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NEWS DIGEST
Auditing  
November 2013

  The PCAOB is urging auditors of broker-dealers to conduct audits with due professional care and skepticism after PCAOB inspectors identified deficiencies in 57 of the 60 audits of broker-dealers reviewed during the final 10 months of 2012.

A report on the PCAOB’s interim inspection program for broker-dealer audits said board inspectors reviewed portions of a total of 60 audits conducted by 43 public accounting firms. The inspections staff found that auditors were involved in the preparation of the financial statements they audited in 22 of the 60 audits examined, contrary to SEC independence rules. The report is available at tinyurl.com/p5cvja2.

These independence findings were identified in about 8% of the audits performed by firms that also audit public companies, but they were found in about 80% of the audits performed by firms that audit brokers and dealers but not public companies.

Deficiencies were most commonly reported with respect to:

  • Audit procedures related to net capital and customer reserve supporting schedules, compliance with the conditions of the exemption claimed by the broker or dealer, and the accountant’s supplemental report on material inadequacies.
  • Audit procedures regarding tests of revenue, related parties, and the consideration of fraud in the audit of the financial statements.


The PCAOB urged firms that audit brokers and dealers to review:

  • Arrangements with brokers and dealers, and quality-control procedures, for the purpose of upholding SEC independence rules.
  • Guidance and training to determine whether appropriate attention is being given to areas where PCAOB inspectors found deficiencies.
  • Policies for supervision and review to help ensure that firm partners and supervisors are paying sufficient attention to these areas.


Broker and dealer management and audit committees—or their equivalent—may want to inquire with their auditors about how audits are addressing these areas, the PCAOB suggested.

The board will continue to conduct inspections of firms that audit brokers and dealers under the interim program until rules for a permanent inspection program take effect. A rule proposal for a permanent inspection program is expected in 2014 at the earliest.

Auditors of brokers and dealers, meanwhile, have a change on the horizon with respect to the standards they follow. Beginning with audits effective for fiscal years ending on or after June 1, 2014, audits of broker and dealers will be conducted in accordance with PCAOB standards. Audits for fiscal years prior to that date have been conducted in accordance with GAAS.


  Audit regulators in the United States and the United Kingdom agreed to continue cooperating on cross-border supervision of audit firms, the U.K. Financial Reporting Council (FRC) announced.

The agreement between the FRC and the PCAOB does not contain an expiration date, but follows recent European Commission decisions that allow such agreements until July 31, 2016.

The agreement allows for joint work on inspections and exchanges of otherwise confidential information.

A data protection agreement signed by both parties describes the limitations on data that can be made available to the PCAOB, and the PCAOB’s responsibilities for protecting data received from the U.K.


NEWS DIGEST
Business & industry  
November 2013

U.S. companies expect to make more money, and spend more of it, in the year ahead—and that could translate into more jobs. At the same time, finance executives’ outlook of the overall economy has cooled.

Those are the key takeaways from the third-quarter AICPA Business & Industry Economic Outlook Survey.

The quarterly survey, available at tinyurl.com/93a9s7n, takes the temperature of more than 1,200 finance professionals across industries, gauging their outlook in nine key areas: U.S. economic optimism, organization optimism, expansion plans, revenue, profits, employment, IT spending, training and development, and other capital spending.

Those nine indicators make up the CPA Outlook Index (CPAOI), which matched a post-recession high of 69 in the most recent survey. That’s even with last quarter, when optimism about the U.S. economic outlook and the fortunes of respondents’ own companies surged. A score above 50 indicates a positive outlook.

Companies plan to ramp up hiring, according to the survey. About one-third of companies (34%) said they have too few employees. Also, 15% plan to hire, up from 9% a year ago. That’s a post-recession high for the survey. Small businesses in particular are more inclined to hire; 20% said in the most recent quarter that they are reluctant to hire, compared with 25% who were reluctant to add staff in the previous quarter.

Overall, companies plan to grow their staffing 1.3% in the next 12 months, compared with 0.8% a year ago.

The most recent CPAOI was propped up by improved attitudes about revenue—and how that money might be spent. The outlook for revenue hit its highest point since the first quarter of 2012. Meanwhile, optimism surrounding expansion plans and other capital spending—and profits—climbed to their highest levels in the past year. The outlook for IT spending also remained strong.

The outlook in those categories was tempered by optimism about the overall U.S. economy, which dipped from 66 to 62—the biggest quarter-to-quarter drop of any of the nine indicators. Organization optimism also dipped by a point compared with the previous quarter, as did the outlook for training and development expenditures. Those declines, driven in part by concerns about health care reform and political gridlock, kept the index from eclipsing 70 points—a mark last achieved in 2007.

