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Business & industry  
October 2013

A federal judge ruled against business groups’ court challenge to new conflict mineral rules, which require U.S. issuers to monitor their supply chains in an effort to curtail human rights abuses in Africa where the raw materials are mined.

Judge Robert Wilkins of the U.S. District Court for the District of Columbia denied the motion for summary judgment filed by the National Association of Manufacturers, the U.S. Chamber of Commerce, and the Business Roundtable. The business groups have filed notice that they plan to appeal the ruling.

The business groups had challenged the conflict minerals rule as arbitrary and capricious, and claimed that the disclosures required by the SEC run afoul of the First Amendment. Wilkins ruled that the business groups’ claims lacked merit. The first Conflict Minerals Reports are due to the SEC on May 31, 2014, to report on the 2013 calendar year.

Businesses are developing procedures to comply with the rule, which was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, and was enacted by the SEC in August 2012.

The rule directly affects an estimated 6,000 U.S. issuers and requires tracing of conflict minerals (gold, tantalum, tin, and tungsten) through supply chains to determine and disclose whether the raw materials originate at mines in the Democratic Republic of the Congo (DRC) or its nine adjoining countries. If the conflict minerals originated in the DRC or its neighboring countries, the issuer must determine and disclose whether the sale of those minerals financed or benefited armed groups.

For more information on conflict minerals and independent private-sector audits of Conflict Minerals Reports, visit the AICPA Conflict Minerals Resources page at

Financial reporting / international  
October 2013

The IASB began a consultation process with the objective of issuing a revised conceptual framework for financial reporting.

The conceptual framework establishes the concepts that underlie the preparation and presentation of financial statements. The IASB follows the principles in the conceptual framework when developing and revising IFRS.

An IASB discussion paper, available at, explores possible changes to the conceptual framework and is designed to gain feedback from stakeholders on issues the board will consider in creating an exposure draft of a revised conceptual framework. The issues include:

  • Definitions of assets and liabilities.
  • Recognition and derecognition.
  • The distinction between equity and liabilities.
  • Measurement.
  • Presentation and disclosure.
  • Other comprehensive income.

In addition to seeking input in the form of comment letters, the IASB will undertake an outreach program designed to obtain feedback on the areas covered in the discussion paper. Comments are due Jan. 14, and can be submitted at

October 2013

  Fees for external audits of financial statements paid by U.S. public and private companies rose in fiscal year 2012 over the previous year, according to a new survey report.

Audit fees paid by 87 public companies averaged $4.5 million in FY 2012, according to a Financial Executives International (FEI) report. That represented a 4% increase over the audit fees those same companies paid in the previous fiscal year.

Private companies paid an average of $147,800 in total audit fees in FY 2012, a 3% increase over their FY 2011 audit fees. Executives from 118 private companies participated in the survey.

It was the third straight year of fee increases reported by public companies in the annual survey, which previously showed increases of 5% in FY 2011 and 2% in FY 2010 after a fee decrease was reported in FY 2009. Private companies saw fees rise 7% in FY 2011, and reported that their year-over-year audit fees remained essentially unchanged in FY 2010 and FY 2009.

  The AICPA Auditing Standards Board (ASB) is proposing changes to its attestation standards as part of its clarity project.

An exposure draft, available at, would clarify and recodify certain Statements on Standards for Attestation Engagements (SSAEs) in the AICPA’s Professional Standards.

The ASB has undertaken the clarity project to address concerns over the clarity, length, and complexity of its standards. A project to clarify the Statements on Auditing Standards has been substantially completed, and the ASB has begun clarifying the SSAEs.

SSAEs that provide a framework for performing and reporting on attestation engagements are the subject of the ED and will be clarified and recoded first. AT Sections 20, 50, 101, and 201 would be superseded by the proposed changes.

Additional SSAEs included in subject-matter specific AT Sections 301–801 will have changes proposed in an ED at a later date. The ASB anticipates that the proposed guidance in both EDs would take effect at the same time, and does not expect the effective date to be for reports dated before Dec. 15, 2014.

