At-A-Glance

In this issue of the Audit & Accounting Alert we delve into the dark side of the commercial world: money laundering, corruption and fraud. With new technological advancements, such as crypto currencies like bitcoin and the ever prevalent but hackable internet of things, accountants need to continually strengthen and extend their sense of vigilance. At the same time, the traditional low-tech forms of fraud that have prevailed over time cannot be overlooked, as our first article illustrates. Two new studies address the role of accountants in tackling corruption and the challenges of complex accounting areas. Then in our second article, we focus specifically on money laundering and how accountants can be drawn in, even inadvertently. The call for mandatory accountancy profession compliance programs is described, as well as guidance from a Canadian compliance program. Finally, our Worldwide Update covers news from organizations across the globe. Editor Gerald E. Herter, CPA

In This Issue 

• The Role of Accountants in Battling Corruption and Fraud

  Two new studies weigh in

• The Dark World of Money Laundering

   Issues and signs requiring accountants’ attention
  

• Worldwide Update

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

• Additional A&A News

The Role of Accountants in Battling Corruption and Fraud

Two new studies weigh in

A year ago, we reported on the Association of Certified Fraud Examiners’ (ACFE) biennial Report to the Nation on Occupational Fraud and Abuse. That report found that worldwide fraud over the prior twenty-year period accounted for 5% of annual revenue, which equates to several trillion dollars a year. The survey supporting the report indicated that over 80% of the frauds included asset misappropriation, a third included corruption, while 10% revealed financial statement reporting fraud.

While there is a lot of discussion over cyber fraud these days, and rightly so, attention is still needed to address the more low-tech forms of deception that have been around for a long time. A recent press release by the United States Securities and Exchange Commission "charged two former executives at a credit card processing company with masterminding a fraudulent scheme to steal millions of dollars through phony expense reimbursements, inflated invoices, and other improper accounting tactics...and...routinely reimbursed themselves for payments that were never actually made to third-party vendors using their personal credit cards. They also allegedly conspired with vendors to inflate invoices and receive kickbacks from the overpayments, and claimed improper commissions and bonuses related to other corporate funds they improperly diverted in various ways."

Two recent reports tackle aspects of corruption and financial statement reporting fraud. The International Federation of Accountants (IFAC) in February, 2017, published The Accountancy Profession—Playing a Positive Role in Tackling Corruption, while the Center for Audit Quality (CAQ) published Addressing Challenges for Highly Subjective and Complex Accounting Areas in March, 2017. Even though financial statement reporting fraud is the smallest of the three forms mentioned above, even that amounts to several hundred billion dollars a year globally.

The CAQ report summarized the results of two workshops that included audit committee members, external and internal auditors, senior management, and representatives from the SEC and PCAOB. Working with an analysis from SEC enforcement actions, the problem areas noted were revenue recognition, expense recognition, valuation issues, asset impairments, earnings management, and the related internal controls over financial reporting (ICFR). Recommendations centered on the role of company accounting policies, ICFR considerations, and staffing challenges in a complex accounting environment. Specifically, the key recommendations as listed in the report were:

Accounting policies:

• Accounting policies must adhere to technical accounting guidance. Supervisors and managers are responsible for implementation. It is critical that these policies be understandable to non-accountants who may not be conversant in the nuances of technical accounting.
• Process must be married to policies. Accounting policies must be reviewed at regular intervals and companies should have a process to identify and monitor changes in activities that have a potential impact on accounting.
• Policies must be tested in the field prior to implementation, and then monitored for compliance post-implementation.

Revenue recognition accounting policies:

• The revenue recognition policy should be granular, because even slight differences in interpretation can have a major impact on revenue recognition.
• Where possible, contract terms should be standardized and reflect how transactions at a contract level relate to the requirements of GAAP. Deviations from typical contract terms that have implications for revenue recognition should be well documented and elevated for approval by senior management.
• Clear responsibility and communication lines among legal, business, and finance should be created so that all key players understand and approve of transactions. This is especially important for implementing the new revenue recognition standard that is effective January 1, 2018 for calendar year-end public companies.

