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Issue 1 | January 2015
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At-A-Glance
The New Year brings renewed efforts
to advance the role of accounting and
the accounting profession around the
world. In the United States, the future
shows a glimmer of life for the
International Financial Reporting
Standards. Our first article reads
between the lines of recent SEC thinking
and joint FASB/IASB activities.
Next, we turn to the ever-present
threat of fraud in all organizations.
Our second article describes a new
report from the Anti-Fraud
Collaboration, detailing preventive
measures designed to make an
organization fraud-resistant.
Finally, we revisit the
emerging realm of integrated reporting
and accounting for sustainability. More
robust approaches and standards are
finding their way into the reports of a
growing number of companies, while
respected world figures tout the role of
accountants in furthering the cause. Our
third article highlights the
developments.
Editor Gerald E. Herter, CPA |
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In This Issue
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Signs of Life for IFRS in the United States
SEC opens the door slightly while the FASB and
IASB consider a future together
Famed American author Mark Twain once said,
upon hearing of an obituary written about him,
“The reports of my death are greatly
exaggerated,” In last month’s issue of the Audit
& Accounting Alert, we quoted former SEC
Chairman, Christopher Cox, stating “I come to
bury IFRS, not to praise them.” Cox was
declaring that full scale adoption of IFRS in
the United States was no longer possible. While
that may be true, recent news indicates that
while IFRS may be on “life support” in the US,
there still is a “heartbeat.”
The most dramatic news came from James
Schnurr, the SEC’s new chief accountant,
speaking at the AICPA National Conference on
Current SEC and PCAOB Developments in
Washington, D.C. Schnurr indicated that the SEC
is considering the possibility that US companies
in the future may be allowed to “prepare
IFRS-based financial information in addition to
U.S. GAAP based information that they use for
purposes of SEC filings.” Making this approach
optional would be a practical solution, since
the added cost of providing the IFRS data would
only be incurred by companies finding the effort
beneficial. This is just one of various
alternatives the SEC is studying. Schnurr has
been asked by SEC Chair Mary Jo White to take a
fresh look at the SEC’s still unresolved
position on IFRS. The goal is to make a
recommendation so that clarity can be provided.
Hopefully, the new 2015 year will bring some
movement in this area.
Schnurr also expressed appreciation for the
work that the FASB and IASB have done in
developing high quality converged accounting
standards. At the same time, he stressed the
importance of assuring consistency as converged
standards are implemented. Ironically,
consistency would appear to be more of a
challenge in a principles-based IFRS world than
in a rules-based GAAP world. Since a
principles-based system relies more on judgment
without detailed rules, the chances for
diversity of application could be greater.
As Schnurr pointed out, the consistency
challenge is facing a current test with
implementation of
Revenue from Contracts with
Customers,
the newly converged standard. Speaking at the
same conference, Russell Golden, FASB Chairman,
noted that the FASB staff is researching
implementation issues that the joint FASB/IASB
Transition Resource Group has already
identified. Three significant areas of concern
are “1) application issues associated with the
pattern of revenue recognition of intellectual
property transactions; 2) clarification of
guidance related to the determination of certain
performance obligations; and, 3) further
development of guidance related to determining
when revenue should be gross versus net of
certain types of arrangements.”
The common goal to consistently implement
standards will be a driving force motivating the
FASB and IASB to continue working together,
despite the formal end of their efforts to
converge all standards. The final joint project
on leases is nearing completion. Though both
boards agree that leases belong on the balance
sheet, they cannot reach agreement on the
treatment of the related expenses. Schnurr sees
this difference a “missed opportunity to not
remain converged on such a broadly applicable
topic.”
The FASB and IASB will expand their joint
efforts as part of the new Accounting Standards
Advisory Forum (ASAF). The ASAF joins national
and regional accounting standard setters from 12
jurisdictions around the world. The group’s
objective is to contribute towards the
achievement of globally accepted high-quality
accounting standards.
For further information, see
James Schnurr Remarks before the 2014 AICPA
National Conference on Current SEC and PCAOB
Developments and
Remarks by Russell G. Golden.
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The Fraud-Resistant Organization
New report from the Anti-Fraud Collaboration
stresses prevention
Legendary American football coach Vince
Lombardi once said that “the best defense is a
good offense.” However, in the arena of
financial reporting, when the avoidance of fraud
is at stake, the new report from the Anti-Fraud
Collaborative, The Fraud-Resistant
Organization: Tools, Traits, and Techniques to
Deter and Detect Financial Reporting Fraud,
encourages good defensive measures as the best
offense to forestall fraud before it can take
hold.
