Among the insights shared at last week’s 2019 AICPA Conference on SEC and PCAOB Developments, held December 9–11, Sagar Teotia, recently appointed Chief Accountant of the Securities and Exchange Commission, delivered a statement that focused on six ongoing priorities for the SEC’s Office of the Chief Accountant (OCA). Mr. Teotia’s remarks serve as both a capstone summary of OCA’s activities during 2019 and a preview of expectations for 2020. OCA’s ongoing priorities cover a diverse array of activities that support “high-quality financial statements,” including:
- Engagement with Stakeholders. Mr. Teotia reported that OCA interacted with stakeholders through over 200 meetings, roundtables, speeches and presentations in 2019. OCA’s consultation process is one of the important ways in which OCA communicates with auditors, audit committees and others. Indeed, many of the insights shared by other members of OCA at the Conference emanated from complex questions channeled through the consultation process.i Through proactive engagement in this regard, OCA hopes that its consultations will “foster high-quality financial reporting among companies and auditors of all sizes and help prevent costly misstatements.”
- Oversight of the FASB, the New Accounting Standards, and Current FASB Standard Setting. Similar to OCA remarks in prior years, Mr. Teotia’s statement dedicated a significant portion to recent FASB developments, including recently effective standards and ongoing standard-setting activities. Mr. Teotia noted that OCA “continue[s] to encourage stakeholder participation in the standard-setting process,” expressing the belief that engagement throughout the entire standard-setting process “is critical to the FASB’s ability to continue to develop high-quality accounting standards.” Highlights include:
- Revenue Recognition. Mr. Teotia described OCA’s active engagement to advance the implementation of the new revenue recognition standard and noted that OCA’s role has “has shifted . . . to primarily answering post-implementation questions and assisting the Division of Corporation Finance in its ongoing, thoughtful review of registrants’ financial statements and disclosures.” Notwithstanding that implementation is effective for the “vast majority of public companies,” there remain a number of areas in which issuers continue to present questions to OCA with some frequency: (a) principal versus agent guidanceii and (b) identifying performance obligations.iii Overall, he indicated that implementation efforts have been positive and observed the following four factors that favorably impacted the implementation:
- Early engagement through a variety of comment letters, roundtables, FASB advisory group meetings, working group meetings and other discussions.
- Identification of issues early on in implementation, which gave preparers and their auditors sufficient time to develop and assess judgments that were necessary to implement the standard.
- Consultation with OCA on the challenging implementation questions.
- Disclosure by companies of their implementation progress and anticipated impact of the new standard.
- Leases. With the new leases standard effective as of January 1, 2019 for calendar year-end public companies, most public companies have now filed their first financial statements that reflect adoption of the new leases standard. As an example of effective collaboration, Mr. Teotia highlighted FASB’s efforts to address issues in the original standard by adopting slight modifications through ASUs “without affecting the availability of decision-useful information to investors.” OCA continues to be involved in the new leases standard and, like with revenue recognition, its role is transitioning to the post-implementation stage.
- Current Expected Credit Losses. As issuers most affected by the new current expected credit losses (CECL) standard know all too well, “the remaining adoption timetable is short.” OCA has been actively monitoring efforts to implement the new standard, and in November 2019, OCA and the SEC’s Division of Corporation Finance issued Staff Accounting Bulletin (SAB) 119, which aligns prior guidance in SAB 102 with the concepts in the new FASB standard.
- Current FASB Standard-Setting. Mr. Teotia briefly discussed three of FASB’s current standard-setting activities: (a) identifiable intangible assets and subsequent accounting for goodwill, (b) distinguishing liabilities from equity and (c) reference rate reform. Consistent with other topics in his statement, Mr. Teotia encouraged stakeholders to continue participating in FASB’s standard-setting process. Mr. Teotia noted that OCA is closely monitoring FASB’s project on distinguishing liabilities from equity, which OCA believes “has the potential to impact many types of transactions,” including those involving convertible debt and instruments potentially settled in an entity’s own equity that bears characteristics of both liabilities and equity.
In regards to reference rate reform, Mr. Teotia provided a brief background on the transition away from LIBOR to another reference rate and the uncertainties to which that transition may give rise. He referenced the July 2019 Joint Statement issued by OCA and the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets regarding the LIBOR transition, which “encourages stakeholders to identify and address the risks related to the LIBOR transition.” He further commended FASB’s proactive approach to analyzing potential accounting implications of the LIBOR transition and “encourage[d] stakeholders to identify and raise potential accounting issues relating to the transition away from LIBOR.”
- Oversight of the PCAOB. Mr. Teotia briefly summarized the PCAOB’s role in “protect[ing] the accuracy and credibility of the audit report” and the SEC’s oversight responsibilities with respect to the PCAOB, while also noting that the SEC “continues to exercise its oversight and regulatory functions over the accounting profession in many other ways,” including direct engagement with accounting firms that audit issuers.
