At-A-Glance

The watchdog of the audit watchdogs, the International Forum of Independent Audit Regulators (IFIAR), continues to call upon the audit regulators of the world to press on with the quest for consistent, high quality in performing financial statement audits. Our first article reports on IFIAR concerns arising from the latest annual survey of audit inspection findings, along with a new initiative that intensifies the effort to reduce deficiencies. Next, artificial intelligence expands its foothold in the accounting profession. With the integration of cognitive computer technologies, like IBM’s Watson, with traditional audit and accounting processes, major accounting firms are investing heavily, in anticipation of more efficient and effective results. Our second article describes this latest development. Finally, our quarterly Worldwide Update covers news from organizations across the globe. Editor Gerald E. Herter, CPA

In This Issue 

• Audit Quality Survey is New, But the Results Are Not

  The beat goes on for recurring deficiencies.

• Auditors Embrace Artificial Intelligence

  IBM’s Watson and Deloitte’s Argus among AI entries to the audit arena.
  

• Worldwide Update

  Quarterly roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.

• Additional A&A News

Audit Quality Survey is New, But the Results Are Not

Joint CIMA/AICPA Survey reveals struggles and successes

 On March 3, 2016, the International Forum of Independent Audit Regulators (IFIAR) released the results of the fourth annual survey of audit inspection findings, this time for 2015. Sadly, our Audit & Accounting Alert (A&A) article from May, 2015, covering the third annual survey of 2014 results, could be repeated here with only the dates changed, and still be largely accurate. Last year’s A&A article title, “Improved Audit Quality Slow in Coming,” still speaks to the persistence of shortcomings in performance.

As a refresher, the IFIAR was established in 2006 to foster a closer working relationship with audit regulators around the world. With representatives from 50 jurisdictions, the IFIAR has a threefold focus:

•  Sharing knowledge of the audit market environment and practical experience of independent audit regulatory activity with a focus on inspections of auditors and audit firms;
• Promoting collaboration and consistency in regulatory activity;
•  Providing a platform for dialogue with other international organizations that have an interest in audit quality.

The annual global survey of audit inspection findings was initiated in 2012 to share results from across jurisdictions. For the fourth year in a row, internal control testing and fair value measurement were the areas with the highest number of audit inspection deficiencies. Revenue recognition, new last year as the third highest area, was just barely edged out this year by risk assessment.

Financial institutions continue to be singled out for special attention. In all four years the results were the same, with the most deficiencies in the auditing of allowance for loan losses and loan impairments, internal control testing, and auditing the valuation of investments and securities. Use of experts and specialists was close behind.

Results from reviews of firm wide quality control systems were also compared. Consistent with prior years, engagement performance yielded the highest incidents of deficiencies, along with independence and ethical requirements.

In a press release, Janine van Diggelen, IFIAR Chair, stated that:

“IFIAR’s 2015 survey of findings from the inspections of the six largest global network audit firms…indicates that 43 per cent of inspected audits of listed public interest entities had at least one inspection finding during the survey period. While this is a four percentage point drop in deficient audits over last year, IFIAR is not yet satisfied that enough has been done by the audit profession to understand and address shortfalls in audit quality. The outcomes continue to show a lack of consistency in the execution of high quality audits and highlight concerns over the robustness of the firms’ internal quality management systems.”

The survey report points out that the number of deficiencies is not indicative of the rate at which financial statements are misstated. Rather, the shortcomings show the potential that an auditor may be vulnerable to missing a material misstatement if one were to occur.

Last year, we noted that IFIAR planned to keep audit quality in the spotlight by continuing to monitor developments and engage with audit firm networks and associations, promoting the cause internationally. Audit firms were called upon to “develop a robust root cause analysis to gain a clearer understanding of the factors that underlie these [inspection] findings and take appropriate remedial actions.” Also, firms needed to “continue improving their auditing techniques, as well as their oversight policies and procedures.”

Since deficiencies have not declined significantly, the IFIAR has established a new initiative with the six largest audit networks designed to achieve a measureable reduction in findings by 2019. Also new is a measurable target of at least a 25 per cent reduction in the next four years of audits with at least one finding. The measurement is to be applied to members of IFIAR’s working group that engages regularly with the largest global audit firms.