ICFR considerations:

• Tone at the top is an essential component of an ICFR regime.
• A risk-based evaluation is the best approach for achieving effectiveness and efficiency in ICFR.
• Internal controls over unusual and nonroutine transactions are sometimes overlooked or given less attention than core processes when developing an effective ICFR regime.

Staffing challenges:

When hiring and evaluating staff, along with the necessary technical accounting skills, consideration should also be given to critical thinking ability as well as communication and listening skills. Also, when especially complex accounting issues are encountered, the company and/or the auditors should not hesitate to bring in outside experts to analyze or review company processes. Examples of complex areas given were derivatives, taxation and securitization.

The IFAC report was more upbeat, giving rare credit for the profession’s noteworthy impact in the ongoing struggle to counter corruption. This report represented the third part of an examination of the accounting profession’s role in society. The first two reports had demonstrated a growing profession in demand, making significant contributions to all areas of society, and more specifically highlighting the economic contribution to a global economy.

Based on an analysis by the independent Centre for Economics & Business Research, the key findings emphasized that reducing corruption is more effective where there is a preponderance of professional accountants in the workplace. That result is enhanced in countries with a stronger governmental structure. Also, where professional accountants must adhere to ethics codes, educational requirements and ongoing oversight, their role produces a more favorable result.

While acknowledging the growing global efforts in battling corruption, the report pointed out three areas where greater diligence must be employed for far-reaching results to be attained:

1. Business, government and the professions joining hands in the cause;
2. Governments enacting better means of financial accountability and transparency, including employment of accrual basis accounting;
3. Broader worldwide adoption of International Financial Reporting Standards, International Standards on Auditing, and international accounting ethics standards.

While these goals may be difficult to achieve, IFAC is optimistic and lays out multiple initiatives in the report that are vigorously working toward them. .

For further information see Addressing Challenges for Highly Subjective and Complex Accounting Areas and The Accountancy Profession—Playing a Positive Role in Tackling Corruption

The Dark World of Money Laundering

Issues and signs requiring accountants’ attention

When money laundering is mentioned these days, thoughts often turn to the added hassles experienced in recent years when opening a bank account or changing authorized signors. Indeed, accountants with banks as audit clients deal directly with the strict regulations specifically in place for financial institutions, where money laundering is commonly cited in the news.

But all accountants, from large firms and small, need to be on the alert for signs of money laundering within their companies, or by clients or prospective clients. Though there are global guidelines and many countries have laws targeting money laundering, their applicability to the accounting profession varies.

To help raise awareness, the Integra International membership gained access to advisory support and technology tools in recent years from The Red Flag Group, a one-time Integra Alliance member. As the name implies, The Red Flag Group specializes in working with companies to detect the "red flags" and develop protective measures against the threats from various forms of corruption, including money laundering.

In a formal measure, the Financial Action Task Force (FATF), the global body formed by the Group of Seven (G7) countries to address money laundering, included in its recommendations, initially issued in 1990 and subsequently updated, the requisite that the accountancy profession institute compliance and reporting programs. The United States (US) was faulted in the FATF December, 2016 evaluation for not implementing this guidance. Granted, US tax accountants must have their clients report certain foreign monetary transactions and holdings. However, in other countries, such as the United Kingdom, specific regulations require accounting firms to have programs in place to assess money laundering risk and report suspicious activity.

In Canada, another country regulating accounting firms that act as financial intermediaries in this arena, the Chartered Professional Accountants of Canada (CPA Canada) issued a guide to assist with anti-money laundering compliance. The guide defines money laundering as "any act or attempted act to disguise the source of money or assets derived from criminal activity," in effect transforming dirty money into clean money. The guide describes the process as following three stages:

• Placement involves placing the proceeds of crime in the financial system.
• Layering involves converting the proceeds of crime into another form and creating complex layers of financial transactions to disguise the audit trail and the source and ownership of funds. This stage may involve transactions such as the buying and selling of stocks, commodities or property.
• Integration involves placing the laundered proceeds back into the economy to create the perception of legitimacy.

