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NEWS DIGEST
Auditing  
June 2013

  The PCAOB took the first step toward what’s intended to be a comprehensive reorganization of its auditing standards.

Board members unanimously voted to publish a proposal for a framework that would place the PCAOB’s auditing standards into a topical structure with a single, integrated numbering system. May 28 was the comment deadline for the proposal, which is available at tinyurl.com/cu7pjpy.

PCAOB Chief Auditor Martin Baumann told the board that the current structure does not present an orderly classification of the board’s standards. The “AS” standards that have been developed by the board since its inception 10 years ago—as well as the interim “AU” standards that were adopted by the board and have not been superseded—would be placed together in a four-digit numbering system designed to follow the flow of an audit.

Neither the proposed framework nor amendments that would be necessary for implementation would add new requirements for performing or reporting on audits.

PCAOB Chairman James Doty said that the board’s current standards, when printed, exceed 2,000 pages. He said navigating those standards can prove daunting.

Implementation costs are expected to be limited to updating methodology and reference materials, and board member Lewis Ferguson said the temporary inconvenience should be overcome by long-term efficiencies in navigating the standards.

Doty said, “This release represents, in my mind, an important first step in making the PCAOB standards more available to auditors.”

The proposed new numbering system would group the standards under the following categories:

  • General auditing standards.
  • Audit procedures.
  • Auditor reporting.
  • Matters related to filings under federal securities laws.
  • Other matters associated with audits.


PCAOB Deputy Chief Auditor Keith Wilson said auditing interpretations would remain part of the standards as a result of the proposal. But rather than being interwoven in the standards, the interpretations would be presented in a different place, separate from the standards themselves. A link would be provided from each standard to its related interpretations.

Wilson said the proposed reorganization would present a comprehensive view of how the standards are intended to work together. This would allow auditors looking at a new standard to see how it is intended to be applied in conjunction with the existing standards.


  Auditors looking for guidance on the new clarified auditing standards about audits of group financial statements and the auditor’s report 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), 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 41 Technical Questions and Answers (TPAs) included in new TIS Section 8800, Audits of Group Financial Statements and Work of Others.

The TPAs 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, as well as implementation issues that have arisen, particularly with regard to equity investments, and variable-interest entities and the component’s use of a basis of accounting that differs from that of the group.

Meanwhile, TPA 9100.07 has been issued to provide nonauthoritative guidance stating that auditors can comply with a requirement in AU-C Section 700, Forming an Opinion and Reporting on Financial Statements, by naming the city and state where the auditor practices, in the firm’s letterhead on which the auditor’s report is issued.

AU-C Section 700 requires the auditor’s report to name the city and state where the auditor practices. More information is available at tinyurl.com/6kj2uku.


  Auditors of fair value for financial reporting are eligible for the AICPA Accredited in Business Valuation (ABV) credential as a result of a recent revision.

The AICPA Forensic & Valuation Services (FVS) Section recently changed the experience requirement section of the ABV credential application kit to make the credential available to those auditors.

To qualify, auditors must perform tasks consisting of:

  • Recalculation of discount rates.
  • Capitalization rates.
  • Verification of models on calculations of value using professional judgment.


More information on the ABV credential is available at tinyurl.com/27xelrw. Questions can be emailed to
abv@aicpa.org.


NEWS DIGEST
Business & industry  
June 2013

  U.S. public companies can use social media to make company announcements as long as they inform investors of the channels they will use to distribute the information, according to a pronouncement by the SEC.

The SEC released a report that makes it clear that companies can use social media outlets such as Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD), so long as investors have been alerted about which social medium the company will use to report the information.

The SEC’s report, available at tinyurl.com/cn2mga2, describes its findings and recommendations in its investigation of Netflix and its CEO, Reed Hastings. On July 3, Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June, according to the report.

Although the commission has decided not to pursue an enforcement action in the matter, its investigation found that neither Hastings nor Netflix had made the investing public aware that Hastings’ personal Facebook page might be used to communicate information about Netflix.

