AICPA & CIMA conference on current SEC and PCAOB developments highlights – December 12, 2022

Representatives from Accounting Research Manager are attending the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments. This conference is being held Monday through Wednesday, December 12-14, 2022. The following are some highlights from conference speeches or presentations. 

AICPA Welcome and AICPA Update: Anoop N. Mehta, Chair of the of AICPA and the Association of International Certified Professional Accountants

Anoop N. Mehta welcomed conference participants to this year’s conference. Mehta provided an update on the key activities and priorities of the AICPA. Mehta indicates that the pace of change in the world today continues to accelerate and our profession faces many significant challenges, including inflation, political uncertainties, and complex regulatory environments. Mehta notes the audit and accounting profession must step forward to lead the way to meet these challenges in three important areas:

• People. The profession must adopt a people first approach that puts people at the center of our decisions and encourages diversity/inclusion. This includes the AICPA’s efforts to reach future accountants at the high school level.
• Skills. New skills must be developed and adopted to meet the needs of emerging areas. The AICPA is working on developing a more relevant CPA exam and reimaging management accounting through the use of apprentices to earn the CGMA designation. The profession must be open to emerging technologies such as the use of Artificial Intelligence and Blockchain in order to meet client, audit, and financial reporting needs.   
• Trust. Trust is the cornerstone of the profession and must remain so in the future. The AICPA has been driving enhanced audit quality.

A Conversation with SEC Commissioner Hester Peirce and Remarks from the Acting Chief Accountant

SEC Commissioner Hester Peirce and Paul Munter, Acting Chief Accountant of the SEC, discussed the SEC’s efforts to support investors, preparers, auditors, and other stakeholders in various areas. Peirce and Munter both emphasized the greater need for even more high quality financial reporting and audits in the face of the challenging economic times that we are facing both domestically and internationally.

Hester Peirce

Hester discussed the SEC’s commitment to encouraging capital formation through the going public process. Hester cautioned that companies considering going public should start the process long before filing with the SEC. This should include discussion of the reasons for the public capital formation, developing strong controls, and having solid financial reporting throughout the entity. Hester also cautioned that the SEC must consider its rulemaking carefully to ensure capital formation requirements are not so overly stringent as to discourage capital formation. 

The regulation of digital assets remains uncertain with more rules expected in the future. Hester encouraged conference participants to consider traditional finance lessons that can be applied to the financial reporting and auditing of digital assets to deal with these assets, even if no specific regulations apply. Basic finance rules of managing a company and financial reporting still apply to digital assets and should be considered. Counterparty risk, proof of reserves, conflicts of interest, and other risks should be considered when accounting for digital assets. Hester indicated that regulators have focused on enforcement rather than regulation for the most part. However, further regulation will come in the future. Hester cautioned the SEC that future digital asset rules should not be so stringent that only large entities would be able to comply. 

Hester provided an update on the SEC’s climate change disclosure proposal. The SEC has received  significant feedback from stakeholders on the proposal. In many cases companies are already providing climate-related disclosures using non-standard reporting or based on requests from third parties. This makes comparing disclosures related to Environmental, Social, and Governance (ESG) difficult, but the ability to pass a single global set of standards on ESG reporting may be unrealistic. Hester cautioned that if an SEC requirement is implemented for climate change disclosures, new reporting liability would be created. Compliance with all of the SEC climate change or ESG disclosures would be mandatory and would likely require disclosures related to the specific company and other entities/processes in the value chain. Non-compliance with these rules would give rise to liability. Hester did remind conference participants that current disclosure rules do not prohibit the disclosure of climate change or ESG items, such as required disclosure of significant risks and uncertainties. Hester indicates that the final rules on ESG reporting must support the reporting standards within the financial reports and not just be “good enough.” Hester fears that ambiguity inherent in ESG standards may creep into other financial reporting estimates or judgments. 

Fraud risks are high for this year-end given the current environment. Hester reminded auditors to give special attention to red flags that tend to arise in times of economic stress. If audit firms are more thinly staffed as a result of the ongoing labor market shortage, staff may cut corners or ignore red flags. It is essential for audit firms to ensure all appropriate measures are undertaken to ensure these red flags are acted upon and addressed in order to ensure high quality audits are performed.

