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May 2013

  The AICPA Auditing Standards Board (ASB) made a correction to an auditing section in the AICPA Professional Standards to reinforce the board’s intentions not to change practice and to avoid unintended consequences.

The auditing (AU) sections were redrafted as part of the clarity project to reflect the ASB’s established clarity drafting conventions, and are designed to make the clarified standards easier to read, understand, and apply.

AU Section 634, Letters for Underwriters and Certain Other Requesting Parties, was redrafted and issued as AU-C Section 920, Letters for Underwriters and Certain Other Requesting Parties, in Statement on Auditing Standards No. 122, Clarification and Recodification.

When this redrafting occurred, the ASB did not intend to change or expand AU Section 634 in any significant respect.

The ASB believed that the substance of the last sentence in paragraph .42 of AU Section 634, “In the case of a business combination, the historical financial statements of each constituent part of the combined entity on which the pro forma financial information is based should be audited or reviewed,” had been appropriately captured in paragraph .53 of AU-C Section 920.

But to reinforce the ASB’s intention, the board added the sentence in paragraph .53 of AU-C Section 920. The following text illustrates the changes (boldface italics denotes new language; deleted text is shown in strikethrough):

.53 The auditor should not provide negative assurance in a comfort letter on pro forma financial information, including negative assurance on

  • the application of pro forma adjustments to historical amounts, 
  • the compilation of pro forma financial information, or
  • whether the pro forma financial information complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X3 [text of footnote omitted for purposes of this illustration] unless the auditor has obtained the required knowledge described in paragraph .52 and has performed
    a. an audit of the annual financial statements, or
    b. a review of the interim financial statements, in accordance with GAAS applicable to reviews of interim financial information,

of the interim financial information of the entity (or, in the case of a business combination, of a significant constituent part of the combined entity) to which the pro forma adjustments were applied. In the case of a business combination, the historical financial statements of each constituent part of the combined entity on which the pro forma financial information is based should be audited or reviewed. If these conditions are not met, the auditor is limited to reporting procedures performed and findings obtained. (Ref: par. .A59)

  The Federal Reserve issued guidance to encourage U.S. banks with more than $10 billion in total assets to have their internal audit functions report to the CEO—a move that could influence similar changes in other industries, observers of the profession say.

In a policy statement, available at, the Federal Reserve said the objectivity of the internal audit function is served best when the chief audit executive (CAE) reports administratively to the CEO. While that relationship is encouraged by the Federal Reserve, it is not required. But if the CAE reports administratively to another executive, the statement requires the audit committee to document its rationale for the reporting structure.

The Fed created the guidance in response to the recent financial crisis in hopes of promoting objectivity in the internal audit function.

Although CAEs in the United States usually report functionally to the audit committee, they often report administratively to an executive in the C-suite. Traditionally, that executive has been the CFO, according to Institute of Internal Auditors (IIA) President and CEO Richard Chambers.

Chambers said there are risks involved with having internal audit report to the CFO.

“A lot of internal audit’s work is done looking at financial risks, financial controls, and so forth,” Chambers said. “Even if you have an objective chief audit executive, how does that look to third parties that, in essence, that individual is leading audit work of their boss’s area of responsibility?”

Just 21% of internal auditors in the United States and Canada surveyed by the IIA in 2010 said CAEs in their organizations report administratively to the CEO. More respondents—23%—said their CAEs report administratively to the CFO.

Financial reporting  
May 2013

  FASB issued a revised proposal that would provide a comprehensive framework for classifying and measuring financial instruments.

The Proposed Accounting Standards Update (ASU), Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, would require financial assets to be classified and measured based on the asset’s flow characteristics and the entity’s business model for managing the asset, rather than on its legal form or whether the asset is a loan or security.

Financial assets would be classified into one of three categories:

  • Amortized cost. This would include financial assets constituted solely of payments of principal and interest that are held for the collection of contractual cash flows.
  • Fair value through other comprehensive income (OCI). This would include financial assets constituted solely of payments of principal and interest that are both held for the collection of contractual cash flows and for sale.
  • Fair value through net income. This would include financial assets that do not qualify for measurement at either amortized cost or fair value through OCI.

Equity investments (except those accounted for under the equity method of accounting) would be measured at fair value with changes in fair value recognized in net income, because such investments do not have payments of principal and interest. A “practicability exception” to measurement at fair value would be provided for equity investments without fair values that can be readily determined.

