Audit, Compliance and Risk Blog

2012: A Year in Review for Accountants—Part 2, Auditing and SEC

Posted by Ron Pippin on Fri, Jan 04, 2013 is the second of two blog articles on 2012 changes in the literature frequently used by accountants. Previously, I covered accounting developments in the United States and internationally. This article covers developments affecting companies (registrants) subject to Securities and Exchange Commission (SEC) oversight and auditing developments.

SEC Matters

Use of IFRS in the United States

Many people thought the SEC staff would recommend to the five SEC commissioners that registrants in the United States be allowed or required to file financial statements using International Financial Reporting Standards (IFRS). This did not happen, as discussed more fully in my prior blog article, “SEC Staff ‘Punts’ on IFRS Decision.” I followed up this discussion with another article, “International Group Comments on SEC Non-decision on IFRS.” In short, stay tuned on this “adventure.”

Conflict Minerals

Recently, the SEC adopted final rules implementing the “conflict minerals” disclosure requirements in Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1502 of the Dodd-Frank Act was enacted by Congress in an attempt to impair the financing of the conflict in the Democratic Republic of Congo and adjoining countries. The final rules do not require any disclosure applicable to 2012, but registrants that believe that they may be using “conflict minerals,” as defined, should begin to capture the required information before the new Form SD is required to be filed in 2014.

Iran Disclosures

I view as a “sleeper” disclosure issue the new Iran Threat Reduction and Syria Human Rights Act of 2012, which was enacted on August 10, 2012, requiring disclosure by SEC registrants if they have had certain activities relating to Iran. The disclosure requirement is effective for any required filing due after February 6, 2013. The SEC staff has concluded this to mean that a Form 10-K due, say, on March 15, 2013, would require such disclosure even if filed prior to February 6.

Any registrant, including its affiliates, that has knowingly engaged in an activity or transaction, as defined, with Iran must provide three disclosures: (1) the nature and extent of the activity; (2) the gross revenues and net profits, if any, attributable to the activity; and (3) whether the issuer or the affiliate of the issuer (as the case may be) intends to continue the activity.

I term this a “sleeper” issue as the SEC has not updated its formal rules to reflect the above requirements, although the SEC staff has provided guidance beginning with Question 147.01 of its “Compliance and Disclosure Interpretations—Exchange Act Sections.” A company that may have such activities needs to quickly discuss the matter with legal counsel as well as with its external accountants to determine what steps are necessary to comply with the requirements in the law.

Jumpstart Our Business Startups Act

In April 2012, legislation termed the “Jumpstart Our Business Startups Act” (JOBS Act) was signed into law, giving certain companies called “emerging growth companies” (EGCs) relief from certain SEC requirements. Most of the relief comes in the form of lesser disclosure in connection with an Initial Public Offering (IPO), but the JOBS Act also allows deferral of when a company has to comply with certain accounting standards. Further, the JOBS Act requires the SEC to determine whether any new rule of the Public Company Oversight Board (PCAOB) should apply to EGCs. The criterion that the SEC must use when making this determination is whether the “application of such additional requirements is necessary or in the public interest.” See Jon Elliot’s blog article, “JOBS Act for Small Companies,” for more discussion of this legislation.

“Hot Buttons” at the SEC

The annual AICPA National Conference on Current SEC and PCAOB Developments was held on December 3–5, 2012, in Washington, D.C. This conference offers accountants a chance to learn from SEC officials about the “hot buttons” in financial reporting that should be considered in upcoming filings. Many of these views are reflected in published speeches from this conference, which will be useful to accountants.

As is typical at this conference, members of the SEC staff reminded registrants of various accounting topics and reinforced the importance of providing a comprehensive discussion, “from the eyes of management,” in a registrant’s Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). For example, if a registrant has exposure to foreign currencies issued by countries that are experiencing sovereign debt concerns, that is a topic for discussion in MD&A. This issue is discussed in the SEC’s CF Disclosure Guidance: “Topic No. 4, European Sovereign Debt Exposures.”