Paul Munter

Munter discussed issues and priorities of the SEC’s Office of the Chief Accountant (OCA). OCA assists preparers, auditors, and other stakeholders on reporting the economics of complex or novel events in financial reports so that investors can make informed decisions. Compliance is part of high-quality financial reporting, but at its heart accounting is a communication activity. Communication of information investors or other stakeholders require changes, as evidenced by the FASB’s work on its agenda consultation project. OCA supports this work, and  items investors or other stakeholders have been requesting include:

• Disaggregation of financial information. Investors and stakeholders are requesting more disaggregation of components of the income statement and more segment reporting. The FASB has a number of projects on these issues, including disaggregation of components of the income statement (income and expenses) and more details on entity income tax provision calculations and disclosures. Munter urged conference participants to consider providing disaggregated financial information even absent any specific rules from the FASB or SEC. Nothing in the current standards or rules prevents entities from providing disaggregation of components of the income statement or the tax provision.
• Segments. The FASB has issued a proposal that would require additional information on segment-specific expenses or single segment entities. OCA receives a significant amount of inquiries from investors regarding appropriate disaggregation and segment reporting. Munter cautioned that current segment reporting standards permit aggregation of segments but entities should consider whether that provides the best reporting information to the public. 
• Improvement in cash flow information. FASB Codification Topic 230 permits the use of the direct method of reporting cash flows. However, nearly all entities use the indirect method of reporting. Munter encouraged entities to consider whether reporting the cash flow statement or details thereof using the direct method would provide more useful information. 

Regarding the financial reporting and auditing of digital assets, Munter encouraged conference participants to consider the SEC staff’s guidance in Staff Accounting Bulletin (SAB) No. 121, which provides guidance on accounting for obligations to safeguard crypto assets an entity holds for platform users. Specifically, SAB 121 updates SAB Topic 5, Miscellaneous Accounting, and provides guidance on various topics associated with these types of arrangements, including how entities that hold crypto assets should account for liabilities associated with these arrangements, and consideration of financial and non-financial disclosures associated with these types of arrangements. OCA has consulted on a number of digital asset lending arrangements and generally found that these transactions are consistent with lending transactions and should follow that accounting treatment. On Wednesday, December 14, 2022, the FASB is scheduled to discuss presentation and disclosure of digital assets.

Munter indicates that the current environment of high inflation, labor challenges, and supply chain constraints makes the likelihood of fraud significant. Preparers should not shy away from making estimates and judgments, but rather embrace well thought out conclusions that brings value to the financial reporting process. Munter encouraged conference participants to consider the guidance in IOSCO Statement on Financial Reporting and Disclosure during Economic Uncertainty. This document indicates that, “IOSCO reminds issuers, external auditors and audit committees (or TCWG) of the important role each plays in providing investors with high-quality, reliable, timely, and transparent financial information, especially in times of heightened uncertainty.”

IASB Update, Chair Dr. Andreas Barckow, IASB Chair

Dr. Andreas Barckow provided an overview of the IASB’s priorities for the next five years. The IASB’s priorities are driven largely by stakeholder feedback received on the IASB’s recent Agenda Consultation. This consultation found that stakeholders seem to be fine generally with how the IASB spends its resources over the different tasks it pursues. However, the IASB was asked to increase the time and effort put into the development of digital financial reporting and into the understandability and accessibility of its literature. Stakeholders want the IASB to prioritize finalizing the roughly 20 existing projects on its work plan before starting any big new projects. Stakeholders also indicated that they want to see communication, collaboration and coordination between the IASB and its new sister board, the International Sustainability Standards Board (ISSB). The requirements from both boards must be connected to meet investors’ needs.

Dr. Andreas Barckow indicates that the IASB has added three new projects as a result of the Agenda Consultation:

• Intangible assets. The IASB will begin with research to determine the scope of the project and the sequencing of its stages. There will be areas in which collaboration with the ISSB will be essential when thinking of intellectual capital more broadly.
• Statement of cash flows. Investors have indicated that certain information about non-cash transactions, such as those coming out of supplier finance arrangements, is lacking. The existing layout does not seem to make much sense for many financial institutions, so it may require reconsideration . 
• Climate-related risks. This project will review whether the requirements in a final IFRS S2, Climate-related Disclosures, are consistent with the IASB’s general reporting requirements in IAS 1, Presentation of Financial Statements, or whether any clarification is warranted to supplement the already existing educational material on climate risk.

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