As part of the initiative, the response to prior year recommendations has been expanded to assess “the rigor of root cause analysis, effectiveness of action plans, and the impact on the frequency of inspection findings.” Current survey answers indicate that while half of the firms typically perform root cause analysis, follow-up monitoring of the corrective actions taken, needs improvement. Certain of the recurring root causes identified included “understanding and review of work done by specialists and other auditors; lack of timely involvement and insufficient supervision and direction of the engagement leader; excessive workload and deadline pressures; and pressures from fees and resources, including high staff attrition rates.” Also, root causes often arose from a “lack of professional attitude and insufficient exercise of professional skepticism,” including a “lack of accountability; insufficient challenge of key assumptions and inputs (related to provisions); inadequate corroboration of management’s explanations; and insufficient verification of supporting calculations.”

Other efforts the IFIAR is pursuing include annual inspection workshops to enhance communication of the survey results, and an ongoing dialogue with the International Auditing and Assurance Standards Board (IAASB) concerning audit standard setting with regard to the breakdowns that continue to occur.

While the survey draws from audits of public companies, the issues revealed apply to private company audits as well, or even more so, since private company auditors often do not have the extent of resources that are available to the larger audit firms. Membership in associations like Integra international can help firms to bridge the gap.

For further information, see  IFIAR 2015 Survey of Inspection Findings

Worldwide Update

Quarterly roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.

 International

IASB – International Accounting Standards Board (www.ifrs.org)

1. Leases: IFRS 16 – The long awaited lease standard, replacing IAS 17, was issued on January 13, 2016, bringing leases onto the balance sheet as assets and liabilities, removing the classification of leases as either operating or financing leases, and treating all leases as finance leases. Leases of less than 12 months and immaterial leases are exempt. Early adoption is permitted (as long as IFRS 15, Revenue from Contracts with Customers is also applied). See the March 2016 and the December 2015 issues of the Audit & Accounting Alert for further discussion of this topic.
2.  Amendments to IAS 7 Statement of Cash Flows – issued on January 29, 2016, as part of the Disclosure Initiative, “require companies to provide information about changes in their financing liabilities and...will help investors to evaluate changes in liabilities arising from financing activities, including changes from cash flows and non-cash changes (such as foreign exchange gains or losses).” Effective beginning in 2017, with early application permitted.

IFAC – International Federation of Accountants (www.ifac.org)

1. International Ethics Standard Board for Accountants (IESBA) - Exposure Draft, Limited Re-exposure of Proposed Changes to the Code Addressing the Long Association of Personnel with an Audit Client – published February 4, 2016, as part of the project to develop more robust and comprehensive provisions dealing with the long association of personnel with an audit or assurance client. It contains a basis for conclusions regarding proposals that have been finalized, as well as the limited re-exposure of three remaining issues. Comment period ends May 9, 2016.
2.  International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft Exposure Draft 61, Amendments to Financial Reporting under the Cash Basis of Accounting (the Cash Basis IPSAS) - released February 3, 2016, proposes that Part 1 of The Cash Basis IPSAS, which identifies requirements that a reporting entity needs to adopt to claim that its financial statements comply with the IPSAS (including requirements for preparation of consolidated financial statements and for disclosure of information about external assistance and payments made by third parties), be recast as encouraged rather than required, and moved into Part 2, which includes encouraged disclosures. Also proposed are amendments to better align cash basis with accrual basis. Comment period ends July 31, 2016.
3.  International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft 60, Public Sector Combinations - released January 28, 2016, “classifies public sector combinations as either amalgamations or acquisitions...The ED proposes the use of the “modified pooling of interests” method of accounting for amalgamations, while the “acquisition” method of accounting (which involves measuring assets and liabilities at fair value) is proposed for acquisitions.” Comment period ends June 30, 2016.
4.  International Public Sector Accounting Standards Board (IPSASB) - Exposure Draft 59, Amendments to IPSAS 25, Employee Benefits - released January 13, 2016, proposes to address terms of IAS 19, Employee Benefits, concerning recognition, presentation and disclosure of defined benefit plans. Comment period ends April 30, 2016.
5.  International Auditing and Assurance Standards Board (IAASB) - ISA 800 (Revised), Special Considerations - Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks, and ISA 805 (Revised), Special Considerations - Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement – published Jan 7, 2016, applies the new and revised auditor reporting standards issued in January, 2015, to these specialized types of financial statements and subsets thereof. Effective for audit periods ending on or after December 15, 2016.

