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NEWS DIGEST
News  
March 2014

Compliance with the SEC’s final municipal adviser registration rules will not be required until July 1, 2014, the commission announced.

The SEC extended the date for compliance to give market participants additional time to analyze, implement, and comply with the final rules. The rules had been scheduled to take effect Jan. 13.

As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203, the SEC adopted the final rules last year. The rules require municipal advisers to register with the SEC if they provide advice to municipal entities or certain other persons on the issuance of municipal securities or about certain investment strategies or municipal derivatives.

Many CPA services are excluded from the activities that would require registration. CPAs will not be required to register as municipal advisers if they are providing audit or attest services, preparing financial statements, or issuing letters for underwriters.

CPAs and others who provide certain other advice to municipalities—including tax advice on municipal securities offerings—will be required to register with the SEC as municipal advisers, under the new rules.

The rules are available at tinyurl.com/k5ksxey.


NEWS DIGEST
Fraud  
March 2014

SEC enforcement actions resulted in a record $3.4 billion in monetary sanctions in fiscal year 2013, the commission announced.

The total was 10% higher than in FY 2012 and 22% higher than in FY 2011, when the SEC filed the most actions in agency history. The SEC filed 686 enforcement actions in FY 2013, fewer than in FY 2012 (734) or FY 2011 (735). The SEC’s fiscal year ends Sept. 30.

For the third straight year, investment advisers and investment companies were the most common subjects of SEC enforcement, with 140 actions taken against them. Delinquent filings, with 132 actions, were the second most common activity targeted for SEC enforcement.

The number of Foreign Corrupt Practices Act enforcement actions dropped to five, down from 15 in 2012 and 20 in 2011.


NEWS DIGEST
Management accounting  
March 2014

Rules proposed by the SEC would build upon the Regulation A exemption with the intention of increasing smaller companies’ access to capital.

The proposed rules would implement part of the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106, by making the Regulation A exemption more useful to small companies seeking capital. Regulation A currently allows unregistered public securities offerings of up to $5 million in a 12-month period, including up to $1.5 million offered by security holders of the company.

Available at tinyurl.com/o8fjt4h, the proposed rules would create two tiers of Regulation A offerings: Tier 1 would consist of offerings currently covered by Regulation A; and Tier 2 would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million offered by security holders of the company.

Companies engaging in offerings of $5 million or less could elect whether to proceed under Tier 1 or Tier 2. Tier 1 and Tier 2 offerings would be subject to basic requirements—including eligibility and disclosure rules—drawn from the existing Regulation A provisions. Tier 2 offerings would be subject to additional requirements.

The SEC will accept public comment on the proposal for 60 days after it is published in the Federal Register.


NEWS DIGEST
Financial reporting  
March 2014

  FASB took what appears to be two steps back from convergence with the International Accounting Standards Board (IASB) with a pair of major tentative decisions in its project on accounting for financial instruments.

In the classification and measurement portion of the project, the board decided not to continue to pursue its proposed “solely payment of principal and interest (SPPI)” model to determine the classification and measurement of financial assets. The fundamental principles of FASB’s proposed SPPI model were aligned with the IASB’s model, although the boards already differed in other areas on classification and measurement.

FASB instead decided to retain the bifurcation requirements for embedded derivative features in hybrid financial assets in current U.S. GAAP. Board members said that although the current guidance is complex, the SPPI model also was complex.

The board directed the staff to perform additional analysis of whether FASB should develop a new approach for using a cash flow characteristics test for financial assets.

Decisions made also keep FASB’s proposed model separated from the IASB’s proposed model on impairment in the accounting for financial instruments project. FASB voted to continue refining its proposed current expected credit loss model for impairment.

FASB’s proposed current expected credit loss model calls for more upfront recognition of loan losses than the IASB’s proposed model. FASB and the IASB have struggled to reach common ground in the financial instruments project despite international pressure to bring their standards together.


  The rules for providing alternative financial reporting guidance for private companies were formally established when FASB and the Private Company Council (PCC) issued their Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.

FASB also issued its definition of a public business entity, clarifying which entities are eligible for alternative guidance for private companies.

The framework will assist FASB, the PCC, and the Emerging Issues Task Force in determining whether and when to provide alternative recognition, measurement, disclosure, display, effective date, or transition guidance for private companies. The framework is available at tinyurl.com/k8ehk7u.

