At-A-Glance
The reputation of the accounting
profession has taken a number of body
blows in recent years, arising from the
myriad of financial crises and
collapses. But rarely has a CPA’s
actions conjured up comparison to the
greedy persona of Gordon Gekko, the
nefarious corporate raider from the
movie Wall Street. That has all changed
now with SEC charges filed and the
release of an FBI photograph showing a
long-time KPMG partner allegedly
accepting cash in exchange for insider
information from his audit clients. We
visit this astounding development in our
first article.
Next we turn to another topic that
some accountants may find astounding as
well: Integrated Reporting. While the
idea of capturing and connecting social,
environmental and economic data about a
company all in one report may boggle the
minds of twentieth century
practitioners, the concept has taken a
major step forward as our second article
reports.
Finally, we are incorporating a
new periodic feature, which will provide
brief highlights of new and upcoming
actions and activities of accounting
organizations throughout the world. This
section will enable the reporting of
items warranting a mention, but not a
full article.
Editor Gerald E. Herter, CPA
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In This Issue
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When the Auditor is the Criminal
KPMG partner caught taking payoff for insider
trading tips
The regulators and standard setters have been
outspoken in recent years about the need for
auditors to be ever more vigilant and skeptical
when conducting audits and assessing credibility
of client personnel. Inspections of audit firms,
as covered in our February and April issues,
have expressed concern that too many audits
still fall short in this respect.
Firms have responded by beefing up training
to better equip their auditors, including in the
key area of ethics. But apparently no amount of
training will deter the intentional criminal
acts of a determined mind. Scott London, a
highly respected and successful partner with
KPMG for 29 years, “acknowledged taking annual
ethics training at KPMG which explicitly
prohibited employees from disclosing inside
information regarding clients,” according to a
complaint filed by the SEC in April. But at
least fifteen instances of just such prohibited
activity over a year-and-a-half were spelled out
in the complaint.
The circumstances leading up to the alleged
crime sound familiar enough to auditors,
accustomed as we are, to facing pressure from
clients in various situations. London met Bryan
Shaw, the recipient of the insider information,
at his country club, where they became golfing
buddies and close friends. Several years later,
Shaw’s family-run jewelry business ran into
financial difficulties. London wanted to help
his struggling friend out. Now here is where the
auditor needs to be ever vigilant and well
prepared to withstand the sometimes intense
challenges to personal integrity. While knowing
where to draw the line is not always easy, in
London’s case there was no question. He
intentionally crossed clear-cut ethical and
legal lines, giving Shaw non-public, insider
information on five KPMG clients, including
nutritional supplement marketer, Herbalive, Ltd.
and footwear firm, Skechers USA, Inc., for which
he was lead auditor.
The complaint alleges that Shaw’s trading on
the insider information netted him at least
$1.27 million. In exchange, he paid London over
$50,000 in cash, usually handed off in bags
outside Shaw’s jewelry store. Additionally,
items of jewelry and entertainment were provided
by Shaw.
The more difficult question to answer is why
someone in London’s position would risk a
reputation built up over so many years, as well
as jeopardizing his livelihood and even possibly
his freedom, for a few bags of money and jewels
that seem small in comparison to the salary of a
Big Four firm partner. Hopefully, answers will
come. Meanwhile, KPMG has had no choice but to
resign as auditor for Herbalife and Skechers, as
well as pull the last two or three years’ audit
reports for those companies.
Remarkable as this episode sounds, any
organization can be vulnerable, as long as human
beings are involved. Even an Integra firm
recently experienced what have been
characterized by one partner as ethical and
legal breeches by fellow partners. In this case,
partners who had worked together for years,
abruptly left the firm and the remaining
partner, taking clients and client files, in
apparent disregard for agreements,
relationships, and moral consequences.
Unfortunately, in situations like these,
accounting profession codes of ethics and state
statutes must be invoked, when personal common
sense and integrity fail.
Coincidently, the AICPA in April issued an
Exposure Draft, updating and modernizing the
AICPA Code of Professional Conduct, which all
AICPA members are required to follow. Also, the
PCAOB is considering a proposed rule that would
require audit firms to disclose the identity of
the audit partner for all of their clients.
For further information, see
SEC files complaint against KPMG Partner
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Integrated Reporting Moves a Step Closer
Framework draft issued for review
Though I recall hearing both the AICPA Chairman and
President mention the emergence of Integrated Reporting
at two separate conferences in the past year-and-half,
the recurrent commotion over the future of IFRS, and the
state of audit competition and quality, appear to have
drowned out the Integrated Reporting message during this
period. Determined to change that in one fell swoop, the
International Integrated Reporting Council (IIRC) held
events in thirteen countries worldwide on April 16,
including six at stock exchanges, to launch the
Consultation Draft of the International Integrated
Reporting <IR> Framework.
