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NEWS DIGEST
Auditing  
February 2013

  The PCAOB is reminding auditors to maintain their professional skepticism when they conduct audits.

A staff audit practice alert issued by the PCAOB said the board has observed continued instances in which auditors did not appropriately apply professional skepticism.

Staff Audit Practice Alert No. 10, Maintaining and Applying Professional Skepticism in Audits, is intended to assist audit firms in their application of professional skepticism in upcoming calendar year-end audits.

“Professional skepticism is an attitude that requires a questioning mind and a critical assessment of audit evidence,” PCAOB Chief Auditor and Director of Professional Standards Martin Baumann said at the AICPA Conference on Current SEC and PCAOB Developments in Washington. “It is essential to the performance of every audit and for effective audits.”

The practice alert is available at tinyurl.com/cr7p7fx.

  A new International Auditing and Assurance Standards Board (IAASB) proposal would require auditors to read and consider information in certain documents that accompany audited financial statements.

If this additional information leads the auditor to identify a material inconsistency, or a misstatement in the audited financial statements, the auditor would be required to respond appropriately.

The ED, available at tinyurl.com/d4uydww, is called International Standard on Auditing (ISA) 720 (Revised), The Auditor’s Responsibilities Relating to Other Information in Documents Containing or Accompanying Audited Financial Statements and the Auditor’s Report Thereon.

Depending on the nature of a material inconsistency discovered, the auditor’s responses could include:

  • Requesting that management correct the other information, and making sure the correction is made.
  • Reporting the matter to those charged with governance to get a correction made.
  • Considering the reporting implications of the inconsistency.
  • Withdrawing from the engagement, where possible under law.


A discovery that audited financial statements may be materially misstated could lead an auditor to report the inconsistencies in the auditor’s report. If the discovery occurs after the date of the auditor’s report, the auditor would be required to follow the guidance in ISA 560, Subsequent Events, regarding such discoveries.

The IAASB is an international body that develops auditing and assurance standards and guidance. It has set a due date of March 14 for comments on ISA 720 (Revised).

  Auditors looking for guidance on the new clarified auditing standard about audits of group financial statements can turn to a new resource.

The new standard, AU-C Section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (AICPA, Professional Standards), took effect for audits of group financial statements beginning for calendar year 2012/fiscal year 2013 audits as part of the AICPA Auditing Standards Board’s clarity project.

Nonauthoritative guidance regarding the implementation of AU-C Section 600 is available in 23 Technical Questions and Answers (TPAs) that are available in new TIS Section 8800, Audits of Group Financial Statements and Work of Others.

The TPAs, available at tinyurl.com/6kj2uku, are based on the questions and answers included in the Audit Risk Alert Understanding the Responsibilities of Auditors for Audits of Group Financial Statements—2012.


NEWS DIGEST
Business & industry  
February 2013

Economic optimism, which started 2012 on an upswing, fell to a 12-month low, according to the AICPA Business & Industry U.S. Economic Outlook Survey for the fourth quarter.

A big reason for the gloomier mood: Washington.

“The overwhelming majority of comments this quarter focused on the fiscal cliff and government or politics,” said the report, which polled CPAs who hold executive positions in companies across an array of industries. “Pessimists were most concerned about government policies and inability to get things done, particularly with the fiscal cliff, the results of the election and the level of government debt, deficits and spending.”

Just 21% of the 1,668 qualified respondents indicated that they were optimistic or very optimistic about the U.S. economy in the next 12 months, down from 22% in the previous quarter. During the same period, however, respondents who were once neutral became more pessimistic. Forty-nine percent of respondents were pessimistic about the next 12 months, up from 40% in the third-quarter survey.

Economic optimism is one of several indicators that make up the CPA Outlook Index, which fell to 59—the lowest point since the third quarter of 2011. A score of 50 or more is generally considered positive. But the index dipped as each of its components—economic optimism, organizational optimism, expansion plans, revenue, profits, employment, IT spending, other capital spending, and training and development—hit a 12-month low.

The survey is available at tinyurl.com/3px6u9l.