Financial liabilities would generally be required to be carried at cost unless:

  • The reporting organization’s business strategy is to subsequently transact at fair value, or
  • The obligation results from a short sale.

The embedded derivative requirements for hybrid financial liabilities would be retained.

Public companies would be required to disclose fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost, with exceptions for demand deposit liabilities, and receivables and payables due in less than a year. Nonpublic entities would not be required to disclose this fair value information parenthetically or in the notes.

Comments on the proposal, available at, are due May 15.

“The proposed accounting standard would measure financial assets based on how a reporting entity would realize value from them as part of distinct business activities, while the measurement of financial liabilities would be consistent with how the entity expects to settle those liabilities,” FASB Chairman Leslie Seidman said in a statement.

Seidman said the revised proposal simplifies the classification methods currently in use and provides an opportunity for convergence with the proposal issued by the International Accounting Standards Board (IASB) in November.

If approved, the proposal would narrow the availability of the existing fair value option for financial assets and financial liabilities. In the limited cases where the fair value option would be allowed for financial liabilities, changes in the fair value attributable to an organization’s own credit risk would be reported in OCI rather than net income.

The proposal is part of a broader joint project with the IASB to improve and converge accounting for financial instruments, which has received significant scrutiny in the wake of the global financial crisis.

FASB decided to require amortized cost as a measurement attribute for assets held for collection of cash flows, because the value is realized over the holding period of the asset. Assets that might be sold to manage interest rate risk or liquidity risk would not qualify for cost measurement. FASB also decided that financial liabilities would generally be measured at amortized cost unless certain conditions are met.

Accounting for expected credit losses on debt instruments carried at amortized cost or fair value through OCI is addressed in FASB’s ASU on credit losses, which was issued in December. Both ASUs are part of the broader financial instruments project.

The IASB issued a classification and measurement proposal for financial instruments in November and released its ED on financial instruments impairment in March. The IASB’s expected credit loss model differs from FASB’s, but the boards are holding out hope for convergence after comments are reviewed.

  FASB changed the format for reporting amounts reclassified out of other comprehensive income (OCI) in a move designed to increase transparency at minimal cost.

ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, does not change current requirements for reporting net income or OCI in financial statements.

All the information required by the ASU already is required to be disclosed elsewhere in the financial statements. The ASU, available at, simply creates new presentation requirements. Organizations will be required to:

  • Present the effects on the line items of net income of significant amounts reclassified out of accumulated OCI, but only if the item reclassified is required to be reclassified to net income in its entirety during the same reporting period. Presentation should occur either on the face of the statement where net income is presented, or in the notes.
  • Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. An example would be when a portion of the amount reclassified out of accumulated OCI initially is transferred to a balance sheet account rather than directly to income or expense.

OCI includes gains and losses that initially are excluded from net income for an accounting period. Later, those gains and losses are reclassified out of accumulated OCI into net income.

All public and private companies that report items of OCI are required to comply with the ASU. Public companies are required to comply for interim and annual reporting periods.

Private companies are required to meet the reporting requirements of the amended paragraphs about the roll forward of accumulated OCI for interim and annual reporting periods. But private companies are required to provide information about the impact of reclassifications on line items of net income only for annual reporting periods.

The ASU takes effect for reporting periods beginning after Dec. 15, 2012, for public companies, and for reporting periods beginning after Dec. 15, 2013, for private companies.

  Private companies and nonpublic not-for-profits are exempt from a particular fair value disclosure as a result of a FASB amendment that underwent a speedy review process.

The amendment clarifies that the requirement to disclose the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety (as Level 1, Level 2, or Level 3) does not apply to private companies and nonpublic not-for-profits for items:

  • That are not measured at fair value in the statement of financial position, but
  • For which fair value is disclosed.

ASU No. 2013-03, Financial Instruments (Topic 825): Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities, makes the clarification. The ASU clarifies guidance in ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

FASB was notified by stakeholders in December that the 2011 amendments, codified in ASC Section 825-10-50, appeared to be inconsistent with the board’s intentions. FASB decided to expedite the clarification.

The update, available at, takes effect immediately.