The guide goes on to lay out implementation of a compliance program which includes the following steps to assure recording and reporting of suspicious transactions and prescribed financial transactions:

• Obtaining a commitment from senior management;
• Appointing a compliance officer;
• Developing compliance policies and procedures;
• Applying a risk-based approach to money laundering and terrorist financing;
• Monitoring the effectiveness of the compliance system;
• Providing ongoing training for employees and agents.

In the United Kingdom, the Consultative Committee of Accountancy Bodies (CCAB), a body formed by the five UK accountancy organizations, in October, 2016, issued the Manifesto for Fighting Economic Crime. The manifesto proposed four recommendations:

1. A central information resource able to provide evidence of identity would help safeguard the economy and eliminate unnecessary cost.
2. An intelligence portal to share information on suspicious individuals or entities between regulators and law enforcement authorities, supported by better mechanisms for sharing skills and experience, would together help cement a true private-public crime fighting partnership.
3. A system for prioritising suspicious activity reports, to sort the wheat from the chaff at an early stage of processing, would help target law enforcement resources.
4. By giving statutory recognition to ‘accounting services’ we could ensure that all accountants are appropriately qualified and regulated, promoting trust in the ‘gatekeepers’ of the economy by raising their skills and standards, and making sure that all ‘gates’ are guarded with equal vigilance.

The Scottish accountancy body’s guide for addressing the UK regulations lists common sense due diligence steps for evaluating prospective clients:

1. Ascertain and verify the identification of the client;
2. Ascertain and verify the identity of beneficial owners;
3. Gather sufficient information on the purpose and intended nature of the business relationship.

Standard due diligence, as listed above should be done for all clients, while simplified due diligence can be done for financial institutions already subject to money laundering regulations, and enhanced due diligence should be applied where there is greater risk, especially if the client is not physically present.

While in the past, identity or status may have been accepted without question, accountants cannot afford to make assumptions in this regard under the current environment. The potential damage could be catastrophic.

Further details can be found at Flag It Up! How accountants can protect themselves from money launderers

Worldwide Update

Periodic 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. Exposure Draft - Prepayment Features with Negative Compensation (Proposed amendments to IFRS 9), issued April 21, 2017, proposes "minor amendments to the financial instruments Standard, IFRS 9, to enable companies to measure at amortised cost certain prepayable financial assets with so-called negative compensation." The comment period ends May 24, 2017.
2. Disclosure Initiative—Principles of Disclosure –Discussion Paper published March 30, 2017. The IASB has identified that significant concerns about financial statement disclosures center around a lack of sufficient relevant information, while having irrelevant information included, and overall ineffective communication. The Paper suggests new approaches to "help entities apply better judgement and communicate information more effectively; improve the effectiveness of disclosures for the primary users of financial statements; and provide guidelines for improving disclosure requirements in Standards." The comment period ends October 2, 2017.

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

1. International Auditing and Assurance Standards Board (IAASB) –Exposure Draft - ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures – published April 20, 2016, proposes to amend ISA 540. "The proposed standard: enhances requirements for risk assessment procedures to include specific factors related to accounting estimates, namely complexity, judgment, and estimation uncertainty; sets a more detailed expectation for the auditor’s response to identified risks, including augmenting the auditor’s application of professional skepticism; and is scalable regardless of the size or sector of the business or audit firm". The comment period ends August 1, 2017. 2.
2. International Public Sector Accounting Standards Board (IPASB) - Financial Reporting for Heritage in the Public Sector, Consultation Paper, published April 11, 2017, proposes recognition on the statement of financial position of heritage items, described as "those items that are intended to be held indefinitely and preserved for the benefit of present and future generations because of their rarity and/or significance." Measurement and presentation methods are also discussed. The comment period ends September 30, 2017.
3. Accrual Practices and Reform Expectations in the Caribbean, survey report issued March 15, 2017, on the status of IPSAS adoption in area countries.
4. The Accountancy Profession—Playing a Positive Role in Tackling Corruption, – Study Report published February 23, 2017. See first article above for details.
5. Accrual Practices and Reform Experiences in OECD Countries – Study Report published February 24, 2017, jointly developed with the International Organisation for Economic Co-operation and Development, describes the progress of national governments toward accrual based accounting.  