NEWS DIGEST
Compilation and review  
February 2013

The AICPA Accounting and Review Services Committee (ARSC) exposed for public comment proposed Statements on Standards for Accounting and Review Services (SSARS) as part of its clarity project.

ARSC separated the proposals in an attempt to make the clarified standards easier to use, understand, and implement. The proposed SSARS Review of Financial Statements addresses areas that are applicable to a basic review engagement. The proposed SSARS Review of Financial Statements—Special Considerations addresses areas that are encountered less frequently.

The proposed SSARSs would supersede paragraphs 1.07 to 1.08 and 3.01 to 3.73 of SSARS No. 19, Compilation and Review Engagements (see AICPA, Professional Standards, AR Sec. 60 and AR Sec. 90).

Comments on the ED, which is available at tinyurl.com/b2v5jjm, are due April 26.


NEWS DIGEST
Financial reporting  
February 2013

 The cumulative amount of revenue entities recognize under a new converged standard should not be subject to a significant revenue reversal or downward adjustment under guidance tentatively approved by FASB and the International Accounting Standards Board (IASB).

The boards met to discuss elements of the revenue recognition standard, which is scheduled to be released in the first half of 2013.

The boards’ tentative decisions were posted on FASB’s website. They decided that an entity would meet the objective of the constraint if the entity possesses experience or evidence supporting its assessment that the cumulative amount of revenue recognized should not be subject to a significant revenue reversal.

A reversal is a downward adjustment that might arise from subsequent changes in the estimate of the amount of variable consideration to which the entity is entitled. The standard would require an entity to reassess this objective as changing facts and circumstances come to light.

The assessment the entity would perform would be qualitative.

More information, including additional tentative decisions on consumer credit risk and licenses for intellectual property with respect to revenue recognition, is available at tinyurl.com/b4y78xu.


 A new proposal would narrow the definition of financial instruments in FASB’s recently implemented standard on disclosures about offsetting assets and liabilities.

FASB issued a Proposed Accounting Standards Update (ASU), Balance Sheet (Topic 210): Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities. Comments from stakeholders were due Dec. 21. The proposal is available at tinyurl.com/cv7zfcu.

Disclosures will apply to derivatives, repurchase agreements, and reverse purchase agreements, as well as securities borrowing and securities lending transactions that are offset in accordance with FASB criteria or subject to a master netting arrangement or similar agreement.

In December 2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures About Offsetting Assets and Liabilities (available at tinyurl.com/ckchc5f). The standard was the result of a joint FASB project with the IASB and was created to improve transparency and comparability between U.S. GAAP and IFRS.

The standard requires enhanced disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or a similar agreement.

After the standard was finalized, companies realized that many contracts have standard commercial provisions that would equate to a master netting arrangement. As a result, FASB decided to narrow the definition of financial instruments in ASU No. 2011-11 to prevent unnecessary compliance costs for situations where disclosures would provide minimal value to users.


 FASB directed its staff to prepare an ED of an ASU on presentation of items reclassified out of accumulated other comprehensive income (OCI), according to the board’s website.

During a meeting, the board discussed feedback from stakeholders on the ED issued in August, Comprehensive Income (Topic 220): Presentation of Items Reclassified Out of Accumulated Other Comprehensive Income.

FASB made key decisions, which will become effective only after a formal written vote by the board on the ASU:

  1. The ASU will require an entity to provide enhanced disclosures to present, separately by component, reclassifications out of accumulated OCI.
  2. If U.S. GAAP requires items to be reclassified to net income in their entirety, the ASU would require the entity to disclose the effect of reclassification on the respective line items of net income. For items that U.S. GAAP does not require to be reclassified to net income in their entirety, the ASU would require an entity to provide a cross-reference to other disclosures currently required under U.S. GAAP for those items.

When the information contained in Items 1 and 2 is presented in notes to financial statements, the ASU will not require the entity to present the information in a tabular format as long as all the required information is in a single location.

The ASU would allow the required information in Item 2 to be presented in the notes or parenthetically on the face of the financial statements, as long as all the information is presented in one place. Entities will have the option of voluntarily providing duplicate information in the notes and on the face of the financial statements.