A common theme in recent years, audit quality served as the focus of Mr. Teotia’s remarks concerning the PCAOB, which included a description of the PCAOB’s initiatives to improve audit quality. His summary generally aligned with PCAOB Chair Duhnke’s remarks at Baruch College’s 14th Annual Audit Conference, including discussion of proactive stakeholder outreach and plans to develop a new standards framework for audit quality. (See our prior post) Mr. Teotia indicated that OCA supports the PCAOB’s proactive approach to engaging with stakeholders and noted that it believes “the Board’s emphasis on increased proactive engagement with all stakeholders, including preparers, audit committees, investors, and the audit profession, is already driving improvements in audit quality as well as in how the PCAOB fulfills its mission.” He pointed to the PCAOB’s description of “good practices” in its inspection results preview as one such example. He also pointed to the PCAOB’s CAMs guidance from earlier this summer as another example of proactive outreach and noted that OCA “encourage[s] auditors to consider the guidance as they work through CAM implementation.” Notably, the PCAOB issued a Critical Audit Matters Spotlight report during the Conference, offering preliminary PCAOB observations on initial CAMs implementation based on a selection of 12 audits of large accelerated filers with fiscal years ending on or after June 30, 2019.
- International Accounting, Audit, and Disclosure Matters. Similar to prior years, international accounting, audit and disclosure matters again received some focus of attention. As Mr. Teotia noted, “international matters are a critical priority of the office and we devote significant resources to these efforts.” Through participation in international organizations, including The Monitoring Group, the International Organization of Securities Commissions, and the IFRS Foundation Monitoring Board, Mr. Teotia explained, OCA gathers insights regarding and contributes to the progressive improvement in international audit quality. Turning to emerging economies and markets, Mr. Teotia touched on the SEC’s and PCAOB’s efforts to address challenges in conducting inspections of PCAOB-registered audit firms in China. Mr. Teotia described an ongoing dialog with leaders of the four largest global network audit firms and noted that the SEC “expect[s] to emphasize the need for effective and consistent global firm oversight of member audit firms, including those operating in emerging markets and the importance of the design and implementation of audit procedures that are tailored to reflect changes in risk.”
- Staff Guidance and Other Initiatives, including Auditor Independence. In addition to mentioning the recent issuance of SAB 119 and guidance on the anticipated transition away from LIBOR, Mr. Teotia discussed recent developments with regards to auditor independence. He reminded that “auditor independence is a shared responsibility among audit committees, management, and their auditors.” In addition to recent changes to the independence rules regarding an auditor’s lending relationships with certain shareholders of an audit client, Mr. Teotia discussed OCA’s June 2019 revisions to the staff’s FAQs on auditor independence matters. He also previewed that additional changes to the SEC’s auditor independence rules may be forthcoming, noting that OCA is “making significant progress” on providing recommendations for possible additional changes.
- Other Key Areas (Internal Control over Financial Reporting (ICFR), Independent Audit Committees, and Technology and Innovation). Other “key areas” identified in Mr. Teotia’s remarks covered a number of longstanding SEC mainstays – the importance of ICFR, independent audit committees and engaging with market participants on innovative technologies.
- ICFR. Mr. Teotia stated OCA’s belief that “it is critical for audit committees, auditors, and management to have appropriate, proactive, and ongoing discussions regarding ICFR – from risk assessment, design and testing of controls, through to documentation.” Though he commended companies that have improved in this area, he also noted that OCA’s “consultation experience and Commission enforcement actions suggest that there is additional room for improvement, including in the area of evaluating the severity of identified deficiencies.” He also reminded that “changes to ICFR may be necessary when transitioning to a new accounting standard,” commenting that new or additional controls may become necessary if the current control environment does not mitigate risks presented by new accounting standards.
- Independent Audit Committees. Commenting on the importance of audit committees, he noted that “[t]he independent audit committee requirement arguably was one of the most effective and cost effective financial reporting enhancements included in Sarbanes-Oxley.” Illustrating the audit committee’s importance, he noted that OCA has “a long-standing policy of requiring the audit committee’s view on the proposed accounting treatment or auditor independence issue in a consultation submission to OCA.” He also encouraged audit committees to “continue their efforts to understand the new [accounting and auditing] standards and remain engaged with preparers and auditors in the implementation process.” More broadly, Mr. Teotia encouraged audit committees to continue challenging management and auditors, including “the impact that new accounting and auditing requirements may have on the financial statements and how they are prepared and reviewed.”
- Technology. Mr. Teotia last described OCA’s collaboration with the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), which aims to inform the SEC’s understanding of new financial technologies, while also increasing the accessibility of the SEC’s work in this area. Mr. Teotia encouraged those in FinTech to engage with FinHub and for the accounting profession to work together in considering the effects of technology on financial reporting.