Category: Accounting and Auditing
Is XBRL already obsolete?
You’ve got to just love the irony: the SEC’s amendments mandating the use of Inline XBRL aren’t even effective yet, and experts at an accounting conference have declared XBRL “nearly useless as an investment tool,” and “all but unnecessary.”
Cooley Alert: SEC Adopts Mandatory Inline XBRL
For some riveting nighttime reading, you might want to take a look at our Cooley Alert, SEC Adopts Mandatory Inline XBRL. I’m sure you’ll find it both suspenseful and moving!
Are non-GAAP financial measures still problematic?
A couple of years ago, the SEC made a big push—through a series of staff oral admonitions and written guidance, as well as one enforcement action—toward requiring 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.) And, as this article revealed, according to Audit Analytics, in 2016, over 25% of the companies in the S&P 500 index had shifted their presentations to put GAAP at the top of their quarterly earnings releases and 81% made GAAP numbers most prominent, compared with only 52% for the prior quarterly earnings releases. (See this PubCo post.) By the end of 2017, the SEC was apparently sufficiently satisfied with the response that the pendulum had swung back, and there was less staff focus and comment on non-GAAP financial measures. (See this PubCo post.) But is that really the end of the story? How “good” are the numbers that are fed to investors?
CAQ publishes new resource on critical audit matters
In October 2017, the SEC approved the PCAOB’s new auditing standard for the auditor’s report, AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which will require auditors to include a discussion of “critical audit matters.” Given that, for larger companies, CAM disclosure is almost right around the corner, the Center for Audit Quality has made available this new resource, Critical Audit Matters: Key Concepts and FAQs for Audit Committees, Investors, and Other Users of Financial Statements, to help audit committees, investors and other users of financial statements to better understand the concept of CAMs.
SEC Commissioner Stein takes aim at proposal to amend Rules 3-10 and 3-16
Even though the SEC did not have an open meeting to consider its new proposal to amend Rules 3-10 and 3-16 of Reg S-X (see this PubCo post), Commissioner Kara Stein decided nonetheless to release a public statement about the proposal. While she voted in favor of issuing the proposal, she had some serious reservations.
SEC proposes to amend financial disclosure rules related to guaranteed or collateralized debt securities
Yesterday, the SEC voted to propose new amendments to Rules 3-10 and 3-16 of Reg S-X intended to streamline the financial disclosure rules related to registered debt offerings that involve guaranteed or collateralized securities. The proposed amendments to Rules 3-10 and 3-16 are “intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants.” Chair Jay Clayton is quoted in the press release as having “seen firsthand instances in which an issuer did not pursue SEC registration of a debt offering that included a subsidiary guarantee or pledge of affiliate securities as collateral because of the costs and, in particular, time burdens of these rules….The proposed rules are intended to make the disclosures easier for investors to understand and to encourage these offerings to be conducted on a SEC-registered basis.”
JOBS Act 3.0?
Will there be a JOBS Act 3.0? The JOBS and Investor Confidence Act of 2018 just passed the House by a vote of 406 to 4, so, even though Senators may often be chary of jumping on the House bandwagon—remember the doomed Financial Choice Act of 2016 and then 2017— the overwhelming and bipartisan approval in the House still makes the odds look better than usual.
SEC adopts mandatory Inline XBRL
This morning, the SEC voted (by a vote of four to one) to adopt rules mandating the use of Inline XBRL (eXtensible Business Reporting Language) for the submission of financial statement information for operating companies. The rulemaking is part of the SEC’s disclosure modernization initiative. For the most part, the Commissioners showed a lot more enthusiasm for this proposal than for the changes to the definition of “smaller reporting company” also adopted earlier today. (See this PubCo post.)
Audit Analytics reviews financial restatements in 2017
Audit Analytics has published its annual review of financial restatements, which this year covered a 17-year period. The review showed a double-digit percentage decline in the total number of restatements for the last three years in a row, resulting in a new 17-year low of 553 total restatements. Compare that to 1,859 restatements in 2006! As discussed in this article in Compliance Week, the percentage decline was 19% in 2017, 10% in 2016 and almost 12% in 2015. Stepping back, what the data shows is that, following SOX, the number of restatements skyrocketed, as the new act imposed “new discipline to the financial reporting process through its requirement to report on the effectiveness of internal control over financial reporting.” But by 2007, companies seemed to have gained a better handle on the demands of SOX, as the numbers of restatements began to decline.
Should the prospect of CAM disclosures cause audit committees to rethink company disclosures?
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.
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