  The Financial Accounting Foundation (FAF) will conduct post-implementation reviews on a 1992 FASB standard focusing on accounting for income taxes, and on two GASB standards governing reporting of risk financing and insurance-related activities of state and local governments, including public risk pools

A FAF team will review FASB Statement No. 109, Accounting for Income Taxes, which establishes standards for reporting the effects of income taxes in an organization’s financial statements. The standard is mostly codified in ASC Topic 740, Income Taxes.

FAF also will conduct a review of GASB Statements No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and No. 30, Risk Financing Omnibus—an Amendment of GASB Statement No. 10.

A review of FASB Statement No. 141R, Business Combinations, also is under way.

Another FAF post-implementation review affirmed the effectiveness of two GASB standards established to improve state and local government financial reporting for deposit and investment risk, and repurchase and reverse repurchase agreements.

The FAF team reviewed:

  • GASB Statement No. 3, Deposits With Financial Institutions, Investments (Including Repurchase Agreements), and Reverse Repurchase Agreements.
  • GASB Statement No. 40, Deposit and Investment Risk Disclosures.

Both statements require note disclosures about deposit and investment risk. Statement No. 3 also provides guidance for reporting of repurchase and reverse repurchase agreements.

After receiving input from creditors, analysts, citizen and taxpayer groups, preparers, auditors, and academics, the review team concluded that the statements generally meet the needs of shareholders and result in reliable deposit and investment risk information.

The FAF board of trustees approved a more collaborative agenda-setting process for FASB and GASB. Decisions regarding project plans, agenda setting, and priority of projects at FASB and GASB now will be approved by a majority vote of the respective boards instead of by the board chair alone.

The trustees voted to end the previous process, which vested the chairs with the authority to make these decisions. All agenda decisions now will be voted on by the boards in public meetings.

  A Federal Accounting Standards Advisory Board (FASAB) committee issued proposed implementation guidance for financial reporting on general property, plant, and equipment cost accumulation, assignment, and allocation. The proposal, available at, was created to give federal agencies a consistent framework for interpreting existing guidance.

In addition, the proposal is intended to help federal entities correctly apply the general property, plant, and equipment standards and ensure the cost of producing that information does not outweigh the benefits.

The ED proposes implementation guidance for applying FASAB’s standards related to:

  • Recognition requirements related to program costs incurred during the general plant, property, and equipment lifecycle, the required levels of precision, and acceptable methods for recognizing these costs.
  • The concept of a cost accumulation and allocation decision framework.
  • Management’s role in applying the cost accumulation, assignment, and allocation decision framework.

A decision framework is provided to help management apply the principles described in the proposal.

Comments on the proposed implementation guidance were due May 1.

May 2013

Events that contributed to the global financial crisis have led to careful examination of how securities firms protect their clients’ assets.

To help regulators improve supervision of such firms, the International Organization of Securities Commissions (IOSCO) published a consultation report, Recommendations Regarding the Protection of Client Assets.

The report, available at, describes eight principles to clarify the roles of regulated securities firms—called “intermediaries” in the report—and regulators in protecting clients’ assets.

Although laws to protect investing clients vary across jurisdictions, the report describes the basic responsibilities of intermediaries and regulators. Intermediaries placing client assets with third parties should reconcile the clients’ accounts and records with those of the third party, while regulators must maintain effective safeguarding of clients’ assets, according to the report.

May 2013

Members of Congress who also belong to the accounting profession announced the organization of the Congressional Caucus on CPAs and Accountants for the 113th Congress.

Caucuses must be reformed and reapproved for each Congress. The current caucus has 12 members, two more than the caucus for the 112th Congress. All of the accountant members of Congress who were up for reelection in November won new terms. Two freshman CPAs in the House of Representatives—Reps. Patrick Murphy, D-Fla., and Tom Rice, R-S.C.—also won seats in November and have joined the caucus. CPAs returning to the House of Representatives are Reps. John Campbell, R-Calif.; K. Michael Conaway, R-Texas; Bill Flores, R-Texas; Lynn Jenkins, R-Kan.; Steven Palazzo, R-Miss.; Collin Peterson, D-Minn.; Jim Renacci, R-Ohio; and Brad Sherman, D-Calif. Accountant Sens. Mike Enzi, R-Wyo., and Ron Johnson, R-Wis., also return to the caucus.

“Our bipartisan, bicameral structure ensures that members on both sides of theaisle in both the House and Senate get a straightforward CPA perspective to the critical fiscal and budgeting issues facing the country,” Sherman said in a news release.