Meanwhile, Accounting Standards Update No. 2013-012, Definition of a Public Business Entity: An Addition to the Master Glossary, gives one definition of “public business entity” for use in future standard setting. Existing requirements are not affected by the definition.

An entity is a public business entity if it meets any of the following criteria:

  • It files or is required to file financial statements with the SEC (including voluntary filers).
  • It is required to file financial statements with a foreign or domestic regulator in preparation for selling or issuing securities that are not subject to contractual restrictions on transfer.
  • It has securities that are traded, listed, or quoted on an exchange or over-the-counter market.
  • It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis.


Employee benefit plans and not-for-profits are not considered business entities under the standard. The standards update is available at tinyurl.com/pndqps8.


  SEC Chairman Mary Jo White directed the commission’s staff to develop recommendations for updating the rules for what a company must disclose in its public filings, according to an SEC news release.

The SEC staff issued a report to Congress recommending that the commission’s disclosure requirements be reevaluated to ensure that investors are provided with meaningful, nonduplicative information. The report is available at tinyurl.com/qbnvnv3.   

Congress mandated the report in the Jumpstart Our Business Startups (JOBS) Act of 2012, P.L. 112-106. The report offers an overview of SEC Regulation S-K, which governs public-company disclosures.

The SEC’s Office of the Chief Accountant will coordinate with FASB to identify ways to improve effectiveness of disclosures and eliminate duplication.

Keith Higgins, director of the SEC’s Division of Corporation Finance, said in a statement that updating the SEC’s rules is just one step in improving company disclosures.

“For their part, companies should examine how they can improve the quality and effectiveness of their disclosures and how our rules can be improved to facilitate clear and effective communications to investors,” Higgins said. “Better disclosure benefits everyone in the marketplace.”


  Rule-making duties related to federal legislation have prevented the SEC from devoting time to deciding on the future of IFRS in the United States, SEC Chief Accountant Paul Beswick said.

“I think from my perspective, everyone in the commission thinks about the decision on IFRS and what the next steps are and thinks it’s very important,” Beswick said during the AICPA Conference on Current SEC and PCAOB Developments in December. “What many people have to realize is, with the passage of Dodd-Frank and the JOBS Act, the commission had a number of issues that were presented that were very complex and taking a lot of time.”

There has been little public discussion of IFRS by the SEC since the SEC staff issued a report in July 2012 that discussed the pros and cons of allowing or requiring U.S. public companies to use IFRS for their financial reporting.

The report did not make a recommendation on whether the SEC should allow or require U.S. companies to use IFRS for their financial reporting. A decision on IFRS now rests in the hands of the SEC commissioners.

The AICPA has been a consistent advocate for one set of high-quality, globally accepted accounting standards.

Beswick did not provide a timeline for the SEC’s further consideration of IFRS.


  The Federal Accounting Standards Advisory Board (FASAB) issued its Annual Report for Fiscal Year 2013 and Three-Year Plan.

The report, available at tinyurl.com/pk7n7hh, highlights the board’s efforts and accomplishments for fiscal year 2013, provides information about current projects, and describes research projects the board hopes to address soon. The document also identifies potential projects considered by the board, but which are not rated a priority. The board asked for comments on the report by Jan. 31, 2014, and plans to consider the feedback in its agenda-setting discussion in early March.


NEWS DIGEST
Auditing  
March 2014

  The European Union took another step toward a mandatory audit firm rotation requirement when the member states’ Permanent Representatives Committee approved new audit regulations.

The new regulations and amendments approved include a requirement that public-interest entities rotate engagements with audit firms every 10 years—with provisions for longer periods when engagements are put out for bid or joint audits are performed. Public-interest entities include banks, insurance firms, and listed companies.

To take effect, the new regulations must still be approved by the European Parliament and the council of national governments.

Regulations and amendments approved include:

  • A 10-year maximum period during which a member state may allow an audit firm to continue auditing the same public-interest entity. If the engagement is put out for public bid, the member state may allow the engagement to continue for a maximum of 20 years. In cases of joint audits, where multiple audit firms share the engagement, the maximum period is 24 years.
  • A prohibition on provision of certain nonaudit services by audit firms to the public-interest entities they audit. Member states will have the right to allow firms to provide some tax and valuation services to their audit clients, provided they are immaterial and have no direct effect on the audited financial statements.
  • A requirement that fees from permitted nonaudit services to an audit client cannot exceed 70% of the audit fees.


