 9, 2012.
Comment Sought On Legal Liability, Disclosure Of Additional Parties
The board members’ opening statements, and in particular, the Question and Answer period between the board members and staff, highlighted a number of issues on which there is still some uncertainty and/or the board is specifically seeking comment in the proposing release.
Will disclosure of the engagement partner, as required in the proposing release (or an engagement partner signature, as still preferred by board member Steve Harris, although he concurred with issuing the proposing release) increase the personal liability of the engagement partner? Matters specifically discussed in the Q&A, particularly in questions posed by board member Dan Goelzer (a lawyer) and board member Jay Hanson (an auditor, who asked for a ‘plain English’ explanation of the legal issues), and in responses provided by the PCAOB’s General Counsel, Gordon Seymour, centered on liability as enforced by the SEC under Securities Act Section 7 and Section 11, and liability under the anti-fraud provisions of Section 10b, particularly in light of the recent Janus decision [Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296 (2011)], as to who the ‘maker’ of a statement is.
Here is an excerpt from the discussion re: engagement partner liability: GOELZER: Let’s turn to liability, the elephant in the room. Treasury ACAP said signature should not impose any greater liability on the partner than they would otherwise have; ACAP went on to discuss possibility of the SEC offering a safe harbor; does the [PCAOB] staff believe the switch from [considering requiring an engagement partner] signature to disclosure [of the name of the engagement partner] would obviate the need for a safe harbor? PCAOB GC GORDON SEYMOUR: ACAP referred to the possibility of a safe harbor regarding Section 11 of the Securities Act of ’33. The SEC administers Section 11, [and the SEC] would have to decide if … [disclosure of the engagement partner] would subject that individual to Section 11 liability, which raises in turn whether the SEC would promulgate a safe harbor; yes, that’s an issue, we’ve had discussions with the SEC, as to their willingness to promulgate a safe harbor, [it is not yet determined], we’ll continue to have discussions with the SEC staff. GOELZER: Section 11 is under the SEC’s control, whether or not they’ll accept a Section 7 consent, that will drive Section 11 liability. …
SEYMOUR [later, in response to question posed by board member Jay Hanson]: There are two provisions in the Federal Securities laws, that could be enforced b y regulatory, and private actions, Section 7 and 11 work in tandem, Section 10b is another, 10b is a fraud based claim, the recent decision in Janus clarifies who the ‘maker’ of a statement is; at the time of [the board’s 2009] Concept Release on an [engagement partner] signature requirement, the law was more uncertain, predated Janus, many commenters thought a signature requirement would make the signer the ‘maker’ of the statement; , we have questions whether there are implications post-Janus on signature requirement; Section 7 and 11 [of the Securities Act] relates to securities offerings, companies [e.g. audit firms] named in a registration statement have to file a ‘consent’ and therefore have potential liability for statements potentially false in the that registration statement; the issue is whether the SEC would require a Section 7 consent; it is clear today an audit firm would be such an expert and face that potential liability, the only issue here is whether the SEC would also see that individual as an ‘expert’ if they are seen [disclosed] in that audit report, therefore that individual could face liability [under Section 11] if they couldn’t show they acted with due diligence. The SEC could issue a safe harbor rule, we understand ACAP recommended [that].
Another issue discussed in the Q&A at the board meeting, on which the PCAOB specifically seeks comment in the proposing release, is whether disclosure of any additional partners should be required, specifically, the Engagement Quality Review [EQR] partner, or the ‘Appendix K’ review partner. As explained by Deputy Chief Auditor Jennifer Rand: “there are certain exceptions to disclosure of other firms or persons, EQR is one, Appendix K review [is another, as well as], specialists, internal audit, use of work of others. Lisa also talked about the construct of disclosure in 1 of 2 buckets: those firms you take responsibility for under AU 543, the other is under AS10 [which] the board issued a year ago…. [In contrast] Engagement quality review is intended to be an objective look at the audit; outside the audit, that person does not perform audit procedures, not involved in role of performing audit work; [but] making sure the opinion was appropriately issued; we thought under construct of AU 543 and AS10, EQR didn’t meet that construct, the release includes questions whether eng quality reviewer should be disclosed.” In response to a question from Chairman Jim Doty on why the ‘Appendix K’ review partner was excluded, Rand replied: “Appendix K is a requirement the board adopted in 2003 from the AICPA’s SEC practice section, which had requirements that went to its member firms; Appendix K requires firms that had been members of the SEC Practice Section to have filings reviewed of foreign affiliated firms before it comes into the US market, to have someone knowledgeable about U.S. rules [conduct a review].” She said the reasoning behind not requiring disclosure of Appendix K review partner was similar to that in not requiring disclosure of the EQR partner.
