What are auditors and audit committees doing to get ready for the impending disclosure of CAMs in audit reports ? You remember that, under AS 3101, the new auditing standard for the auditor’s report, auditors will be required (in 2019 for large accelerated filers and phased in for others) 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.” (See this PubCo post.) 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. The selection of and disclosure regarding CAMs will certainly present a challenge for both audit committees and auditors. This article from Compliance Week reports that, beyond that challenge, the prospect of CAM disclosure should precipitate a reassessment by audit committees and companies of related corporate disclosure to ensure that companies stay ahead of the curve.
Are there external factors that might lead companies to fail to protect the integrity of their financial statements, to put it euphemistically? Some recent articles in CFO.com discuss studies that posit various theories.
For those of you who have been waiting for those big changes to Dodd-Frank to materialize, don’t hold your breath; at least as far as the SEC is concerned, the vast majority of those rules are expected to remain in place. In case you missed it, SEC Chair Jay Clayton, speaking at the annual meeting of the WSJ’s CFO Network, said that “regulators are evaluating how postcrisis rules have performed in practice, and that he had concerns about some of the unintended side effects from some regulations. But any changes will be around the edges, keeping the core of postcrisis overhauls in place, he added. ‘I don’t think Dodd-Frank is changing a great deal, just to put a pin in it,’ he said.” And that tinkering may well be focused primarily on bank-related rules. Of course, there’s always the possibility that Congress may act, but so far it’s been all hat and no cattle. Case in point: the much ballyhooed Financial Choice Act of 2017, which passed the House, but went nowhere in the Senate. (See this PubCo post.)
In this report, Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet and the U.S. Chamber of Commerce—joined forces to make recommendations about how to revitalize the IPO market and make public company status more appealing. Many of these recommendations have in the past been the subject of legislation or proposed rulemaking or have otherwise been floated in the ether but, nevertheless, have not advanced. Will the weight of these groups propel any of these recommendations forward?
Starting in 2018, new rules required disclosure of auditor tenure in audit reports. (See this PubCo post.) And, for some companies, those tenures can stretch over a century. For example, KPMG reported that it has audited GE since 1909. (See this PubCo post.) According to this press release from the American Accounting Association, for “the first 21 companies of the Dow 30 to release their reports this year, the average auditor tenure is 66 years.” But long auditor tenure has its critics and its fans. Some argue that long tenure can adversely affect auditor independence and objectivity, while others contend that long tenure avoids the time loss and distraction of having to “onboard” new auditors, provides deep institutional knowledge—leading to higher audit quality—and offers cost savings resulting from that familiarity. However, a couple of recent academic studies call those suggested benefits into question. The press release cited above and this article in CFO.com report on new academic research that concludes that, among the Big 4 at least, the longer the tenure, the greater the fee, notwithstanding the reduction in effort required of the auditor over time. And this press release from the American Accounting Association reports on another academic study that, contrary to popular assumptions, found a positive correlation between relatively short audit tenure and the speed of discovery of financial misreporting. Will these studies renew calls for mandatory auditor rotation?
The SEC has posted a new rule proposal that would modify the analysis of auditor independence in the context of lending relationships between the auditor and certain shareholders of an audit client during the audit or professional engagement period. Under the current loan provision of Rule 2-01(c) of Reg S-X, some debtor-creditor relationships between an auditor and its audit client are viewed to taint auditor independence. However, the SEC now believes that some of the provisions of this Rule are not as effective as they could be and may present unnecessary practical challenges. The release indicates that the proposed amendments are designed to better focus the loan provision “on those relationships that, whether in fact or in appearance, could threaten an auditor’s ability to exercise objective and impartial judgment.” As Wes Bricker, SEC Chief Accountant, told Bloomberg, “[w]e’re trying to right-size” the Rule.The SEC is also soliciting comment on other potential changes to the loan provision or other provisions of Rule 2-01. Comments are due 60 days after publication in the Federal Register.
As discussed in this PubCo post, both ISS and Glass Lewis recommended voting against a proposal to ratify the appointment of GE’s auditor, KPMG, at the 2018 GE annual shareholders meeting, a pretty unusual event in itself. The shareholders meeting was held yesterday, and, in an even more rare occurrence, as reported by the WSJ, 35% of the shareholders did not vote to retain KPMG. Not exactly token opposition. According to Audit Analytics (reported here), that vote level “represents one of the highest levels of shareholder opposition to an auditor at any company in recent years.” What‘s a company to do? KPMG signed on to audit GE’s books 109 years ago—as CNN Money points out, that was back when William Howard Taft was president of the United States.