Center for Audit Quality (CAQ) Executive Director Cindy Fornelli said in a statement that the changes “raise serious concerns for audit quality.” The CAQ is affiliated with the AICPA.

“There is no evidence to show that mandatory firm rotation improves audit quality, and in fact some studies show it has an adverse effect,” Fornelli said. “There is also little evidence that fees from nonaudit services adversely affect the quality of financial reporting. Additionally, these provisions undermine the important role that audit committees have with respect to auditor selection and scope of services.”

The PCAOB has explored the concept of mandatory audit firm rotation in the United States, but a bipartisan House of Representatives vote in July put the brakes on that process.


  The Center for Audit Quality (CAQ) urged the PCAOB to streamline a proposed process for auditors to provide investors more information on the audit.

The PCAOB has proposed and requested comments on sweeping changes to the auditor’s reporting model. The proposal would require auditors to identify and report on “critical audit matters” that arise during the audit. In addition, the proposal would require auditors to evaluate other information that is included in an annual report but is outside the audited financial statements.

The CAQ expressed support in a comment letter for the PCAOB’s efforts to update the auditor’s reporting model and supply financial statement users with more information.

But the CAQ highlighted suggestions that it said would improve the proposal. The CAQ suggested:

  • Streamlining the auditor’s process for determining critical audit matters. The letter said this can be achieved in part through leveraging the auditor’s communications with the audit committee that already are required. The most important matters in those communications would be the focus of the critical audit matters.
  • Revising the auditor’s report to describe the auditor’s responsibility for other information, including the need to report unresolved material inconsistencies or material misstatements of fact. The CAQ is concerned that the proposed standard may create the appearance of a level of assurance that is not supported by the limited audit procedures the proposal describes with respect to other information.
  • That the auditor’s report should not include a disclosure of the audit firm’s tenure with the client, and that there are other, more appropriate places this information could be provided. The PCAOB has proposed disclosing audit firm tenure in the auditor’s report.


The CAQ said it also has collaborated with members of the auditing profession to field-test the PCAOB’s proposal. Although testing and analyzing results will take several months, the results are expected to be ready in time for a round-table meeting the PCAOB plans to hold on the issue in the spring.

The comment letter is available at tinyurl.com/n49gnav.


  Audit firms’ quality controls will be the subject of PCAOB discussion this year that could lead to a new auditing standard, board Chief Auditor and Director of Professional Standards Martin Baumann said.

The PCAOB plans to issue a concept release seeking comment on ways to address audit firm quality controls. Baumann said at the AICPA Conference on Current SEC and PCAOB Developments that current quality-control standards do not appropriately address several matters that are important to audit quality.

In addition, the PCAOB plans to propose a standard in late 2014 on auditing accounting estimates, including fair value measurements. Baumann said the proposal would be designed to replace a number of interim standards.


NEWS DIGEST
Auditing / government  
March 2014

New guidelines unveiled by the Office of Management and Budget (OMB) raise a key threshold for compliance audits of entities that receive federal award money from $500,000 per fiscal year to $750,000 per fiscal year.

Among other things, the new rules raise the federal awards threshold that triggers compliance audits currently performed under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, which are also referred to as single audits or Circular A-133 audits.

As a result of the new rules, states, local governments, and not-for-profit entities will be required to undergo a single audit if they spend $750,000 or more in federal awards in a fiscal year.

Nonfederal entities that spend less than $750,000 in a fiscal year will be required to make records available for review or audit by appropriate officials of the federal agency, passthrough entity, and the U.S. Government Accountability Office.

Approximately 5,000 nonfederal entities will be relieved of the single-audit requirement as a result of the higher threshold. The guidelines are available at tinyurl.com/ncprlw8.

The comprehensive new rules also contain numerous other changes to the requirements for entities spending federal awards and their auditors.

Raising the threshold is part of a larger federal effort to reduce administrative burden, waste, fraud, and abuse. The new rules combine eight previously separate sets of OMB guidance into one for entities that receive a portion of the $600 billion in federal grants that are awarded annually.

The new rules are expected to take effect for single audits of fiscal years beginning on or after Jan. 1, 2015, according to an alert from the AICPA Governmental Audit Quality Center to its members.


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