If approved, the ASU will be effective for reporting periods beginning after Dec. 15, 2012, for public entities and for reporting periods beginning after Dec. 15, 2013, for nonpublic entities.

More information is available at tinyurl.com/bunw7ly.


 Going-concern financial reporting in the United States appears headed for new requirements after FASB decided to adopt a new model in a project that still has several issues to be decided before the scheduled release of an ED in the first half of this year.

The model under discussion would put the focus of financial reporting requirements for management’s assessment of going concern on the likelihood of an entity’s potential inability to meet its obligations within a reasonable amount of time as they come due, according to a summary of board decisions posted on FASB’s website. The summary is available at tinyurl.com/at9avwk.

Management would assess the entity’s potential inability to continue as a going concern, and the need for related disclosures, each reporting period.

The triggering circumstance for management to begin disclosing an entity’s financial difficulties comes when it is “near more likely than not” that the entity may be unable to meet its obligations in the ordinary course of business within a reasonable amount of time from the balance sheet date.


 Limited changes to IFRS standards for classification and measurement of financial instruments were proposed in an International Accounting Standards Board (IASB) ED.

The proposal would change IFRS 9, Financial Instruments, as part of a larger convergence project with FASB as the boards reform accounting for financial instruments, which has seen considerable changes in recent years.

The IASB published new classification and measurement requirements for financial assets in 2009 and financial liabilities in 2010. But in January, the board decided to consider limited amendments to clarify a narrow range of application questions and reduce differences with FASB’s developing model. The IASB also wanted to take into account the interaction between the classification and measurement of financial assets and accounting for insurance contract liabilities.

Changes were kept to a minimum because the IASB considers IFRS 9 to be fundamentally sound, and because some entities have already adopted or prepared to adopt the standard as previously published.

The amendments are consistent with the business-model-driven classification structure in IFRS 9. The ED proposes introducing a fair value through other comprehensive income measurement category for debt instruments that would be based on an entity’s business model.

FASB is scheduled to release an ED on classification and measurement of financial instruments in the first half of 2013. In addition, the boards are scheduled to release separate EDs on impairment of financial instruments before the end of the first quarter of this year.

Convergence is expected to be limited in the impairment EDs because FASB decided to develop a “Current Expected Credit Loss” model that is different from the IASB’s “three-bucket” model for credit risk impairment (see “FASB’s Developing Model ‘Totally’ Changes Impairment Concept”).

The ED is available at tinyurl.com/bwbgz9s.


NEWS DIGEST
Fraud  
February 2013

Roughly 3,000 tips on alleged wrongdoing were passed on to the SEC in the first full fiscal year of a new whistleblower program.

Tips came from all 50 states and 49 countries, according to an annual report on the program for the fiscal year that ended in September. The program was created to comply with a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203.

Allegations about corporate disclosures and financials, which represented 18.2% of submissions to the SEC, were the most common category of complaints from whistleblowers, followed closely by offering fraud (15.5%) and manipulation (15.2%).

A total of 3,001 tips were filed, and 143 enforcement judgments and orders were issued during the fiscal year that may be eligible for whistleblower awards. The Dodd-Frank Act allows the SEC to pay financial awards to whistleblowers who provide information that leads to a successful SEC enforcement action with more than $1 million in sanctions.

The SEC’s first award under the whistleblower program totaled nearly $50,000 and was given Aug. 21 to an informant whose identity remains anonymous. The whistleblower is expected to receive more if additional judgments in the case lead to more funds being collected in sanctions. Whistleblowers can receive between 10% and 30% of the sanctions collected, and awards are paid from the Investor Protection Fund established by Congress.

The annual report is available at tinyurl.com/cu8mzjg.
 


NEWS DIGEST
Management accounting  
February 2013

The Department of Justice (DOJ) and SEC released a 120-page guide providing a detailed analysis of the agencies’ approach to enforcement of the Foreign Corrupt Practices Act (FCPA), which is designed to prevent bribery and corruption of foreign officials by companies seeking to gain a competitive business advantage.