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com/)

1.  Complete finance professionals: How Indian businesses are addressing skills gaps in their finance function - research report issued March 10, 2016, in partnership with Meridian West, summarizing findings from “in-depth research among 20 of the largest Indian national and multinational corporations, as well as accountancy firms operating in India, to better understand how the skills of Indian finance professionals are changing and where the most significant skills gaps exist currently.
2.  Filling the information black hole: How are fossil fuel companies reporting on the stranded asset risk? – survey report issued on February 26, 2016, “looks at how fossil fuel companies report on their stranded assets using integrated reporting (<IR>). Investors and regulators are becoming increasingly aware of the potential threat from ‘stranded assets’ to financial stability and to fossil fuel company market valuations. With this awareness comes the need for greater information to help investors and others understand these risks better and appreciate the extent to which companies are taking mitigation action.”
3.  Constant Forward Motion: The evolving phenomenon of cybersecurity regulation and the race to keep up – research report issued on February 1, 2016, addressing “the issue of cybersecurity and how fast changing technology is causing a problem for lawmakers in the race to make effective legislation.”

CIMA – Chartered Institute of Management Accountants (www.cimaglobal.com)

1. Thinking the unthinkable: a new imperative for leadership in the digital age – report issued in February, 2016, arising out of a “global roundtable that brought together specialists from a variety of disciplines to ‘think the unthinkable’, using the Global Management Accounting Principles as a framework to take decisions which will create value in the short, medium and long term.” Having found executive leadership’s ability “to spot, identify and handle unexpected, non-normative events… not just to be wanting but also perilously inadequate at critical moments,…this paper explores some of the corporate governance issues in an effort to help boards understand what they must do to be more effective.”

Africa, Europe, India, and the Middle East (AEIME)

FRC – Financial Reporting Council of the UK (www.frc.org.uk)

1.  Enhancing Confidence in Audit: The Financial Reporting Council’s Audit Enforcement Procedure – consultation paper issued March 23, 2016, in response to the new EU audit regulations, in regards to investigation and sanctioning of breaches arising from the regulations. Comments are due by May 4, 2016.
2.  Amendments to FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland - Fair value hierarchy disclosures – issued March 08, 2016, “simplify the preparation of disclosures about financial instruments for financial institutions and retirement plans,” while increasing the consistency with disclosures required by EU-adopted IFRS. Effective generally in 2017, with early application permitted.
3.  Audit Quality Thematic Review: Engagement Quality Control Reviews - published February 8, 2016, reports “concerns is that firms’ do not maintain a consistently high standard of auditing. Whilst excellent work is performed by many, some in the same firm fall short of expectations. The engagement quality control (“EQC”) review process should ensure consistently high quality. Often it does improve quality but we also found evidence in some audits where weaknesses were not identified by the review. Firms can do more to evaluate the effectiveness of the EQC review and implement additional procedures, where appropriate, to reduce the occurrence of audit weaknesses that are not identified.”
4.  Audit Quality Thematic Review: Firms’ audit quality monitoring - published on January 5, 2016. See article in the February, 2016, issue of Audit & Accounting Alert, discussing this report.
5.  Clear & Concise: Developments in Narrative Reporting – report issued December 17, 2015, providing “practical tools to help companies achieve Clear & Concise reporting and provides an overview of developments in narrative reporting. It also includes a study reviewing the influence of the FRC’s Guidance on the Strategic Report since its publication in 2014, which found that annual reports have become more cohesive, with better linkage between related information and more focus on Clear & Concise reporting.

Americas, Asia, Australia and New Zealand (AAANZ)

FASB – Financial Accounting Standards Board (www.fasb.org)