Although many of the proposed changes are not substantive, a few important changes are proposed. These include:

  • For all examination and review engagements, a practitioner would be required to obtain from the responsible party a written assertion about the measurement or evaluation of the subject matter against the applicable criteria.
  • Representation letters would be required in all examination and review engagements.
  • Practitioners would be required to obtain a more in-depth understanding of the development of the subject matter than currently is required. This change is proposed to help practitioners better identify the risks of material misstatement in an examination engagement.
  • A requirement that when the engaging or responsible party imposes restrictions that significantly limit the scope of the engagement, the practitioner should decide whether to express a qualified opinion, disclaim an opinion, or withdraw from the engagement when withdrawal is possible under applicable regulations. Currently, the practitioner’s options in those circumstances are to disclaim an opinion or withdraw from the engagement.

Comments are requested by Oct. 24 and should be addressed to Sherry Hazel at

  The SEC approved rule amendments that strengthen audit requirements for broker-dealers.

The amendments are intended to increase protections for investors whose money and securities are turned over to SEC-registered broker-dealers. The final rules are available at

Broker-dealers are required by previous rules to file annual reports with the SEC and the self-regulatory organization (SRO) designated to examine that broker-dealer that contain financial statements audited by a PCAOB-registered independent public accountant. The new rule amendments require:

  • Broker-dealers that have custody of customers’ assets to file a “compliance report” with the SEC to verify that they are complying with broker-dealer capital requirements, protecting customer assets, and sending periodic statements to customers.
  • Broker-dealers that do not have custody of customers’ assets to file an “exemption report” with the SEC citing their exemption from requirements for carrying broker-dealers.

In both cases, the broker-dealer is required to engage a PCAOB-registered independent public accountant. The accountant would prepare a report based on an examination of certain statements in the compliance report, or a report based on a review of certain statements in the exemption report, depending on whether the broker-dealer has custody of customers’ assets.

The examination or review of the newly required reports—and the examination of the broker-dealer’s financial statements—must be conducted according to PCAOB standards. The accountant’s report based on an examination of the compliance report will satisfy the annual internal control audit report requirement for investment advisers.

Requiring reports under PCAOB standards is a significant change for auditors because broker-dealer reports have been prepared under generally accepted auditing standards (GAAS).

Broker-dealers registered with the Securities Investor Protection Corporation (SIPC) also are required to file an annual report with the SIPC.

In addition, the amendments require a broker-dealer to file a new quarterly Form Custody report containing information about whether and how custody of customers’ securities and cash is maintained. The objective of these reports is to establish a custody profile for broker-dealers that can be used as a starting point by SEC and SRO staff conducting routine inspections and examinations of broker-dealers.

The amendments also require broker-dealers to allow SEC or SRO staff to review the work papers of the independent public accountant, if requested in writing, for purposes of an examination of the broker-dealer. Broker-dealers are required to allow the accountant to discuss findings with the examiners. This amendment applies to broker-dealers regardless of whether they have custody of their clients’ assets.

The amendments regarding the Form Custody report and the requirement to file annual reports with the SIPC take effect Dec. 31. The effective date for the requirements relating to broker-dealer annual reports is June 1, 2014.

The commission also amended financial responsibility rules for broker-dealers. The net capital, customer protection, books and records, and notification rules all were changed with the intent of protecting broker-dealer customers and strengthening the SEC’s monitoring ability.

The financial responsibility rule amendments take effect 60 days after their publication in the Federal Register. The final rules are available at

  Six possible elements of audit quality are highlighted in a report by the Center for Audit Quality (CAQ).

The report describes elements of audit quality that audit firms could consider in refining or developing their own reporting regarding their public company audit practices. The elements are:

  • Firm leadership and tone at the top of the audit firm.
  • Independence, objectivity, and skepticism.
  • Audit process, methodology, and performance.
  • Professional development and competency.
  • Monitoring.
  • Firm organization and structure.

“The CAQ and its members believe that audit quality reporting can foster greater confidence in the public company audit process by assisting financial statement users, audit committee members, and other stakeholders in understanding how an audit firm’s management and operations support the performance of high-quality audits,” CAQ Executive Director Cindy Fornelli said in a news release.