The law was enacted in 1977, and enforcement has been stepped up in recent years as business has become more global. In every full year since 2007, the SEC has announced FCPA enforcement actions against at least 10 companies, according to a list provided on its website. Enforcement actions were much less frequent before 2001. In 2010, the SEC created a special unit to enhance enforcement of the FCPA.

The release by the DOJ and SEC is designed to aid businesses practicing in foreign markets and is available at tinyurl.com/aujcgnv. The guide contains a chapter that describes the FCPA’s accounting provisions, and defines who is considered a foreign official and the difference between proper and improper gifts.

In one chapter, the guide explains that the FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting.

The “books and records” provision requires companies to keep records that accurately and fairly reflect transactions and dispositions of assets. The “internal controls” provision requires companies to maintain internal accounting controls that will ensure management’s control, authority, and responsibility over the firm’s assets.

According to the guide, a company’s internal controls and compliance program should be tailored to its specific circumstances with regard to operational realities and risks such as:

  • How products or services get to market.
  • The nature of the workforce.
  • The degree of regulation.
  • The extent of government interaction.
  • The degree to which the company operates in countries where there is a high risk of corruption.

NEWS DIGEST
FYI  
February 2013

 In a post-election change, Elisse Walter replaced Mary Schapiro as SEC chairman.

President Barack Obama named Walter, who has been an SEC commissioner since 2008, as Schapiro’s successor. After leading the agency’s response to the financial crisis, Schapiro stepped down Dec. 14.

Walter can serve without Senate approval through December because the Senate confirmed her when she was named a commissioner. She served as acting chairman during January 2009. Before Walter’s appointment as an SEC commissioner, she served as senior executive vice president for regulatory policy and programs for the Financial Industry Regulatory Authority.

“She is a very able and experienced regulator,” AICPA President and CEO Barry Melancon said in a statement. “We are committed to working with her on the many financial and accounting matters of importance to CPAs and investors alike.”

Schapiro became chairman in January 2009 as the United States was struggling to break free of the grip of a crisis that put some of the nation’s largest financial institutions on the brink of collapse.


 U.S. representation on the IASB won’t decrease with the end of Paul Pacter’s term, as another U.S. representative, Mary Tokar, has been appointed to the board.

Tokar, a CPA, has served more than 10 years as the global leader for KPMG’s international financial reporting group, helping companies around the world adopt and apply IFRS. She previously worked as the SEC’s senior associate chief accountant for international issues.

She was scheduled to join the IASB in January for a term that will end June 30, 2017, when she will be eligible to have her term renewed for three years. Her appointment could soften concerns that the IASB will shun U.S. representation and influence as a result of the SEC’s continuing indecision on whether to allow or require U.S. issuers to file financial statements prepared in accordance with IFRS.

Tokar’s appointment means that the number of IASB members from the United States will remain at three.


NEWS DIGEST
Professional issues  
February 2013

The number of CPAs in Congress grew as a result of November’s elections.

Rep. Brad Sherman held off Rep. Howard Berman in an unusual and hotly contested race between two congressional Democrats in California’s 30th District as all eight CPAs serving in the House of Representatives won reelection.

In addition, Republican Tom Rice won in South Carolina’s newly created 7th District, and Democrat Patrick Murphy unseated Rep. Allen West in a tight race in Florida’s 18th District.

The total number of CPAs in the House rose to 10, and the number of CPAs and accountants in Congress jumped to 12. The two accountant senators, Mike Enzi (R-Wyo.) and Ron Johnson (R-Wis.), were not up for reelection in 2012.

In addition to Sherman, the other CPAs who won reelection were:

  • Rep. Mike Conaway (R-Texas)
  • Rep. Bill Flores (R-Texas)
  • Rep. Lynn Jenkins (R-Kan.)
  • Rep. Steven Palazzo (R-Miss.)
  • Rep. Collin Peterson (D-Minn.)
  • Rep. John Campbell (R-Calif.)
  • Rep. James Renacci (R-Ohio)


In February 2011, Sherman and Conaway created the Bipartisan Congressional CPA Caucus. The informal group is dedicated to discussing and formulating innovative policy approaches to issues of interest to CPAs such as tax administration and compliance, and accounting and auditing standards. The caucus also seeks to reduce the compliance burden of tax laws.


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