During a discussion of disclosures for board leadership structure and risk oversight at the AICPA & CIMA Conference on Current SEC and PCAOB Developments, Cicely LaMothe, CPA, called out a pattern her division had seen while calling for what the division wants to see.
"In many cases, the disclosure was boilerplate and really did not appear specially tailored to communicate to investors some of the unique challenges or opportunities that the structures and oversight were meant to address, despite being in different industries or having different risk profiles," said LaMothe, the SEC's acting deputy director of disclosure operations for the Division of Corporation Finance. "We are not encouraging any particular structure; we're really trying to elicit greater transparency. Our comments are not intended to establish a template for what the staff wants to see. We recognize that this is not our story; it's yours."
LaMothe's call for accounting professionals to follow standards but to do so in a way that tells investors a company's one-of-a-kind story was a common theme throughout the three-day event in Washington, D.C.
While some presenters called for more prescriptive disclosures in financial reports — like FASB's project on disaggregation of income statements (see below) — even the more black-and-white items unpacked at the conference included calls for the disclosure of information that truly helps investors understand what makes a given company tick.
"As we carry out our responsibilities, we're always trying to think about it through the lens of, 'What information is it that will help investors better understand the risk inherent in an investment?' so that they can make more informed investment decisions," said Paul Munter, CPA, Ph.D., acting chief accountant at the SEC. "What we're really focused on is, 'How is it that we as an office at the SEC can help facilitate that communication?' which gets back to a fundamental role of financial reporting: While compliance is a part of high-quality financial reporting — compliance with GAAP, compliance with our rules is a critical part of high-quality financial reporting — at its heart, accounting is a communication activity.
"You may recall that maybe in your first accounting course, maybe in the first chapter of that first accounting course, you ran across a paragraph that said something like, 'Accounting is the language of business.' We are a communication profession. We are trying to take complex transactions, complex events and depict those complex transactions and events in a manner that is understandable for investors."
SEC update: Climate-related disclosure rules
Any public appearance by the SEC these days leads those in attendance to wonder if they'll get an update on when the commission will release its final rule regarding climate-related disclosures.
Finance professionals headed home from the conference are still wondering.
"I would love to tell you when the adopted rules will come out, but I cannot. I enjoy having my job."
That was the playful response from Shehzad Niazi, deputy chief counsel in the SEC's Office of the Chief Accountant (OCA). The OCA co-authored the proposal, focusing its work on financial statement and assurance requirements for greenhouse gas emissions disclosures.
The proposed rule was first released in March. The final rule has been expected early in 2023, but in October, the public comment period was reopened due to a technological issue, and the SEC hasn't stated whether that will alter its time frame.
PCAOB update: Inspections in China and Hong Kong
PCAOB chair Erica Y. Williams provided an update on the board's continued efforts to hold public companies in China and Hong Kong that trade in U.S. capital markets to PCAOB standards.
The PCAOB and the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China signed a Statement of Protocol in August, the effectiveness of which is being reviewed by the PCAOB.
"In September, we sent over our team to try to put what was on paper into test and practice," Williams said. "We are, right now, evaluating the work that the staff has done and what we obtained as a result of that oversight activity. Before the end of the month, we will be making another determination as to whether we've been able to inspect and investigate completely in China and Hong Kong.
"The agreement that we drafted and the law require complete access, and we will demand nothing short of complete access, with no loopholes or no exceptions."
FASB update: Project on disaggregation of income statement expenses
FASB provided a comprehensive update on progress on its projects, including one on disaggregation of income statement expenses, an issue that Nellie Debbeler, FASB's deputy technical director, said is top of mind based on investor feedback as well as mentions by preparers and practitioners.
Debbeler provided FASB's current thoughts on scope of the project, which could reach the exposure draft phase before July 2023.
"Based on the discussion with the board in July and in October, the current approach to the project would do the following: We would disaggregate specific functional expenses, such as cost of goods sold or SG&A [selling, general, and administrative expenses] into consistent, natural categories such as employee compensation, depreciation, and amortization. And any relevant expense line item would be included in the project scope. So if it contains those three breakout items that I mentioned, those would be broken out further.
"For capitalizable amounts like inventory, the project would focus on disaggregating the costs incurred during the period, disaggregating those into the categories that I mentioned and potentially into other categories like purchases or raw materials. Over the years the board has heard that disaggregating costs of goods sold is very complex. Inventory expenses lose their nature when they're capitalized, and cost-of-goods-sold expense in a given period can relate to inventory capitalized much earlier, which makes that detail hard to re-create or track. So this approach, which would disaggregate costs incurred, is intended to help address that complexity. And our project is also exploring separate presentation or disclosure of selling expenses. albeit without explicitly defining selling expenses."
FASB chairman Richard R. Jones, CPA, further explained why FASB is pursuing the project.
"When we did our outreach with investors, time and again what we heard was that as they look at the income statement, they just weren't seeing the level of detail they needed to really understand those operations," Jones said. "So as we progress on this project, I would ask you to think about it in that lens: If you were trying to understand one of these companies, is the information that's on the face of the income statement sufficient, or would you look at additional detail to understand the change from period to period?"
Standards update: Multiplicity of quality control systems
The new quality control (QC) systems standards proposed by the PCAOB in October stated that many of the standards align with standards required by the AICPA and the International Auditing and Assurance Standards Board, but the PCAOB's chief auditor discussed some differences that firms should keep in mind.
"Our proposal does not completely align with other quality management standards and includes certain provisions that we believe are appropriate to address our environment, the needs and priorities of our stakeholders and our statutory mandate of protecting investors and the public interest," said Barbara Vanich, CPA, chief auditor and director of professional standards. "Like other quality management standards, QC 1000 is risk-based and therefore inherently scalable. However, rather than focusing on what's similar, I would like to spend a few minutes highlighting some of the areas where QC 1000 differs."
The differences highlighted by Vanich included:
- All firms registered with the PCAOB would be required to design a QC system that is in effect at all times "when the firm is required to comply with applicable professional and legal requirements with respect to any of the firm's engagements."
- The QC system would need to be evaluated annually, as of Nov. 30, and the evaluation would be required to be shared with the PCAOB and the audit committees of a firm's clients.
- All firms would face additional requirements related to the assigning of roles and responsibilities. Firms who audit more than 100 issuers would face additional requirements related to governance and leadership — for example, "the firm's governance structure should incorporate an oversight function for the audit practice that includes at least one person that is independent of the firm as described in the proposal."
The public comment period on the proposal runs through Feb. 1, 2023.
— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.