On June 8, 2017, SEC Chief Accountant Wesley Bricker gave a speech titled “Advancing the Role of Credible Financial Reporting in the Capital Markets” at the 36th Annual SEC and Financial Reporting Institute Conference. Mr. Bricker emphasized the importance of reliable accounting and effective control over financial reporting in protecting investors and the capital markets. Mr. Bricker also discussed the key roles played by audit committees and independent external auditors in providing assurance to investors that financial statements are disclosed without material misstatements or omissions. Highlights of the speech include the following:
- The PCAOB’s Important Role: Bricker noted the recent adoption by the PCAOB of a new standard for auditor’s reports that requires a description of “critical audit matters,” for purposes of providing investors with information regarding the most challenging, subjective or complex aspects of the audit. Mr. Bricker also noted that regardless of where, or whether, prior years of service of an audit firm is disclosed, the years of experience may be one of the many factors considered by audit committees in their selection and oversight of the external auditor.
- Revenue Recognition: Mr. Bricker mentioned that the new revenue disclosures may require the disclosure of different data and information than previously provided, potentially necessitating updates to existing processes and controls. For those companies that anticipate applying the standard as required in 2018, robust transition disclosures as described in SEC Staff Accounting Bulletin 74 and the related September 2016 SEC staff announcement should be made to enable investors to understand the anticipated effects of the new standard.
- Other New Standards: Mr. Bricker also discussed implementation activities related to the leases, financial instruments and new credit losses standards. The new leases standard, which will be effective beginning in 2019, will result in lessees recognizing most leases on the balance sheet. This new standard will require companies to first ensure they, first, evaluate their arrangements in relation to the scope of the new standard and transition provisions and, second, update their system of internal control over financial reporting arising from the impact of the standard. Mr. Bricker encouraged companies to evaluate the scope paragraphs in these standards to identify relevant transactions and accounts for an assessment and to provide transition disclosure of the anticipated effect of the new standards. Mr. Bricker also cautioned against a purely sequential implementation process for the new standards.
- Internal Control Over Financial Reporting: Bricker noted that companies that apply the COSO framework for assessing the effectiveness of internal control over financial reporting might find its five components and related concepts and principles useful in developing a structured approach for implementation and meeting related documentation expectations. Each of the five COSO components must be present and operating to conclude that internal control over financial reporting is effective under the COSO framework.
- Auditor Independence: Mr. Bricker noted that while audit firms are generally more active in bringing independence issues to the SEC staff, audit committees and management may also address with the SEC staff independence matters that impact their filings or other interpretive questions. Audit committees and management should also keep in mind that the SEC staff does occasionally reach out to the audit committee to understand its position about an independence matter that has been submitted to the SEC staff for its consideration. When selecting a successor auditor, an audit committee should request information to be satisfied that the successor is independent at the start of the audit and professional engagement period, and audit committees should consider circumstances that might require the company to make adjustments to prior period financial statements (e.g., the reporting of discontinued operations, a retrospective application of an adoption or change in accounting principle, or the correction of an error).
- Reminders to the Audit Profession: Mr. Bricker noted that just as management needs to allocate sufficient time and resources to the preparation of their books and records (with good internal controls), so too should public accounting firms work with the audit committee and management to agree on appropriate deadlines and audit fees to ensure that audit quality is consistently maintained.
- Continuing to Advance Through Innovation: Mr. Bricker noted that there have been significant advances in technology in recent years with an accompanying increase in the use of technology by auditors, which has the potential to enhance audit quality and the auditor’s detection capabilities. Mr. Bricker also mentioned that some ratings agencies and data aggregators now utilize data scraping technology and machine learning to review SEC filings and analyze trends over time, which has the potential to help auditors and users of the financial statements identify inappropriate bias in financial statements.
A copy of the speech is available at: https://www.sec.gov/news/speech/bricker-remarks-financial-reporting-institute-conference-060817.