The short-term story obscures the tale of an otherwise upbeat year. On a year-over-year basis, sentiment improved in all nine sectors of the index, including a 21-point increase in U.S. economic optimism and a seven-point gain in company optimism.


NEWS DIGEST
Financial reporting  
November 2013

  Russell Golden used his first major speech as FASB’s chairman to describe plans to increase the efficiency and effectiveness of the board’s operations.

Golden provided wide-ranging remarks about FASB’s future as he spoke at a one-day conference in New York City celebrating the board’s 40th anniversary.

He said the board needs to evaluate its agenda decision process, improve its Accounting Standards Codification (ASC), and attempt to shorten the duration of its projects while enhancing the projects’ quality.

Golden said FASB will analyze areas where the ASC may be improved. The board will determine whether it can improve how it writes and communicates changes to the codification.

Some of the more confusing sections will be rewritten, Golden said. The board currently is rewriting the ASC’s liabilities and equity section.

“We should listen to our stakeholders across the country who have delivered mixed reviews regarding the codification,” Golden said. “Most agree and applaud the concept of the value of the codification, but they also observe that, as presently constituted, it is very cumbersome and not user-friendly.”

FASB also plans to:

  • Continue improving the way it communicates with stakeholders. Focusing on nontechnical audiences and “plain English” explanations is a key objective.
  • Reduce the complexity and cost of applying standards. The work of the Private Company Council (PCC) plays a role in that, but simplicity is sought for both private and public companies.
  • Increase its cooperation with its parent organization—the Financial Accounting Foundation (FAF)—and GASB, which also falls under FAF’s umbrella.


In addition, Golden said, FASB plans to continue pursuing convergence with the International Accounting Standards Board (IASB) while also carrying out its mission of improving U.S. capital markets. He said this can be accomplished by:

  1. Completing the remaining major convergence projects on revenue recognition, leases, financial instruments, and insurance.
  2. Considering IFRS and convergence while making changes to U.S. GAAP.
  3. Actively participating in the development of IFRS.
  4. Enhancing relationships and communications with other national standard setters.


  A new tool developed by the AICPA provides guidelines to help privately held businesses determine which accounting framework best meets their financial reporting needs.

The AICPA in June released the new Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs, available at tinyurl.com/bql5o8e), for use by private, owner-managed businesses when GAAP financial statements are not required.

Meanwhile, FASB and the PCC are developing potential alternatives for private companies within GAAP. Four narrowly scoped alternatives for private companies have been proposed by FASB and are under consideration by the PCC and FASB.

The AICPA developed its decision-making tool with input from the National Association of State Boards of Accountancy. The tool, presented as a nonauthoritative aid whose use is not required, takes readers through a step-by-step process for choosing a framework.

The tool, available at tinyurl.com/pyjmkzv, immediately advises use of GAAP financial statements for entities that:

  • Face a reporting requirement that demands GAAP-based financial statements; or
  • Operate in an industry that uses transactions requiring highly specialized accounting guidance that makes use of a non-GAAP framework insufficient for financial reporting.


For the remainder of privately held entities, the tool presents considerations to help decide whether GAAP, the FRF for SMEs, cash/modified cash basis, or tax basis is the most suitable accounting framework. Organizations also are advised to consult with their CPA firm and external stakeholders, where appropriate.

Before issuing the tool, the AICPA released illustrative financial statements and disclosures (available at tinyurl.com/n9xvsd8) as an aid to implementing the FRF for SMEs that help distinguish between financial statements based on the new framework and GAAP-prepared statements.


  FASB formally issued for public comment a proposal that would exempt many private companies from the requirement to apply variable-interest entity (VIE) consolidation guidance to lessor companies under common control.

The proposal, which was originally advanced by the PCC, would create an alternative within U.S. GAAP that would address a common source of frustration for private companies and their financial statement preparers.

Under the proposal, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (formerly FIN 46(R) and FASB Statement No. 167), a private company lessee would have the option not to apply VIE consolidation guidance when:

  • The lessor and the private company are under common control;
  • The private company has a leasing arrangement with the lessor; and
  • Substantially all activity between the two companies is related to the lessor’s leasing activity.


The proposal is available at tinyurl.com/ozm89xn.

Additional disclosures would be required of private companies that apply this exemption. These disclosures would include:

  • The key terms of the leasing arrangements.
  • The amount of debt and/or significant liabilities of the lessor under common control.
  • The key terms of existing debt agreements of the lessor under common control.
  • The key terms of any other explicit interest related to the lessor under common control.