3% threshold for disclosure of other firms or individuals (outside the principal audit firm) performing part of the audit: In response to a board member’s question, Baumann noted that the 3% figure was arrived at after the staff concluded there should be a threshold, and they determined the 3% threshold to be reasonable for this purpose. Staff pointed out the 3% threshold differs from the board’s 20% threshold which determines which audit firms must be registered with, and inspected by, the PCAOB (firms performing 20% or more of audits of a public company). Therefore, some nonregistered audit firms may be disclosed under this proposals 3% threshold, and some registered audit firms involved in less than 3% of the work on a particular audit may not necessarily be disclosed in that particular audit report.
Information will be searchable: in response to a question from Goelzer, PCAOB staff member Mary Peters said that the names of engagement partners as disclosed in PCAOB’s Form 2 will be searchable on the PCAOB website.
Will Enhanced ‘Accountability’ Mindset Drive Increase In Audit Procedures, Cost?
Also during the Q&A , board member Daniel Goelzer raised a specific line of questions on the subject of cost-benefit, centering on whether changes in attitude (i.e., a presumed enhanced sense of ‘accountability’ on the part of an engagement partner whose name was disclosed) would lead to changes in behavior, and specifically to changes in audit procedures – which could in turn potentially drive increased costs. Although PCAOB staff said ‘no new procedures’ were required under this proposal (which could potentially be used to assert no additional costs were likely to arise), the potential for the engagement partner to drive increased procedures that result in simply covering their liability, but do not add to audit quality, and the potential for increased audit procedures that actually increase audit quality, is certainly there, and is something that commenters may want to consider.
Following are some excerpts from the Q&A during today’s PCAOB board meeting, regarding cost-benefit of the proposal for disclosure of the name of the engagement partner: GOELZER asked Baumann to describe the ‘specific behavioral changes the staff expects from a signature or disclosure requirement. ‘ BAUMANN replied that the staff ‘expect it would enhance a sense of accountability; ….inspection results show there is room for substantial improvement in professional skepticism and other areas, and the enhanced accountability from a disclosure of the engagement partner is expected to [be helpful].” ANDRIYENKO added that ‘the proposal does not require any additional audit procedures.’ GOELZER: “Do you plan to do a cost/benefit analysis, if people are going to perform audits differently, I think there has to be some analysis of the costs.” BAUMANN: “On the surface, inclusion of [engagement partner] signature would require no cost; whether the auditor suddenly feels he or she has to perform more procedures just because their name is there, … as to the assertion we heard from the [audit] firms that they already felt accountable signing the audit firms’ name, whether additional procedures [in some cases are necessary].. that would be a positive benefit; additional costs are not quite known. We are looking for input on this proposal on issues of cost and benefit.” GOELZER: [As referenced earlier in the meeting and in the proposal] the EU requires signature of [engagement partner]natural person on audits, do you know if there has been behavioral research on changes from that? BAUMANN: audit quality is a very hard thing to define; measuring improvements in audit quality is a difficult thing, a period of time is needed to assess improvements, there isn’t a lot of history whether engagement partner signature [in the EU] has changed audit quality; one study showed no apparent change, but those researchers used ….. things that are not necessarily linked to audit quality. “ANDRIYENKO : “One study on the effect of engagement partner signature in one European country; failed to document any relationship in audit quality based on parameters of the study; however, [the study also] failed to unconditionally conclude there is no relationship between audit quality, changes in audit quality, and [the EU] requirement for engagement partner signature.” GOELZER: It seems to me there are several things going on, one is whether they [the engagement partner] would feel more accountable, one is whether they would act differently, .. whether they are doing self protective things that wouldn’t improve audits, staff should [look at that]. The other is disclosure/transparency matter; [for example] you know who [a public company’s] directors are, officers, a lot of information required to be disclosed about people involved with public companies, do you know if the SEC has ever considered requiring disclosure of the names of engagement partners? PCAOB staff: “The SEC staff talked about some matters staff was considering, they had not presented it to the commission, I am not aware if that has advanced to the commission; not aware of other activity.”
Links to PCAOB Documents
The following documents relating to today’s PCAOB board vote to release proposed amendments requiring disclosure of the name of the engagement partner, and disclosure of certain other firms and individuals (outside the principal audit firm), have been issued by the PCAOB:
PCAOB Press release Oct. 11, 2011
Statement of Chairman Jim Doty
Statement of Board Member Dan Goelzer
Statement of Board Member Lew Ferguson
Statement of Board Member Steven B. Harris
Statement of Board Member Jay Hanson
Watch for a link to the proposed rule (and the archived webcast) to be posted here.
The following documents relating to today’s PCAOB board vote to release proposed amendments requiring disclosure of the name of the engagement partner, and disclosure of certain other firms and individuals (outside the principal audit firm), have been issued by the PCAOB:
PCAOB Press release Oct. 11, 2011
Statement of Chairman Jim Doty
Statement of Board Member Dan Goelzer
Statement of Board Member Lew Ferguson
Statement of Board Member Steven B. Harris
Statement of Board Member Jay Hanson
Watch for a link to the proposed rule (and the archived webcast) to be posted here.
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