SEC Material in the FASB Codification

As noted in my first blog article on 2012 in review, “2012: A Year in Review for Accountants—Part 1, Accounting Standards,” the FASB added certain guidance that was issued by the SEC to its Codification, in the form of Accounting Standards Update (ASU) No. 2012-03. This ASU was published by the FASB on August 27, 2012; however, the actual SEC guidance (primarily Staff Accounting Bulletin No. 114) in this ASU was published by the SEC on March 7, 2011. As discussed in my prior blog item “FASB Codification Turns Three Years Old,” the SEC adds some of its guidance to the FASB Codification but it is only selective content and not particularly timely, so accountants that need to rely on SEC guidance should understand this situation. As stated in the FASB Codification’s Notice to Constituents, “[t]he SEC’s normal update procedures are not changed by the inclusion of SEC content in the Codification, and, accordingly, there may be delays between the release of the SEC’s changes and updates to the Codification.”

U.S. Auditing Standards

The standard setter for auditing standards applicable to public companies in the United States is the PCAOB, whereas auditors of private companies follow standards issued by the American Institute of Certified Public Accountants (AICPA).

Audits of Companies Subject to SEC Oversight

New PCAOB Auditing Standard Issued
On August 15, 2012, the PCAOB issued Auditing Standard (AS) No. 16, Communications with Audit Committees, Related Amendments to PCOAB Standards, and Transitional Amendments to AU Sec. 380. It replaces AU Sec. 380, Communication with Audit Committees, and AU Sec. 310, Appointment of the Independent Auditor. However, like all PCAOB rules, it required approval by the SEC before it became effective. AS 16 states that the guidance is effective for audits of fiscal years beginning on or after December 15, 2012. The SEC approved AS 16 on December 17, 2012, and determined that application of AS 16 to audits of “emerging growth companies” as defined by the JOBS Act was appropriate.

PCAOB Staff Practice Alert Issued
On December 4, 2012, the PCAOB issued Staff Audit Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits. The staff in the PCAOB issued this release at this late time in 2012 to remind auditors of the requirement to apply professional skepticism throughout their audits, which includes having a questioning mind and making a critical assessment of audit evidence.

Internal Control Deficiencies in an Audit
On December 10, 2012, the PCAOB issued a report (referred to as a “4010 report”) summarizing deficiencies in audits of internal control over financial reporting (ICFR) it detected in its 2010 inspections of the eight largest domestic registered audit firms.

The PCAOB said in the report that 46 of 309 audits it inspected failed to obtain sufficient audit evidence to support the auditor’s opinion on ICFR. According to the report, 39 (or 85%) of those 46 engagements that failed to support the opinion on ICFR also failed to obtain sufficient audit evidence to support the auditor’s opinion on the financial statements, largely because the deficiencies in testing internal controls can result in an inappropriate reliance on internal controls and, consequently, an inappropriate reduction of substantive tests in the audit of the financial statements.

The PCAOB believes the report provides information that can be used in discussions with management and audit committees about the additional focus being placed by the PCAOB on audits of ICFR in the current-year audit process.
The PCAOB report is useful reading, whether a person or firm is subject to PCAOB oversight or not.

Other Information
For more discussion of current issues related to audits of public companies and internal controls, see my prior blog articles, “Where Is the Regulator of Auditors of Public Companies?” and “Internal Control—An Updated Framework Coming.”

Audits of Non-SEC Registrants

The Clarity Project
Probably the biggest change or adjustment auditors of non-SEC registrants must make is transforming their auditing procedures (under generally accepted auditing standards or GAAS) for the AICPA’s “clarity project.” This change in auditing procedures is discussed more fully in my blog article, “GAAS Rules Are Being Tweaked for Calendar Year 2012 Audits.” For the most part, the revised auditing rules will not require auditors to reinvent how to audit a company; rather, the rules change primarily the documentation standards. However, if the new guidance is not followed by an auditor, this could lead to undesirable results in connection with a peer review.

Revised AICPA Guides
The AICPA has issued numerous updates to its audit and accounting guides, for example, those for Gaming, Health Care Entities, and Entities with Oil and Gas Producing Activities, to name a few. In addition, changes were made in various audit guides including Analytical Procedures, and Government Auditing Standards and Circular A-133 Audits. For the most part, the numerous changes to these guides were made to conform the discussion therein with the changes made by the Clarity Project, but other updates were made as well. Accountants that have used or relied on the guidance in these guides should review the updated guidance.

Other AICPA Guidance
Separately, the AICPA has issued a new tool, “U.S. GAAP Financial Statements—Best Practices in Presentation and Disclosure,” that auditors and accountants may find useful.


About the Author 

Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.

Tags: SEC, Accounting & Tax, Audit Standards, Accountants, JOBS Act, US GAAP, GAAP, IFRS, Internal Control