The Anti-Fraud Collaboration was formed in
October, 2010 to bring together the four members
of the “financial reporting supply chain.” The
four include 1) company financial management
represented by the Financial Executives
Institute, 2) internal auditors represented by
the Institute of Internal Auditors, 3) boards of
directors and their audit committees represented
by the National Association of Corporate
Directors, and 4) external auditors represented
by the Center for Audit Quality. Conscientious
and trustworthy individuals at all levels are
key, since the report states
“if all who have a
role in the financial reporting supply chain
understand their responsibilities, encourage a
strong tone at the top and ethical culture
through both word and deed, know how to exercise
skepticism, and communicate consistently and
effectively with all relevant parties across all
geographic locations, an environment conducive
to financial reporting fraud is less likely to
occur.”
The first chapter summarizes the
“Fraud-Susceptible Culture,” noting that the
typical fraudster is often the otherwise honest
employee who succumbs to the convergence of the
three sides of the “fraud triangle:” pressure,
opportunity and rationalization. The presence of
such conditions likely results from a lack of
skepticism, ethical lapses, and/or communication
breakdowns in the reporting supply chain.
The second chapter turns to a military
strategy, “defense in depth,” a “complex and
multilayered defense system to protect against
threats,” here referring to the supply chain
members as the layers of defense against fraud.
Skepticism is singled out as essential at all
levels. The six characteristics of skepticism
presented are:
- A questioning mind—A disposition to
inquiry, with some sense of doubt,
- Suspension of judgment—Withholding
judgment until appropriate evidence is
obtained,
- Search for knowledge—A desire to
investigate beyond the obvious, with a
desire to corroborate,
- Interpersonal
understanding—Recognition that people’s
motivations and perceptions can lead them to
provide biased or misleading information,
- Autonomy—The self-direction, moral
independence, and conviction to decide for
oneself, rather than accepting the claims of
others, and
- Self-esteem—The self-confidence to
resist persuasion and to challenge
assumptions or conclusions.
The Professional Judgment Resource,
(PJR) developed by the CAQ in August,
2014, contains a helpful tool to help overcome
threats to skepticism. Drawing from the PRC, the
report lists “Common Judgment Tendencies and the
Strategies to Avoid Them and Mitigate Bias”.
These are:
- Confirmation - The tendency to put
more weight on information that is
consistent with initial beliefs or
preferences. Strategy – a) Make the opposing
case and consider alternative explanations,
and b) Consider potentially disconfirming or
conflicting information.
- Overconfidence - The tendency to
overestimate one’s own ability to perform
tasks or to make accurate assessments of
risks or other judgments and decisions.
Strategy – a) Challenge opinions and
experts, and b) Challenge underlying
assumptions.
- Anchoring - The tendency to make
assessments by starting from an initial
value and then adjusting insufficiently away
from that initial value. Strategy – a)
Solicit input from others, and b) Consider
management bias, including the potential for
fraud or material misstatements.
- Availability - The tendency to
consider information that is easily
retrievable or what’s easily accessible as
being more likely or more relevant. Strategy
– a) Consider why something comes to mind,
b) Obtain and consider objective data, and
c) Consult with others and make the opposing
case.
These are useful principles that would be
beneficial to keep in mind for all forms of
human discourse, particularly nowadays when
questions of politics or religion are often in
the forefront of discussions.
In the chapters that detail the role of each
level of the supply chain, the implications and
challenges of their global interrelationships
are underscored. For example, there needs to be
an awareness and plan to consider that:
- The concept of skepticism is discouraged
in some places.
- Ethical principles and codes of
conduct must be translated into the various
languages in a way that is sensitive to the
nuances and unique nature of each country’s
customs.
- Whistleblower programs must be
tailored to conform with local laws and
cultural differences.
- In rapidly growing markets, boards
need a more detailed understanding of the
business.
The report points out that these issues
should be tackled first by learning “the laws,
customs and unique risks presented by various
locations” and then applying that knowledge by
tailoring training and communications
specifically to each location while taking care
to preserving the original principles.
For further information, see
The Fraud-Resistant Organization: Tools, Traits,
and Techniques to Deter and Detect Financial
Reporting Fraud.
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Sustainability Accounting and Reporting Forge
Major Inroads
Diverse sources promote the role of accountants
A year ago in the January 2014 issue of Audit
& Accounting Alert, we reported on the release
of the International Integrated Reporting <IR>
Framework. As noted in the Framework, “the
primary purpose of an integrated report is to
explain to providers of financial capital how an
organization creates value over time. An
integrated report benefits all stakeholders
interested in an organization’s ability to
create value over time, including employees,
customers, suppliers, business partners, local
communities, legislators, regulators and
policy-makers.”