The report says Regulation FD applies to social media and other emerging means of communication in the same way it applies to public companies’ websites. Guidance the SEC issued in 2008 said that websites can be used to inform investors as long as they have been made aware that company information will be posted on the websites.

Regulation FD requires companies to distribute information to the public broadly and nonexclusively, so that all investors will be able to get the information at the same time. The report on the Netflix investigation represented the SEC’s first specific guidance on whether announcements on social media can satisfy the disclosure requirements of Regulation FD.


  Business executives are upbeat about their revenue and expansion plans in the next 12 months. But optimism about the U.S. economy remains lukewarm, according to the first-quarter AICPA Business & Industry Economic Outlook Survey.

The CPA Outlook Index (CPAOI) rose seven points to 66—the second-highest CPAOI reading in the five years of the survey, tying the second quarter of 2011. Each of the nine components that make up the index increased from the previous quarter, led by U.S. economic optimism, which jumped 14 points to 50. A reading above 50 indicates a generally positive outlook.

Despite the surge, the economic optimism figure indicates that some uncertainty lingers about the economy. The main culprit: uncertainty in Washington.

In November, the presidential election and looming fiscal cliff were heavy on the minds of CPA decision-makers. Now, they’re more confident in their own businesses but still wary of Washington.

Real estate industry optimism is up sharply, from 40% in the fourth quarter to 59% in the first quarter. Survey details are available at tinyurl.com/advwfr7.


NEWS DIGEST
Financial reporting  
June 2013

  Private companies would be able to choose and use only the GAAP exceptions or modifications that make sense for them in their financial reporting under a new proposal released April 15 by FASB.

FASB and the Private Company Council (PCC) issued an Invitation to Comment, available at tinyurl.com/c6gezjq, on the private company decision-making framework. Comments are due June 21.

The decision-making framework will provide conditions under which the PCC can consider and vote on exceptions and modifications to GAAP for private companies. The PCC was formed last year, and its recommendations for exceptions and modifications are subject to endorsement by FASB.

In February, FASB and the PCC deliberated feedback on a previous Invitation to Comment that FASB issued on the private company decision-making framework in July 2012. As early as December of last year, PCC members largely opposed the “all-or-nothing” approach FASB originally proposed, which would have required private companies to use either all or none of the GAAP modifications and exceptions created through the PCC process.

The new proposal would allow a private company to select only the alternatives within GAAP for recognition or measurement guidance that it deems appropriate.

In addition, the new proposal would remove the presumption that industry-specific recognition and measurement guidance applies to users of both public and private company financial statements. This would open the door for exceptions and modifications for private companies with respect to industry-specific guidance.


  Investors told FASB that current GAAP calls too often for disposals of assets to be presented as discontinued operations.

FASB has responded to those concerns by issuing a proposal that would redefine “discontinued operation” in such a way that discontinued operations disclosures would be required only for disposals that are considered significant changes in strategy.

Comments are requested by Aug. 30 on the Proposed Accounting Standards Update (ASU), Presentation of Financial Statements (Topic 205)—Reporting Discontinued Operations. The proposal is available at tinyurl.com/cmpwvbz.

Discontinued operations and other disposals that do not qualify for discontinued operations presentation in the financial statements would still be subject to additional disclosures under the proposal.

In addition, disclosures about an organization’s continuing involvement with a discontinued operation would be expanded. Continuing involvement disclosures would be required until the discontinued operation’s results no longer are separately presented in the statement where net income is reported.

If approved, according to FASB, the proposal would achieve greater convergence with IFRS No. 5, Non-Current Assets Held for Sale and Discontinued Operations.


  FASB amended financial reporting standards to resolve diversity in practice related to financial reporting involving the narrow issue of a parent entity’s accounting for the cumulative translation adjustment of foreign currency into net income upon derecognition of foreign subsidiaries or assets.

The amendments are contained in ASU No. 2013-05, Foreign Currency Matters (Topic 830), Parent’s Accounting for the Cumulative Translation Adjustment Upon Derecognition of Certain Subsidiaries or Groups of Assets Within a Foreign Entity or of an Investment in a Foreign Entity.