The comment period ended Oct. 14. The effective date would be determined after the PCC considers feedback received on the exposure draft.

After reviewing feedback, the PCC will have an opportunity to make changes and hold a vote that would forward the final version of the GAAP exception to FASB. If FASB endorses the exception, the alternative would be written into GAAP.

Companies that can use the exception would continue to apply other applicable FASB guidance, including Topic 840, Leases, and Topic 460, Guarantees.


  FASB voted to propose changes designed to improve the relevance and reduce the complexity of development-stage entity financial reporting.

The board planned to issue an exposure draft by the end of October that would apply to public and private entities.

During a July 16 meeting, the PCC recommended that FASB add a project to its technical agenda that would help decrease the complexity of financial reporting for all organizations that are in the development stage.

According to FASB, a development-stage entity devotes substantially all its efforts to establishing a new business and:

  • Has not begun planned principal operations; or
  • Has begun planned principal operations without producing significant revenue.


U.S. GAAP requires development-stage entities to present the same basic financial statements and apply the same recognition and measurement requirements as established operating organizations for revenues, startup costs, and other similar costs.

Development-stage entities also are required by U.S. GAAP to present inception-to-date information about income statement line items, cash flows, and equity transactions. The cost and lack of relevance of these additional presentation requirements has led to concerns among stakeholders.


  Accounting standards for risk financing and insurance-related activities of state and local governments, including public risk pools, achieve their purpose, according to a Financial Accounting Foundation (FAF) review report.

GASB Statements No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, and No. 30, Risk Financing Omnibus, were reviewed by a FAF post-implementation review (PIR) team. The full report is available at tinyurl.com/ov4rnha.  

In addition, the PIR team:

  • Is reviewing FASB Statement No. 157, Fair Value Measurements. The review will include a survey of stakeholders about the application and effectiveness of the standard.
  • Will start a review of FASB Statement No. 123(R), Share-Based Payment, later this year.


Parties who would like the opportunity to participate in PIR surveys can register online at tinyurl.com/c467dkj.


  FAF issued a revised proposal describing a process that would decide which information GASB could consider for its standard setting for state and local governments.

Under the proposal, GASB would consult with the FAF trustees’ Standard-Setting Process Oversight Committee to determine whether particular information falls within the scope of GASB’s standard-setting mission.

The revised proposal is available at tinyurl.com/nek2ua5. Comments were due Sept. 30.

The revised proposal diminishes the role the FAF trustees would have performed under the original proposal. FAF Chairman Jeffrey Diermeier said in a news release that many stakeholders had expressed concerns that the trustees were stepping into GASB’s standard-setting role.


  FASB released its proposed 2014 U.S. GAAP Financial Reporting Taxonomy.

The taxonomy consists of a list of computer-readable financial reporting labels coded in XBRL. The proposal contains updates for accounting standards and other recommended improvements to the official taxonomy, which is used by public issuers registered with the SEC.

Comments on the proposal, which is available at tinyurl.com/lcqcex3, were due Oct. 31. FASB plans to complete and publish the 2014 U.S. GAAP taxonomy early next year.

Although FAF, FASB’s parent organization, maintains the taxonomy, questions about using it to create and submit XBRL-tagged files in compliance with SEC rules should be directed to the SEC.


NEWS DIGEST
Personal financial planning  
November 2013

Many U.S. adults lack a basic understanding of common financial terms found in health insurance plans as they face critical decisions about their future coverage, according to an AICPA survey.

More than half of respondents (51%) polled in July could not accurately identify at least one of the following terms: premium, deductible, and copay, according to a telephone survey of 1,008 U.S. adults by Harris Interactive. These terms are commonly used in health insurance plans.

The Patient Protection and Affordable Care Act, P.L. 111-148, which was passed in 2010, requires individuals to purchase health insurance or pay a penalty beginning in 2014. Although open enrollment was scheduled to begin in October, the survey found that knowledge of the health care law and its implications is limited.

Forty-one percent of respondents said they are not at all knowledgeable about the law, and another 48% said they are somewhat knowledgeable.

“Half of Americans would fail health insurance 101,” Ernie Almonte, CPA, chair of the AICPA’s National CPA Financial Literacy Commission, said in a news release. “That’s critical insight as consumers prepare to make important decisions with implications for both their health and fiscal well-being.”

Fourteen percent of those surveyed said they do not have health insurance; half of those respondents said figuring out how to pay for health insurance is their biggest concern about the mandate. The requirement to purchase health insurance is the biggest financial concern for 11% of survey respondents.

Tips on evaluating and choosing health insurance are available at the AICPA’s financial education site at 360financialliteracy.org.


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