CAQ discusses lessons learned from “dry runs” on critical audit matters and related questions for audit committees
As you may recall, auditors of large accelerated filers will be required to report on CAMs—critical audit matters—in their auditor’s reports for fiscal years ending on or after June 30, 2019 and in auditor’s reports for all other companies (except EGCs) to which the requirements apply for fiscal years ending on or after December 15, 2020. (See this PubCo post.) As SEC Commissioner Kara Stein observed in her statement on approval of the new rule, the new “standard marks the first significant change to the auditor’s report in more than 70 years.” Because the selection of and disclosure regarding CAMs will certainly present a challenge for both auditors and audit committees, auditors have been taking steps to prepare for the coming change, including conducting “dry runs” to get a better handle on how the new CAM disclosures will look and how the process will affect financial reporting. To provide some lessons learned from these early dry runs and enhance the understanding of audit committees, auditors and other participants in the process, the Center for Audit Quality has published Critical Audit Matters: Lessons Learned, Questions to Consider, and an Illustrative Example.
A number of members of the SEC accounting staff addressed the 2018 AICPA Conference on Current SEC and PCAOB Developments. Some of the remarks provided helpful guidance for evaluating internal control over financial reporting.
Officials at the SEC all seem to be singing the same tune these days, emphasizing the need to amp up company disclosures regarding Brexit, the LIBOR phase-out and cybersecurity. As reported by the WSJ, Corp Fin Chief Accountant Kyle Moffatt, speaking at the FEI Current Financial Reporting Issues Conference, echoed the earlier informal guidance provided by SEC Chair Jay Clayton, Corp Fin Director William Hinman and Deputy Director Shelley Parratt that the SEC will be looking for enhanced disclosure on these topics where material. (See this PubCo post.) Given the onslaught of admonitions, companies would be well advised to pay attention.
The Center for Audit Quality, working with Audit Analytics, has just released a new edition of its annual Audit Committee Transparency Barometer, which, over the past five years, has measured the robustness of audit committee disclosures in proxy statements among companies in the S&P Composite 1500. The bottom line, according to the CAQ, is that the level of voluntary transparency has continued to steadily increase in most areas. The report includes several useful examples of the types of disclosure discussed.
In this report, EY discusses an analysis it conducted of voluntary cybersecurity-related disclosures in the 10-Ks and proxy statements of Fortune 100 companies (79 companies that had filed as of September 1, 2018). The analysis notes that, not only are regulators focused on cybersecurity risk management and disclosure, but investors consider cybersecurity risk management as critical to the board’s risk oversight responsibilities and boards are increasingly engaged on the topic. The analysis found a wide variation in the depth and nature of the disclosures.
Now that it’s time for 10-Q filings, questions have been raised about the timing of some of the Inline XBRL-related changes. (See this Cooley Alert and this PubCo post.)
You might recall that, in 2016 and early 2017, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as an enforcement action—to require issuers to be more transparent and more consistent in the use of non-GAAP financial measures and to avoid altogether non-GAAP measures that were misleading. For example, companies were advised that they needed to present GAAP measures with equal or greater prominence relative to the non-GAAP measures. (See, e.g., this PubCo post.) By early 2017, the SEC staff were apparently sufficiently satisfied (see this PubCo post) with the responses to their campaign that the pendulum swung back, and the relentless finger-wagging by the staff about non-GAAP financial measures appeared to have tailed off. (See this PubCo post.) But, according to this analysis from Audit Analytics, it wasn’t until this year that the SEC staff’s comments regarding non-GAAP financial measures actually began to decline.