Originally a project undertaken by FASB’s Emerging Issues Task Force, the ASU is designed to eliminate diversity that had emerged with regard to the application to the release of the cumulative translation adjustment into net income.

The ASU is available at tinyurl.com/armzgfr.


  New standards proposed by the Federal Accounting Standards Advisory Board (FASAB) are designed to make sure the appropriate agencies and organizations are included in the federal government’s financial reporting.

Under the proposed standards, available at tinyurl.com/cx4qzrx, the governmentwide general-purpose federal financial report (GPFFR) would include organizations that are:

  • Budgeted for by elected officials of the federal government;
  • Owned by the federal government; or
  • Controlled by the federal government with risk of loss or expectation of benefits.


The proposal also would require that the GPFFR include an organization if it would be misleading to exclude that organization, even if it does not meet one of the three inclusion principles.

With the proposal, FASAB is refreshing inclusion standards that date to 1995.

Comments are requested by July 3. The proposed statement would take effect for periods beginning or after Sept. 30, 2016; earlier implementation would be encouraged. FASAB also has scheduled a public hearing on the proposal for its Aug. 28 board meeting.


NEWS DIGEST
Financial reporting / international  
June 2013

  FASB is one of 12 national and regional standard setters participating as inaugural members of a group that has been formed to provide technical advice to the International Accounting Standards Board (IASB).

The group, known as the Accounting Standards Advisory Forum (ASAF), was formed to improve cooperation among standard setters across the globe and advise the IASB as it develops IFRS. The ASAF, which met for the first time April 8–9 in London, also includes the:

  • South African Financial Reporting Standards Council, supported by the Pan African Federation of Accountants (PAFA).
  • Accounting Standards Board of Japan.
  • Australian Accounting Standards Board.
  • Chinese Accounting Standards Committee.
  • Asian-Oceanian Standard-Setters Group (AOSSG), represented by the Hong Kong Institute of Certified Public Accountants.
  • Accounting Standards Committee of Germany.
  • European Financial Reporting Advisory Group (EFRAG).
  • Spanish Accounting and Auditing Institute.
  • United Kingdom Financial Reporting Council.
  • Group of Latin American Standard Setters (GLASS), represented by the Brazilian Committee of Accounting Pronouncements.
  • Canadian Accounting Standards Board.


  An IASB proposal is designed to simplify certain aspects of accounting for contributions to defined benefit plans under IAS 19, Employee Benefits.

The proposed amendments were created in response to concerns about the complexity of applying requirements related to accounting for contributions from employees and third parties to defined benefit plans.

The proposal is designed to provide a straightforward alternative for accounting when the contributions payable in a particular period are linked solely to the employee’s service rendered during that period.

For example, the proposal would apply to accounting for employee contributions that are calculated according to a fixed percentage of salary. The proposal is available at tinyurl.com/bna5t2v. Comments are due July 25.


NEWS DIGEST
Forensic accounting  
June 2013

The AICPA has made available to members an online guide detailing which states and cities require CPAs practicing forensic accounting to be licensed as a private investigator (P.I.).

More than 40 states have enacted laws requiring P.I.s to buy a license to operate in their state. Most of those regulations have gone into effect during the past five years, according to research done by the AICPA Forensic & Valuation Services (FVS) Section.

Based on feedback from AICPA members, the FVS Section believes many CPAs are unaware that they might be breaking state laws regarding P.I. licensing. Penalties for operating as a P.I. without a license vary, but in some states it is a felony.

To spread the word to the CPA community, the FVS Section is making available to AICPA members an online matrix designed to help CPAs determine whether the tasks they perform in their practice require them to obtain a P.I.’s license in the states and/or cities in which they do business. The matrix of P.I. licensing requirements for CPAs previously had been available only to FVS members.

While the scope and complexity of P.I.-licensing laws and statutes vary nationwide, they all impose licensing requirements on individuals participating in activities associated with private investigations. Because forensic accountants conduct research- and document-based investigations, they often fall under the purview of these laws. In addition, some CPAs specializing in information technology perform work, such as digging for information in computer files, that could require them to register as P.I.s.