The group began caucusing in 2011.

Human resources  
May 2013

CFOs are still concerned about talent, and that’s potentially good news for workers with specialized skills.

Nearly 60% of U.S. CFOs consider it a challenge to find skilled financial professionals, according to a Robert Half International survey. Fifty-four percent said it was “somewhat challenging” to find skilled workers in finance, and 5% said it was “very challenging.” That’s up slightly from September 2012, when 58% of CFOs said it was challenging to find skilled financial professionals.

“It’s a tale of two job markets,” said Paul McDonald, Robert Half senior executive director. “The broad-based media would lead you to believe that, with [U.S.] unemployment above 7%, there’s a plethora of people to pick from. But when you dig in, there’s a war for talent in the finance arena.”

Workers with specific expertise remain in demand, and because there are fewer of them, they often command higher starting salaries. For instance, Robert Half said that demand remains strong for the internal audit role.

Companies are looking in particular for analysts who are CPAs and can turn financial data into business recommendations.

May 2013

A new, greatly enhanced AICPA audit and accounting guide, Not-for-Profit Entities, is available in ebook and paperback form.

The AICPA Auditing Standards Board (ASB), Financial Reporting Executive Committee (FinREC) and Not-For-Profit Guide Task Force have revised the guide, making significant enhancements to improve user understanding and minimize diversity in practice.

Enhancements include:

  • An expanded section about reporting relationships with other entities.
  • New sections about reporting and measuring noncash gifts.
  • A new chapter on program-related investments and microfinance loans.
  • An expanded section about municipal bond debt, and the effects of terms (such as subjective acceleration clauses) on the classification of debt.
  • New guidance for reporting the expiration of donor-imposed restrictions.
  • Expanded discussion about the legal and regulatory environment in which not-for-profit entities operate.
  • Auditing content that has been conformed to the changes resulting from the ASB clarity project.
  • Suggestions for audit procedures an auditor might consider as a supplement to the risk assessment procedures.

For more information, visit

May 2013

  Companies moving IT systems to the cloud are encountering higher costs and more implementation problems than they expected, KPMG International reported in a survey.

About one-third of the more than 650 business and IT leaders in the global survey experienced higher-than-anticipated expenses adopting cloud-computing services, while a similar number reported significant implementation challenges. The survey report is available at

Rick Wright, leader of KPMG’s Global Cloud Enablement Program, said companies need to focus on more than just technology issues when developing their cloud adoption strategies. Companies should examine their business processes and redesign them as needed to secure a smoother transition to the cloud. “Simply put, executives have found that simultaneous process redesign is central to addressing the complexities that often arise in the implementation and operational phases of cloud adoption,” Wright, a partner with KPMG LLP, said in a news release.

Moving to the cloud is not about short-term cost savings, said Erik Asgeirsson, president and CEO of CPA2Biz, the AICPA’s technology subsidiary. “It’s about positioning your business for new fields of growth,” he said. “Down the line, there certainly are cost advantages, but some investment is required upfront, particularly to work through change management issues.”

  Many organizations are unprepared to protect themselves against an emerging, relentless cybersecurity danger that threatens national security and economic stability, according to a new global survey.

Advanced persistent threats (APTs) are not easily deterred, which makes them different from traditional threats, according to global IT association ISACA. But an ISACA survey of more than 1,500 security professionals found that 53% of respondents do not believe APTs differ from traditional threats.

This disconnect indicates that IT professionals and their organizations may not be fully prepared to protect themselves against APTs, according to ISACA.

“APTs are sophisticated, stealthy, and unrelenting,” ISACA International Vice President Christos Dimitriadis said in a news release. “Traditional cyberthreats often move right on if they cannot penetrate their initial target. But an APT will continually attempt to penetrate the desired target until it meets its objective—and once it does, it can disguise itself and morph when needed, making it difficult to identify or stop.”

The survey report is available at

Although more than 70% of the IT professionals surveyed said their organizations can detect APT attacks, and more than 70% said they can respond to APT attacks, their description of controls indicate a misunderstanding and lack of preparation, according to ISACA. Top controls enterprises are using to stop APTs were identified as anti-virus and anti-malware programs (95%) and network perimeter strategies such as firewalls (93%). But APTs have been known to avoid being detected or deterred by these types of controls.


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