Category Archives: Accounting and Auditing

Task force provides framework and guidance for climate-related financial disclosures

by Cydney Posner

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) has recently issued its exhaustive final report—Recommendations of the Task Force on Climate-related Financial Disclosures—and supporting materials, designed to provide a standardized framework and detailed guidance for “voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.” To develop its recommendations, the task force spent 18 months consulting with a wide range of business and financial leaders.  According to the press release, “[o]ver 100 business leaders and their companies with a combined market cap of around $3.5tn and financial institutions responsible for assets of about $25tn have publicly committed to support the recommendations.”  The disclosure recommendations are organized around four core elements—governance, strategy, risk management and metrics and targets.  The Task Force also developed supplemental guidance for financial industries along with companies in energy, transportation, materials and building and agriculture food and forest products. This type of information is expected to enable markets to better “price risk” and allow investors to make more informed decisions.  The task force urged companies to include this information as part of their annual SEC or comparable filings to ensure the application of adequate governance processes. Although there is no specific timeframe for adoption, the task force encouraged companies to adopt as soon as possible, keeping in mind that climate reporting will certainly evolve over time. Continue reading

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SEC Chair Jay Clayton discusses principles guiding his tenure at the SEC

by Cydney Posner

In his first public speech as SEC Chair, Jay Clayton outlined for the Economic Club of New York eight principles that he aims to guide his tenure as Chair. In discussing these principles and some ways in which he plans to put them into practice, Clayton seemed to stress the need to focus more intently on the various costs of regulatory compliance—in dollars, in time, in effort, in complexity and in economic impact.  In particular, Clayton drew attention to a reduction in the number of public companies in recent years—a “roughly 50% decline in the total number of U.S.-listed public companies over the last two decades”—attributing the decline at least in part to the expansion of disclosure requirements, in some cases beyond materiality.  To address this issue, he asserted, the SEC “should review its rules retrospectively” from the perspective of the cumulative effect of required disclosure, not just each incremental slice. Finally, he noted that the SEC “has several initiatives underway to improve the disclosure available to investors, “ including implementation of recommendations contained in the SEC staff’s Report on Modernization and Simplification of Regulation S-K (see this PubCo post).  According to Clayton, the staff “is making good progress on preparing rulemaking proposals based on this report….”

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Form what? CAQ offers help for audit committees in understanding and using Form AP

by Cydney Posner

Remember Form AP? That’s the form that the PCAOB is now requiring audit firms to use to name individual audit engagement partners. The form will also disclose the names and Firm IDs, locations and extent of participation of any other accounting firms, outside of the principal auditor, that participated in the audit, if their work constituted 5% or more of the total audit hours.  (See this PubCo post.) Should companies care? Yes, says the Center for Audit Quality: the disclosures made in Form AP can help audit committee members in satisfying their responsibilities to oversee the engagement audit firm as well as other audit participants.  Continue reading

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The CAMs are coming: PCAOB adopts new standard to enhance audit reports

by Cydney Posner

Yesterday, as anticipated, the PCAOB adopted, subject to SEC approval, a new auditing standard for the auditor’s report that, while retaining the usual pass/fail opinion, will require auditors to include a discussion of “critical audit matters,” that is, “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” The new CAM disclosure requirement will apply (with some exceptions) to audits conducted under PCAOB standards, including audits of smaller reporting companies and non-accelerated filers (although at a later phase-in date), but will not apply to emerging growth companies. Here are the press release and related fact sheet.

SoapBox: I don’t think I’d be going too far out on a limb if I predicted that we might see some disputes erupt over CAM disclosure. Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. But will auditors’ judgments about which CAMs were the real nightmares be called into question? Will the new disclosure requirement precipitate many auditor-management squabbles over the CAMs selected or the nature or extent of the disclosure?  And just how enthusiastic will the CFO be about the prospect of the auditor’s sharing with the investing public the convoluted nature or opacity of the company’s policies or the struggles involved in performing the audit or reaching conclusions about the financials? Although the adopting release suggests that the process will be an iterative one between management and the auditors, how much input will auditors really allow audit committees or managements in reviewing the auditors’ selection or disclosure? Will auditors’ use the new disclosure requirement as leverage to compel managements to include disclosure in the notes or MD&A that management may not view as necessary?  Because the trigger for CAM consideration is whether a matter has been or is required to be communicated to the audit committee, will the new requirement have the effect of chilling communications among auditors, audit committees and managements, a concern often mentioned in comments on the proposal? Or will the new standard ultimately end up just producing more boilerplate, as auditors (and companies) find comfort in conformity?

Notably, the PCAOB expects little chilling effect: “For matters required to be communicated to the audit committee, the Board believes there should not be a chilling effect or reduced communications to the audit committee because the requirements for such communications are not changing. It would seem that any chilling effect would more likely relate to matters that are not explicitly required to be communicated to the audit committee, although given the broad requirements of [the relevant standard], the Board believes that there may be few, if any, relevant communications affected by that possibility.”

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Does it pay to challenge the SEC over non-GAAP financial measures?

by Cydney Posner

As discussed in this article, the WSJ engaged Audit Analytics to perform an analysis of SEC comment letters and company responses regarding the use of non-GAAP financial measures. What did they find?  Companies are winning the argument more often than you might think. Continue reading

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New revenue recognition standard—are companies overlooking the disclosures?

by Cydney Posner

The warnings are everywhere—it’s time to get serious about revenue recognition. The new standard is expected to result in significant changes to measuring, recognizing and reporting of revenue—regarded as the key line item in the financials for most companies. While the impact of the new standard will be certainly be felt on the bottom line for most companies, even when the new rule is not expected to have any material impact on the financials, the related disclosures may well be material, according to Sylvia E. Alicea, Professional Accounting Fellow, Office of the Chief Accountant, in remarks at the Bloomberg BNA Conference on Revenue Recognition.  Moreover, the SEC is expecting to see robust transition disclosures by the third quarter of this year, and the staff is watching closely. Continue reading

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New revenue recognition standard— don’t ignore the impact on compensation

by Cydney Posner

At the recent Bloomberg BNA Conference on Revenue Recognition,  a Deloitte partner observed that, to the extent that, in awarding compensation, companies use metrics that are keyed to revenue, the new revenue recognition standard could affect compensation or bonus plans because the ways of measuring and the timing of recognition of revenue change. He reminded attendees that, “‘when those plans were put into place, whatever they were, they overlap years. You then have the question of, ‘they set up some sort of benchmark and we’re going to pay someone a bonus based on how they do against this metric’— the problem is that metric was designed based on the old rules and you basically changed how you’re going to keep score.’” (See this article in Bloomberg BNA.) Continue reading

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