The CAQ is affiliated with the AICPA. The report is available at

Financial reporting  
October 2013

  FASB moved closer to providing relief for private companies from variable-interest entity (VIE) consolidation requirements for common control leasing arrangements, which are considered costly and irrelevant by many small business owners.

The board voted to endorse a decision by the Private Company Council (PCC) to propose an alternative for private companies within GAAP for applying VIE guidance to lessor entities under common control.

An exposure draft seeking public comment on PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements, was released on Aug. 22, and comments on the proposal are due Oct. 14.

Under the proposal, a private company lessee would not have to apply VIE guidance for assessing whether it should consolidate the lessor entity when all of the following conditions are met:

  • The private company and legal entity are under common control.
  • The private company has a lease arrangement with the legal entity.
  • Substantially all activities between the private company and the legal entity are related to the leasing activities (including supporting leasing activities) of the legal entity.

Private companies still would have to consider other applicable FASB Accounting Standards Codification (ASC) guidance, such as Topic 840, Leases, and Topic 460, Guarantees, for transactions and arrangements between the two entities.

A private company applying the proposed alternative within GAAP would be required to provide the following additional disclosures:

  • The key terms of the leasing arrangements.
  • The amount of debt and/or significant liabilities of the lessor entity under common control.
  • The key terms of existing debt agreements of the lessor under common control, such as amount of debt, interest rate, maturity, pledged collateral, and guarantees.
  • The key terms of any other explicit interest in the lessor entity.

If an entity chooses to use this proposed alternative, it would apply to all of its leasing arrangements that meet the requirements for applying this approach. A full retrospective approach would be used to apply the proposed alternative.

Following the comment period, the PCC will evaluate feedback and vote on a final standard. If FASB endorses the final standard advanced by the PCC, an alternative for private companies will be written into GAAP.

Earlier this year, three other PCC proposals were exposed, with a comment deadline of Aug. 23. For more information, visit

  FASB and the International Accounting Standards Board (IASB) plan to create a joint transition resource group to aid in implementation of the upcoming, converged standard on revenue recognition.

The standard will have wide-ranging implications for many businesses, and the transition group will be tasked with keeping the boards up to date about interpretive issues that arise when organizations implement the standard.

The group will analyze and discuss issues that apply to common transactions that could lead to diversity in practice, and will help the boards determine if action needs to be taken to resolve that potential diversity. The group will advise the boards and will not issue its own guidance.

Members of both boards, as well as preparers, auditors, regulators, and users, will be represented on the 10- to 15-member transition group.

  FASB would not consider not-for-profits (NFPs) and employee benefit plans public business entities for purposes of future standard setting, according to a new proposal the board exposed for public comment.

FASB is defining a public business entity to prevent confusion over which entities can apply the alternatives within GAAP being developed for private companies by the PCC. The board described the proposal in an issue of FASB in Focus released in August, and consideration of NFPs in particular would change if the proposal is approved.

Multiple definitions of the terms “nonpublic entity” and “public entity” exist within FASB’s Accounting Standards Codification (ASC). The proposal, Definition of a Public Business Entity: An Amendment to the Master Glossary, would provide a single definition of a public business entity for use in future standard setting. The proposal, available at, would not affect existing financial reporting requirements.

Although NFPs generally have received the same alternatives as private companies within GAAP, distinctions between NFPs for alternatives within GAAP have typically been made on the basis of whether an NFP has public debt securities, including conduit debt.

The proposal would eliminate a public vs. nonpublic distinction between NFPs in future standard setting. FASB instead would consider various factors on a standard-by-standard basis to determine whether all, none, or only some NFPs will be eligible for alternatives within GAAP for private companies. These factors would include user needs and NFP resources.

An organization would be considered a public business entity if it meets any of the following criteria:

  • It files or furnishes—or is required to file or furnish—financial statements with the SEC. This includes other entities whose financial statements or financial information are required to be or are included in a filing.
  • It is required to file or furnish financial statements with a regulatory agency by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act.
  • It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for the purposes of issuing securities.
  • It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
  • Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis because of a legal or regulatory requirement.

Comments were due Sept. 20.

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