The requirements for obtaining a P.I. license, like the penalties for failing to do so, vary greatly by state. In some states, the statutes specifically exempt forensic CPAs from the licensing mandate. In other states, including Virginia, the P.I.-license exemption is extended only to CPAs based in that state.


NEWS DIGEST
Fraud  
June 2013

The SEC adopted rules jointly with the Commodity Futures Trading Commission (CFTC) that require broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the SEC to adopt programs to prevent identity theft.

A unanimous decision by the SEC commissioners resulted in the adoption of the rule, known as Regulation S-ID.

The requirement expands rules initially enacted in 2007 by several federal agencies—but not the SEC. The Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, transferred rulemaking and enforcement authority for identity theft rules to the SEC and the CFTC for the entities they regulate.

Therefore, many entities recognized as financial institutions or creditors subject to the new Regulation S-ID have already been complying with similar rules, SEC Commissioner Luis Aguilar said.

Registered investment advisers in particular, though, may not have existing identity theft red flag programs and may need to pay particular attention to the rules adopted Wednesday, Aguilar said.

The rules require broker-dealers, mutual funds, and investment advisers to adopt policies and procedures to:

  • Identify relevant types of identity theft red flags.
  • Detect the occurrence of those red flags.
  • Respond appropriately to the detected red flags.
  • Periodically update the identity theft program.


The rules, available at tinyurl.com/cane2zx, will take effect 30 days after publication in the Federal Register, and the compliance date will be six months after the rules’ effective date.


NEWS DIGEST
Regulation  
June 2013

After identifying numerous issues with custody of investors’ funds, the SEC issued a risk alert underscoring existing rules.

An SEC review of recent examinations of investment advisers where significant deficiencies were detected showed custody-related issues in about one-third of the firms examined, resulting in the alert by the SEC’s Office of Compliance Inspections and Examinations (OCIE).

The SEC found that some advisers:

  • Did not recognize that they have custody, such as in situations where the adviser serves as a trustee and is authorized to write or sign checks for clients, or to make withdrawals from a client’s account as part of bill-paying services.
  • Did not meet the custody rule’s surprise examination requirements. Investment advisers who have custody of client assets must enter into a written agreement with an independent public accountant to examine those assets on a surprise basis every year, according to an SEC Investor Bulletin issued along with the risk alert.
  • Did not satisfy the custody rule’s qualified custodian requirements. For example, they may have mingled client, proprietary, and employee assets into a single account, or lacked a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.


The risk alert is available at tinyurl.com/bj4xqcv.


NEWS DIGEST
FYI  
June 2013

  The Senate confirmed the nomination of Mary Jo White, who was sworn in as chairman of the SEC.

White, a former prosecutor who was the first woman to hold the high-profile position of U.S. attorney for the Southern District of New York, brings a pedigree that could raise the SEC’s reputation for enforcement.

The Southern District of New York includes Manhattan, and White’s successful prosecutions include that of Ramzi Yousef in the 1993 World Trade Center bombing. She also gained a conviction in the prosecution of mob boss John Gotti in 1992 when she was acting U.S. attorney in the Eastern District of New York.


  David Vaudt, who has been Iowa’s state auditor since January 2003, has been named GASB’s new chairman.

Vaudt, 59, will take his post on July 1 following the retirement of current chairman Robert Attmore. As state auditor, Vaudt has been responsible for auditing Iowa’s comprehensive annual financial report and single audit report. He also has supervised the annual audit of more than 200 Iowa cities, counties, school districts, and other government agencies.

The FAF trustees appointed Vaudt to a single, seven-year term in a departure from their past practice of awarding an initial five-year term with the possibility of a second five-year term. Attmore has served nine years as GASB’s chair.

Before serving as Iowa’s state auditor, Vaudt worked for 25 years in KPMG’s Des Moines office, including 13 years as partner. He specialized in the office’s government services practice and also served as the office’s human resources and recruiting partner. He was president of the National State Auditors Association from 2011 to 2012, chair of the National Association of State Boards of Accountancy from 2003 to 2004, and chair of the Iowa Accountancy Examining Board from 1995 to 2002.


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