At-A-Glance
Though
universal
adoption of
International
Financial
Reporting
Standards
has stalled
in the
United
States, a
major
milestone of
mutual
cooperation
is about to
transpire.
As we go to
press, the
joint
release by
the IASB and
FASB of a
major new
standard for
revenue
recognition
accounting
is expected
any day. In
fact, it may
have already
been
released as
you read
this issue.
In our first
article, we
highlight
this
monumental
effort.
The
new revenue
recognition
standard
will only
become a
household
word among
accountants.
But before
long
everyone
will be
talking
about
Alibaba
Group
Holdings,
Ltd., the
emerging
Chinese
internet
company.
Alibaba is
about to
launch
possibly the
largest
initial
public
offering in
US history.
An ongoing
dispute
between the
SEC and
Chinese
regulators
has put
auditors in
the
spotlight.
Our second
article
describes
the
difficulty
the SEC and
US auditor
watchdog,
PCAOB, are
having with
Chinese
auditors.
Concerned
about
revealing
state
secrets,
China has
erected
roadblocks,
preventing
access to
audit
workpapers
for
inspection.
Consequently,
the SEC is
faced with a
tough
decision.
Our
third
article
continues
our coverage
of the
search for
audit
quality
improvement.
This past
month, the
AICPA-affiliated
Center for
Audit
Quality
issued a
proposal of
specific
measures for
use in
evaluating
and
comparing
auditors on
a
quantifiable
basis. These
audit
quality
indicators
would reveal
heretofore
private
data,
spelling out
details of
the audit
process,
competency
and
reputation
of the
auditors and
the audit
firm. The
CAQ plans to
pilot test
this new
approach
over the
coming year.
Editor Gerald E. Herter, CPA |
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In This Issue
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Long Overdue Revenue
Recognition Standard Becomes
a Reality
One size fits all will
cause challenges for
some
The overhaul of the
revenue recognition
accounting standard has
been on the convergence
agenda of the FASB and
the IASB since 2002.
When we first wrote
about the protracted
journey of this process
two years ago, the final
standard was hoped for
by the end of 2012. At
that time, a Discussion
Paper and two Exposure
Drafts had already been
issued and debated
extensively. Now at
last, the final
standard,
Revenue from Contracts
with Customers,
is at hand.
The deliberate
nature of the process
has proved beneficial in
providing sought after
clarity and more
specific criteria for
making the
determinations required
by the standard.
Respondents presented
unique aspects of their
contracts to enable
further delineation of
how the standard would
be applied.
Considering that various
aspects of revenue
recognition have been
addressed previously in
over 100 pronouncements,
the goal of “one
standard fits all” has
been a monumental
undertaking, justifying
the time taken. Though
new definitions and
terms of measurement
will need to be
considered in the
standard’s five step
approach, some
industries, such as
software and
construction are already
used to dealing with the
determination of
multiple elements or
phases in their revenue
recognition models. Even
so, some industries,
such as
telecommunications,
questioned the benefit
of a single standard
over the value of
industry-specific
accounting. For example,
sellers of cell phones
bundled with service
contracts will have to
change their revenue
recognition allocation
practices from prior
methods which they felt
were a better fit.
Following is the
fundamental crux of the
new standard, as
described in the
introduction to the IFRS
version:
“The core
principle of this IFRS
is that an entity shall
recognise revenue to
depict the transfer of
promised goods or
services to customers in
an amount that reflects
the consideration to
which the entity expects
to be entitled in
exchange for those goods
or services.
To achieve that core
principle, an entity
shall apply all of the
following steps:
- identify the
contract with a customer;
- identify the
separate performance
obligations in the contract;
- determine the
transaction price;
- allocate the
transaction price to the
separate performance
obligations in the contract;
and
- recognise revenue
when (or as) the entity
satisfies a performance
obligation.”
The IFRS and FASB
versions parallel each
other, varying only in
minor technicalities.
For instance, the
required threshold for
probable collectability
of revenue is lower in
the IFRS than the FAS.