In the September, 2012 Audit & Accounting Alert, we
covered the history of the Integrated Reporting
movement, dating back to 1989. Though support for the
general idea was noted to be widely held, the formidable
practicalities of implementation were seen to cloud the
likelihood of ever achieving the goal. However, the
Draft Framework represents a substantial step forward
along the intricately complex path that lies ahead.
The IIRC asserts that current reporting models and
strategy formation do not adequately integrate vital
intangible factors from the economic, social and
environmental sectors, so that businesses and investors
are at risk of making unsound decisions regarding
employment of resources, leading to higher capital
costs.
Focusing on current and long-term value creation, the
goals of Integrated Reporting are stated as to 1)
achieve a more cohesive and efficient approach to
reporting that communicates the full range or pertinent
factors, 2) inform capital allocation decisions, 3)
enhance accountability and stewardship of the broad base
of capitals employed, as well as the relationship of
their interdependencies, and 4) support integrated
thinking, decision-making and actions.
The basic concept of Integrated Reporting is to show
how an entity employs and impacts the intangible as well
as the tangible aspects of financial, manufactured,
intellectual, human, social and relationship, and
natural capital through its business model to create (or
destroy) value over time.
The capitals, which are the key categories for
reporting are further described as:
Financial capital: The pool of funds that is
available to an organization for use in the production
of goods or the provision of services, and is obtained
through financing, such as debt, equity or grants, or
generated through operations or investments.
Manufactured capital: Manufactured physical objects
(as distinct from natural physical objects) that are
available to an organization for use in the production
of goods or the provision of services, including
buildings, equipment, infrastructure (such as roads,
ports, bridges, and waste and water treatment plants).
Manufactured capital is often created by other
organizations, but includes assets manufactured by the
reporting organization when they are retained for its
own use.
Intellectual capital: Organizational, knowledge-based
intangibles, including 1) intellectual property, such as
patents, copyrights, software, rights, and licences, 2)
“organizational capital” such as tacit knowledge,
systems, procedures and protocols, and 3) intangibles
associated with the brand and reputation that an
organization has developed.
Human capital: People’s competencies, capabilities
and experience, and their motivations to innovate,
including their 1) alignment with and support for an
organization’s governance framework, risk management
approach, and ethical values, 2) ability to understand,
develop and implement an organization’s strategy, and 3)
loyalties and motivations for improving processes, goods
and services, including their ability to lead, manage
and collaborate.
Social and relationship capital: The institutions and
the relationships within and between communities, groups
of stakeholders and other networks, and the ability to
share information to enhance individual and collective
wellbeing. Social and relationship capital includes 1)
shared norms, and common values and behaviors, 2) key
stakeholder relationships, and the trust and willingness
to engage that an organization has developed and strives
to build and protect with external stakeholders, such as
customers, suppliers, business partners, local
communities, legislators, regulators, and policy-makers,
and 3) an organization’s social license to operate.
Natural capital: All renewable and nonrenewable
environmental resources and processes that provide goods
or services that support the past, current or future
prosperity of an organization. It includes 1) air,
water, land, minerals and forests, and 2) biodiversity
and eco-system health.
At the launch event held at the Johannesburg Stock
Exchange in South Africa, the IIRC chairman, Mervyn King
said: “The world today faces two critical and
interconnected dangers: financial instability and
unsustainability… The corporate reporting landscape has
not kept pace with the scale of the changes that have
taken place in the world economy, business and society
in recent decades…” At a similar event in New York, the
IIRC CEO, Paul Druckman added: “Over the last three
years, the IIRC has built consensus around the idea that
the current corporate reporting model must change to
meet the needs of today’s business and investment
environment. The Framework is the product of business
and investor input and testing involving over 300
individuals and organizations. The IIRC has recruited
businesses and investors to its Pilot Programme in 25
countries.”
Those taking part in the work, according to the IIRC
press release include “The Coca-Cola Company, China
Light and Power, The Clorox Company, National Australia
Bank, Unilever and Hyundai. The 50+ institutional
investors that have been involved in shaping and testing
the Framework include: Deutsche Bank, Goldman Sachs,
Natixis, APG and Norges Bank.”
Noting “the business model as being at the heart of
integrated reporting, the Chartered Institute of
Management Accountants (CIMA), the International
Federation of Accountants (IFAC), and PwC, at the
request of the International Integrated Reporting
Council (IIRC), issued in March a background paper,
“Business Model,” to provide a consistent format for
companies to follow in communicating their business
model, which is defined as “the chosen system of inputs,
business activities, outputs and outcomes that aims to
create value over the short, medium and long term.”
Judging by the positive feedback already for the
Draft Integrated Reporting Framework, from sources
around the world, the cause for Integrated Reporting has
now appeared to gain traction and much needed attention.