1.  Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) – ASU 2016-08 – issued March 17, 2016, to improve guidance with regard to the sale of goods or services “requirement of the entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer.” Four clarifying factors are provided. Effective dates are the same as for ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date.
2.  Investments—Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting – ASU 2016-07 – issued March 16, 2016, eliminates “the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively.” Also, “an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting, recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. Effective generally for 2017.
3.  Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments - ASU 2016-06 – issued March 14, 2016, clarifies “the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence.” Effective generally in 2017 for public companies and 2018 for private companies and organizations, with early application permitted.
4.  Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships - ASU 2016-05 – issued March 10, 2016, clarifies “that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met.” Effective generally in 2017 for public companies and 2018 for private companies and organizations, with early application permitted.
5.  Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products – ASU 2016-04 – issued March 10, 2016, provides that prepaid store value products covered by this ASU are financial liabilities. Effective generally in 2018 for public companies and 2019 for private companies and organizations, with early application permitted.
6.  Intangibles—Goodwill and Other (ASU 2014-02), Business Combinations (ASU 2014-18), Consolidation (ASU 2014-07), Derivatives and Hedging (ASU 2014-03) – ASU 2016-03 – issued March 7, 2016, provides that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of the above ASU’s, effective immediately.
7.  Leases ASU 2016-02: - issued February 25, 2016, requires organizations to recognize leases on the balance sheet as assets and liabilities for the rights and obligations created by those leases. Effective generally in 2019 for public companies and 2020 for private companies, with early application permitted. See the March 2016 and the December 2015 issues of the Audit & Accounting Alert for further discussion of this topic.
8.  Exposure Drafts - Compensation—Retirement Benefits—Defined Benefit Plans—General: Changes to the Disclosure Requirements for Defined Benefit Plans – and Compensation—Retirement Benefits : Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - issued January 26, 2016, “aimed at improving the effectiveness of disclosures in the notes to financial statements by focusing on the information that is most relevant to financial statement users,” and “seeks to improve guidance related to the presentation of defined benefit costs in the income statement.”. The comment period ends April 25, 2016.
9.  Financial Instruments— Overall ASU 2016-1: Recognition and Measurement of Financial Assets and Financial Liabilities - issued January 5, 2016, “intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments,”. Effective generally in 2018 for public companies and 2019 for private companies and organizations, with limited early application permitted

GASB – Governmental Accounting Standards Board (www.gasb.org)

1.  Exposure Draft, Leases - issued on February 8, 2016, establishing a single approach for reporting leases of state and local governments, which mirrors the FASB Accounting Standard Update on Leases, with comments due by May 31, 2016.
2.  GASB Statement No. 80 - Blending Requirements for Certain Component Units, issued on February 11, 2016, “intended to provide clarity about how certain component units incorporated as not-for-profit corporations should be presented in the financial statements of the primary state or local government, by blending them in like departments or activities.. Effective for periods beginning after June 15, 2016, with earlier application permitted.

AICPA – American Institute of Certified Public Accountants (www.aicpa.org)

1.  Accounting and Review Services Committee (ARSC) a) Interpretation No. 1, "Considerations Related to Reviews Performed in Accordance With International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements," of AR-C Section 90, Review of Financial Statements - issued on February 18, 2016, provides that “a practitioner may review the financial statements of an entity in accordance with SSARSs and in accordance with another set of review standards (for example, ISRE 2400 [Revised]). In circumstances in which the accountant’s review report states that the review was conducted in accordance with SSARSs and another set of review standards, the practitioner should comply with both sets of standards.”
2. 2. Auditing Standards Board a) Statement on Auditing Standards (SAS) No. 131, Amendment to Statement on Auditing Standards No. 122 Section 700, Forming an Opinion and Reporting on Financial Statements - issued January 22, 2016, provides that “when an audit is not under the jurisdiction of the PCAOB but the entity desires, or is required by an agency, by a regulator, or by contractual agreement, to obtain an audit conducted under PCAOB standards, the AICPA Code of Professional Conduct requires the auditor to also conduct the audit in accordance with GAAS…When the auditor refers to the standards of the PCAOB in addition to GAAS in the auditor’s report, SAS No. 131 requires the auditor to use the form of report required by the standards of the PCAOB, amended to state that the audit was also conducted in accordance with GAAS.” Effective for audit periods ending on or after June 15, 2016, with early application permitted.

Additional A&A News

The following links provide a selection of current articles devoted to highlighting other A&A topics currently making news.

1. India Companies not ready for New Accounting Standards: PwC
2. Silicon Valley nightmare: SEC wants to crack down on screwball accounting gimmicks
3. Australia: New false accounting provisions increase the risks for companies
4. The SEC’s Ultra Vires Recognition of the FASB as a Standard-Setting Body
5. Hype springs eternal for Blockchain
6. FASB Amends Revenue Recognition Standard

Audit & Accounting Alert is a publication of Integra International intended to highlight emerging issues in the profession. The goal is to give Integra members an awareness of developments impacting the practice of Audit & Accounting, enabling them to stay on the forefront of industry trends.

Editor Gerald E. Herter  •  HMWC CPAs & Business Advisors, 17501 E. 17th Street, Suite 100, Tustin, CA 92780-7924
 •  Tel: 1 714 505-9000  •  Fax: 1 714 505-9200  •  Email: [email protected]