Also, the FAS does not
permit early adoption,
while the IFRS does. The
effective date starts
generally with the 2017
calendar year, with
non-public companies
having the option of
waiting until 2018.
Some companies have
expressed concern that
the impact of the
effective date comes
even sooner than it
appears, since those
that decide to apply the
desirable full
retrospective transition
need to start
accumulating data at the
start of 2015.
Anticipating this and
other challenges, with
such major changes in
the standard, the FASB
and IASB have planned to
form a Revenue
Recognition Joint
Transition Resource
Group to assist with
issues that arise.
Though much guidance and
discussion are sure to
follow in coming months
and years, the
attainment of this joint
effort of the FASB and
IASB is a major
milestone in
international
cooperation.
For further information, see
Revenue
Recognition—Joint
Project of the FASB
and
IASB
BREAKING NEWS:
Paul Beswick,
Chief Accountant for the
SEC, recently announced
his resignation, with
plans to return to the
private sector. Over his
six year tenure with the
SEC, Beswick has been
heavily involved in the
Commission’s efforts to
consider IFRS. He has
spoken in the past year
on the impact that IFRS
already has on United
States capital markets.
A successor to Beswick
has not yet been named.
For further information
see
SEC.
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Alibaba Spotlights SEC Dispute with
Auditors in China
Will the massive IPO reward investors
with a treasure trove or a band of
thieves?
Until recent times, the name Alibaba
conjured up one of two images: a
cave filled with treasure, exposed
by speaking the words “Open Sesame,”
or else a band of forty thieves,
conspiring to kill the humble
woodcutter who had learned their
secret. Jack Ma, founder of Alibaba
Group Holdings, Ltd., displayed
prophetic vision when naming the
privately owned Chinese behemoth.
Talking with people from all over
the world, he found that everyone
recognized the name Alibaba. And it
was easy to spell. His original
vision of an “Open Sesame” for small
businesses has grown into an
international conglomerate of
internet trade.
So where do the auditors and the SEC come in? With what could be the
largest Initial Public Offering in
history, financials audited by a
Chinese firm are on display. The
problem is that Chinese audit firms
have been recommended for suspension
by the SEC, for failing to subject
their workpapers to inspection, as
is required of all firms that audit
companies trading in the US. The
suspension is currently under
appeal. The auditors’ defense is
that the government of China
prohibits the release of the
workpapers.
The SEC and PCAOB have been in conflict with the Chinese Securities
Regulatory Commission (CSRC) for
years over this issue. The
controversy started to soften in
2012, when the PCAOB reached an
agreement with the CSRC that allowed
observational visits of the Chinese
audit firms’ quality control
systems. However, review of specific
audit workpapers was not permitted.
Then in May, 2013, a Memorandum of Understanding provided for workpapers
from audits to be sent to the PCAOB
and SEC for review. Nevertheless,
onsite review of workpapers was
still off limits, and there was no
telling what manner of redaction
would be performed before the
workpapers were sent for review.
The final blow came in January, 2014, when an SEC administrative law judge
suspended the Big 4 accounting
firms’ Chinese affiliates, calling
their non-compliance regarding audit
workpapers “egregious” and acting
“willfully and with a lack of good
faith.” The audit firms have been
able to continue their work pending
the appeal.
On May 9, 2014, the SEC issued its decision to hear the appeal. Still,
final resolution could take months
and years. Consequently, Alibaba
included a risk warning in its
offering documentation, disclosing
the uncertainty regarding the audit
of the financial statements that are
included. A further complication is
that the Alibaba auditors are based
in Hong Kong. While they fall under
China’s rules, the suspension is not
against them, but against the
mainland offices of the audit firms.
Even so, since substantial
operations of Alibaba take place in
mainland China, significant amounts
of the audit work may be performed
by the mainland offices. Since the
files have not been made available,
that issue has not been resolved.
Interestingly enough, Alibaba had
originally planned to have the stock
offering in Hong Kong. However,
regulatory restrictions were not as
strict in America, so the planned
offering was moved to a US stock
exchange.