President and CEO Barry Melancon spoke on behalf of the
AICPA: “The AICPA has long supported efforts to develop
a voluntary global framework for business reporting to
complement financial reporting. The release of the Draft
Framework represents important progress toward this
goal. We applaud the IIRC for fostering international
collaboration and encouraging key stakeholders to
contribute to the <IR> Framework, which we believe will
facilitate meaningful adoption of <IR>.”
The European Commission (EC) went even further on
April 16, proposing a new law that will require certain
large companies “to disclose information on policies,
risks and results as regards environmental matters,
social and employee-related aspects, respect for human
rights, anti-corruption and bribery issues, and
diversity on the boards of directors.” The goal is
better transparency, while providing flexibility in how
the data is provided in annual reports. Michel Barnier,
Commissioner in charge of the Internal Market and
Services at the EC, noted that “companies that already
publish information on their financial and non-financial
performances take a longer term perspective in their
decision-making. They have lower financing costs,
attract and retain talented employees, and ultimately
are more successful.
For further information, see
The International Integrated
Reporting Council
Worldwide Update
Roundup of recent and upcoming actions and
activities by audit and accounting organizations
Periodically, we will summarize significant items
impacting the accounting world.
International
IASB – International
Accounting Standards Board (www.ifrs.org)
- Accounting Standards Advisory Forum (ASAF) is
formed and signs Memorandum of Understanding. With
representation from accounting standard setters from
the six continents, the group’s objective “is to
provide an advisory forum where members can
constructively contribute towards the achievement of
the IASB’s goal of developing globally accepted
high-quality accounting standards.
- IFRS for SMEs – Monthly updates are provided. A
comprehensive three year review is under way for the
standards which were initially issued in 2009.
- XBRL – The 2013 annual IFRS Taxonomy is
published.
- Conceptual Framework project – A discussion
Paper is planned for release in upcoming months that
will focus on the reporting entity, elements of
financial statements, measurement, presentation and
disclosure. The Framework is a guide of basic
concepts from which consistent accounting standards
can be developed.
IFAC – International
Federation of Accountants (www.ifac.org)
- IFAC reports that SMEs and SMPs (small and
medium accounting practices) “that integrate
sustainability into their core business strategy can
benefit from lower costs, reduced risk, and new
opportunities. See article at
Sustainability:
Challenges and Opportunities for SMPs and SMEs.
- “Business Model,” a background paper for
integrated reporting was issued in March 2013 to
provide businesses a standard definition of the
business model, to promote consistent application in
reporting. The paper defines the term business model
as “the chosen system of inputs, business
activities, outputs and outcomes that aims to create
value over the short, medium and long term.”
- The International Ethics Standard Board for
Accountants (IESBA) meets about four times a year,
and develops and issues ethical standards for the
accounting profession. The 2012 edition of the IESBA
Code of Ethic for Professional Accountants is
currently in effect, and is updated periodically.
- The International Auditing and Assurance
Standards Board (IAASB) sets audit and assurance
standards and facilitates convergence of national
standards. Currently, the Consultation Paper, “A
Framework for Audit Quality is out for comment until
May 15, 2013. See the March 2013 issue of the Audit
& Accounting Alert for a discussion of this
document.
IIRC - International
Integrated Reporting Council (www.theiirc.org)
1. Consultation Draft of the
International <IR> Framework is launched on April 16,
2013. See the preceding article in this issue, as well
as the September, 2012 issue of the Audit & Accounting
Alert for more on this topic.
AAA
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Americas, Australia & Asia
FASB – Financial
Accounting Standards Board (www.fasb.org)
- Reporting Discontinued Operations – Exposure
Draft issued in April to limit definition of
discontinued operations to a separate major line of
business or major geographic area of operations.
Also, disclosures of financial results would be
expanded, and convergence with IFRS would be
enhanced.
- Financial Instruments – Credit Losses
– Comment
deadline for proposed update on accounting for
credit losses extended to May 31, 2013. A single
“expected credit loss” measurement is proposed that
would require estimating and recording the total
loss expected based on past, current and future
inputs. See the July 2012 issue of the Audit &
Accounting Alert for a discussion of this topic.
- Leases – A revised exposure draft is planned for
the second quarter of 2013, to address comments
received and deliberations with the IASB since
issuance of the original exposure draft in 2010. See
the April 2012 issue of the Audit & Accounting Alert
for a discussion of this topic.
- Revenue Recognition: Revenue from Contracts with
Customers - The final standard is scheduled for the
second quarter of 2013, having been deliberated with
the IASB. Results of deliberations have been
considered in the application of the five step
process of identifying the customer and the separate
performance obligations, determining and allocating
the transaction price, and recognizing revenue upon
satisfaction of performance obligations. See the May
2012 issue of the Audit & Accounting Alert for a
discussion of this topic.