A number of significant developments have
propelled the cause of integrated reporting
forward, as well as the sustainability
accounting standards that form the foundation.
At the recent World Congress of Accountants held
in Rome, one of the three major sessions was
titled Integrated Thinking, The Key to Improved
Performance and Value Creation. “Integrated
thinking means that integrated reporting is
inextricably connected to the organization’s
management processes concerning resources,
relationships, risks, and opportunities—in both
strategy and daily management.” (Alta Prinsloo,
IFAC, 11/25/14).
While there is still substantial work to be
done before integrated reports are as common and
standardized as current financial reports, a
surprising amount has already been accomplished
and much more is in process.
Though Integrated Reporting is in the early
stages in the United States, the concept is much
further along elsewhere. In South Africa, public
companies have been required to produce
integrated reports for several years already. A
2014 research report by the World Business
Council for Sustainable Development analyzed
results for South African companies thus far.
From interviews with companies and institutional
investors, the report concluded that integrated
reporting is a journey for the entire
organization, integrated thinking is key to
successful integrated reporting, but not a
prerequisite, and assembling an integrated
report promotes integrated thinking, by breaking
down silos of business activity and introducing
a new way of assessing value. Takeaways to be
considered for producing an effective integrated
report are:
- Obtain buy-in and support from the top
- Establish a formal structure
- Put in place
systems to collate data and information
- Set
up broadly represented integrated teams
- Maintain an ongoing annual process that aligns
with external reporting
- Have a robust process
for developing content.
Since technology will be critical for
integrated reporting, the IIRC has launched a
technology initiative to assess how technology
is being used, and how it can be developed and
assimilated to assist the integrated reporting
process. Deloitte and PwC are joining several
other companies as charter members in this
initiative.
In a separate development, the Institute of
Management Accountants (IMA) has joined the
International Integrated Reporting Council
(IIRC). An American organization, the IMA will
help push the U.S. along in the <IR> movement.
IMA president, Jeff Thomson, pointed out,
however, that the benefits <IR> brings will need
to be balanced with the “current reality of
disclosure overload as well as the potential for
litigation and reputation risk.”
Robert Herz, former chairman of the Financial
Accounting Standards Board (FASB), has recently
joined the board of another American based
organization, Sustainability Accounting
Standards Board (SASB). For integrated reporting
to be effective, the underlying accounting
standards that delineate the elements of
sustainability must be clearly defined and
consistent. The SASB was established to develop
voluntary industry standards. Thus far,
provisional standards have been issued for 45
industries in the following sectors: healthcare,
financials, technology and communications,
non-renewable resources, transportation, and
services. Standards for another 35 industries
are in the works for the resource
transformation, consumption, renewable resources
& alternative energy, and infrastructure
sectors.
As if these developments were not enough,
accountants have also gained the attention of
two world figures. Britain’s Prince Charles is
no newcomer to the cause of sustainability. In
fact, The Prince’s Accounting for Sustainability
Project (A4S), which he initiated ten years ago,
was responsible for forming the IIRC. Speaking
at the A4S Summit in December, 2014, he stated
“how vital I think it is that we properly
account for the real value of all our economic
activities. It is quite simply an essential
skill if mankind is to thrive within the
constraints of an increasingly crowded planet.
Finance and accounting professionals provide, as
it were, the dashboard to set the direction and
speed of travel of our organizations and
economies, the engine to translate those
instructions into action and the steering to
avoid the worst of the potholes along the road!”
He went on to encourage the members to “work
with the finance, accounting and investment
community to dispel the idea that there is
necessarily a choice between making money on the
one hand and "doing the right thing" on the
other. On the contrary, once it is recognized
that "business as usual" is unsustainable it
follows naturally that those organizations which
start to develop resilient business models will
be the ones which succeed.”
Even Pope Francis has gotten into the act. At
the afore-mentioned World Congress of
Accountants, he gave perspective to the efforts
being made by affirming that “All those called
to work in various capacities in the economy and
finance, are called to make choices that foster
the social and economic well-being of the whole
of humanity…In your activity, you accountants
support businesses, but also families and
individuals, in giving your economic and
financial advice… If we want to give future
generations an improved environmental, economic,
cultural and social patrimony than we inherited,
we are called to assume the responsibility to
work for a globalization of solidarity.
Solidarity is a requirement that flows from the
network itself of the interconnections that are
developing with globalization.”
For further information, see
Integrated Thinking: The Key to Improved
Performance and Value Creation and
SASB Proposes
Sustainability Accounting Standards for Service
Industries and
The Prince of Wales hosts the Accounting
for Sustainability Annual Forum
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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.
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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]
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