For further information, see
Does the SEC Have the Guts
to Tank Alibaba's IPO?
Quality Indicators Seek to Advance Audit
Effectiveness
Audit assessment evolves with the
times
Last month we described persistent
auditor deficiencies, as well as current
legislative and regulatory measures
designed to reduce the frequency of
audit failures. This month we cover an
approach by the profession to strengthen
audit quality using quantitative
measurements.
In February, 2014, the International
Auditing and Assurance Standards Board
(IAASB) issued A Framework for Audit
Quality: Key Elements that Create an
Environment for Audit Quality. This
document details factors, organized by
inputs, outputs, interactions and
context, that impact audit effectiveness
at the engagement, firm, and national
levels.
Also, the PCAOB in November, 2012,
launched a project to develop audit
quality measures focused around a
framework of inputs, processes and
results. A Concept Paper is expected
later in the year.
Drawing upon these and other efforts,
the AICPA-affiliated Center for Audit
Quality has provided input to the PCAOB
and, in April, 2014, issued its own
paper, the CAQ Approach to Audit Quality
Indicators. Noting a lack of consensus
on several aspects, including the
definition of audit quality, an audit
quality framework, the specific
indicators, and communication, the CAQ
offered an approach for moving forward.
The paper identifies four thematic
elements of audit quality to use in
categorizing the audit quality
indicators (AQI):
- Firm Leadership and Tone at the
Top
- Engagement Team Knowledge,
Experience, and Workload
- Monitoring
- Auditor Reporting
The CAQ’s approach is to supplement
current communications to the audit
committee, by providing the AQI on an
annual basis, in order to broaden
understanding, facilitate evaluation,
and stimulate further discussion on
audit matters. With an emphasis on
engagement-specific measures, the AQI
may help the audit firm to improve
quality as well.
The CAQ further delineated the
thematic elements into the following
categories:
I. Firm Leadership and Tone at the
Top:
- Overview of how the audit firm’s
leadership, through its tone at the
top, emphasizes audit
quality and holds itself accountable
for the audit firm’s system of
quality control
II. Engagement Team Knowledge,
Experience, and Workload:
- Knowledge and Experience of Key
Engagement Team Members
- Audit Firm Training Requirements
- Trends in Engagement Hours and
Related Timing
- Allocation of Resources by
Significant Risk Areas
- Specialists and National Office
Personnel Involvement by Significant
Risk Areas
- Key Engagement Team Members’
Workloads
III. Monitoring:
- Internal Quality Review Findings
- PCAOB Inspection Findings
IV. Auditor Reporting:
- Reissuance Restatements and Withdrawn
Auditor’s Reports
For many of the categories, the CAQ
proposed readily quantified indicators
that could be useful in the audit
oversight process. For example, the
“knowledge of the engagement team
members” category includes the number of
years 1) with the firm, 2) at the
current level, 3) on the engagement and
4) of industry experience. The “trends
in engagement hours and related timing”
category includes planned and actual
audit hours for the current and prior
year at each level, as well as the
allocation between planning and
execution. For monitoring and reporting
categories, the numbers and types of
occurrences are indicated.
The CAQ will pilot test the proposed AQI
with selected auditors and audit
committees through the 2014 audit cycle.
Separately, in breaking news, the AICPA
recently announced a new Enhancing Audit
Quality Initiative. The initiative plans
to monitor execution of Auditing
Standards Board standards, create new
resources, and reform the peer review
process. More information and a
discussion paper are expected in coming
months.
For further information, see
Center for Audit Quality
Leads First Effort in U.S. to Pilot Test
Audit Quality Indicators
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
UK FRC publishes amended
accounting rules for
micro-entities
-
IAASB Proposes Changes in
Auditing
-
Accounting for natural capital:
the elephant in the boardroom
-
Going Concern Looks
Out One Year, Starting in 2016
for FASB
-
ISACA releases white paper
on Big Data
-
Reconciliation of Accounts
Still Mostly Done by Hand
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