- Liquidation Basis of Accounting – Accounting
Standard Update No. 2013-07 issued April 22, 2013
clarifies when entities should apply this basis, and
how to account and report. Assets are measured based
on expected cash proceeds, while liabilities are
reported based on GAAP.
Late Breaking News: On April 23, the FASB announced
that Russell Golden will succeed Leslie Seidman as FASB
chairman on July 1. A former Deloitte & Touche partner,
Golden joined the FASB staff in 2004, and was appointed
to the board in 2010. More to come in future issues.
AICPA – American
Institute of Certified Public Accountants (www.aicpa.org)
- Auditing Standards Board (ASB)
a. Attestation standards, which
cover assurance engagements other than for audits
and reviews of historical financial information, are
being updated for clarity and convergence with IAASB
standards. An exposure draft is scheduled for May,
2013.
b. Statement of Position 13-1 (SOP
13-1) – Attest Engagements on Greenhouse Gas
Emissions Information updates SOP 03-2 adding review
guidance to the examination guidance of the earlier
SOP. Issued in April, 2013.
c. Not-for-Profit Entities Audit and
Accounting Guide – The first comprehensive
revision since 1996 was released in March, 2013. The
guide includes enhancements and expansions in areas
such as reporting relationships with other entities,
noncash gifts, program-related investments and
microfinance loans, municipal bond debt,
donor-imposed restrictions, and the legal and
regulatory environment.
- Accounting and Review Services Committee (ARSC)
– A new exposure draft on compilation standards is
expected in June to replace, combine and revise the
three proposals that were withdrawn. The compilation
engagement may be repositioned as a nonattest
service, as is the preparation of financial
statements. See the November, 2012 issue of the
Audit & Accounting Alert for a discussion of this
topic.
- Professional Ethics Executive Committee (PEEC) –
Exposure Draft issued on April 15, 2013
restructuring and codifying the AICPA Code of
Professional Ethics. The proposed code is
categorized by topic for easier and more intuitive
use, a conceptual framework and approach is
incorporated both for members in public practice and
in business, and nonauthoritative guidance is
referenced.
PCAOB – Public
Company Accounting Oversight Board (www.pcaob.org)
1. Proposed Framework for
Reorganization of PCAOB Auditing Standards was issued
for public comment on March 26, 2013. The framework
would place existing standards into a logical, topical
format arranged by categories of general auditing
standards, audit procedures, auditor reporting, matters
relating to filings under federal securities laws, and
other matters associated with audits.
BAC – Business
Accounting Council of Japan’s Financial Services Agency
(www.fsa.go.jp/en)
1. Opinion on the Standard
Setting to Address Risks of Fraud in an Audit issued on
March 26, 2013, to be used by the Japanese Institute of
Certified Public Accountants to revise current standards
and converge with international standards.
EMEIA – Europe,
Middle East, India & Africa
EFRAG – European
Financial Reporting Advisory Group (www.efrag.org)
1. Three bulletins published on
April 11, 2013 address the IFRS Conceptual Framework
proposal from the standpoints of prudence, reliability
of financial information, and uncertainty. The IFRS
proposal drops the use of the term “prudence,” replaces
“reliability” with “faithful representation,” and limits
the use of “uncertainty” to the area of measurement and
not to definition or recognition of an element. The
bulletins make the case for the importance of retaining
the usage of these terms in the Conceptual Framework.
FRC – Financial Reporting Council of the UK (www.frc.org.uk)
1. Audit Quality Inspection
Reports were issued for BDO and Grant Thornton. The
reports noted issues with professional skepticism on
several audits, as well as sufficiency of audit evidence
obtained.
EC – European
Commission (http://ec.europa.eu/)
1. Proposal for a Directive
amending Council Accounting Directives (Fourth and
Seventh Accounting Directives on Annual and Consolidated
Accounts, 78/660/EEC and 83/349/EEC, respectively) as
regards disclosure of non-financial and diversity
information by certain large companies and groups. The
objective is to increase EU companies’ transparency and
performance on environmental and social matters, and,
therefore, to contribute effectively to long-term
economic growth and employment. See preceding article in
this issue.
Late Breaking News: Following up on last month’s
article on mandatory auditor rotation, the Legal Affairs
Committee of the European Parliament voted on April 25
to require companies to change auditors every 14 years,
unless certain conditions are met, in which case the
time frame is 25 years. The full European Parliament
will consider the reform later this year.
Additional A&A News
The following links provide a selection of current articles
devoted to highlighting other A&A topics currently making
news.
-
Herz Pens Book on FASB
Experiences
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A Pension Plan Funded With Cheese
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Local audits go back to the future
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China Accounting: Stalking
the Big Four
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Australian Accountants Compromise on Pay
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Indian Accounting Regulator Plans to Launch TV
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