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

1. Insights into Integrated Reporting: challenges and best practice responses – Review Report issued April 13, 2017, with results from 41 corporate reports, indicating benefits from integrated reporting of "more integrated thinking and management; greater clarity on business issues and performance; improved corporate reputation and stakeholder relationships; more efficient reporting; employee engagement and improved gross margins." Also, areas where improvements are needed include value creation, connectivity, defining performance measures, materiality, conciseness, reliability and completeness.
2. MPs: Accountants will be in demand during Brexit process – Survey Report issued February 13, 2017, jointly by ACCA and Association of Accounting Technicians, indicating that compared to negative opinions, twice as many MPs feel "that Brexit will have a positive impact on the accountancy profession, because accountants can advise clients on the implications of exiting the European Union." 

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

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

1. Audit Quality Thematic Review: Firms' audit quality control procedures and other audit quality initiatives – issued March 2, 2017, found that a third of firms required significant improvements in audit quality. Best practices noted that were recommended included having a committee to oversee audit quality, multiple interactive audit quality procedures, initiatives to identify needed improvements and monitor related training, and a higher level of partner involvement.
2. Financial Reporting Exposure Draft (FRED) 67, issued March 23, 2017, proposes to amend FRS 102,the Financial Reporting Standard applicable in the UK and Republic of Ireland, principally by "simplifying the accounting for directors’ loans by small entities by no longer requiring a market rate of interest to be estimated; requiring fewer intangible assets to be separated from goodwill in a business combination, and; permitting investment property rented to another group entity to be measured based on cost (rather than fair value). In addition, amendments proposed to the classification of financial instruments will allow more of them to be measured based on cost (rather than fair value) and fewer entities will be classified as financial institutions required providing enhanced disclosures about financial instruments." The comment period ends June 30, 2017.

Americas, Asia, Australia and New Zealand (AAANZ)

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

1. Receivables—Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities – ASU 2017-08, issued March 30, 2017, to amend the standards to "shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity".
2. Compensation—Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost – ASU 2017-07, issued March 10. 2017, "to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost," by requiring "that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost...are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented." Effective generally in 2018 for public companies and 2019 for other entities, with early application permitted under specified conditions.
3. Plan Accounting: Defined Benefit Pension Plans, Defined Contribution Pension Plans, Health and Welfare Benefit Plans - Employee Benefit Plan Master Trust Reporting – ASU 2017-06, issued February 27. 2017, "to improve the usefulness of the information reported to users of employee benefit plan financial statements and to provide clarity to preparers and auditors. This Update relates primarily to the reporting by an employee benefit plan (a plan) for its interest in a master trust. A master trust is a trust for which a regulated financial institution (bank, trust company, or similar financial institution that is regulated, supervised, and subject to periodic examination by a state or federal agency) serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held." Effective generally in 2018 with retrospective application, and with early application permitted.
4. Exposure Draft - Compensation—Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting – issued March 7, 2017, "to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments." Stock compensation payments for goods and services to nonemployees would be added to the standard that covers stock compensation payments to employees. The comment period ends June 5, 2017. 

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

1. GASB Statement No. 85 – Omnibus 2017, issued on March 20, 2017, addresses ten different accounting and financial reporting issues affecting state and local governments. Effective for periods beginning after June 15, 2017, with earlier application encouraged.

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

1. Exposure Draft – Uniform Accountancy Act and UAA Model Rules – Changes, issued jointly with the National Association of State Boards of Accountancy (NASBA) on March 6, 2017, to incorporate needed changes and updates since the last edition was issued in 2014. The UAA represent best practices to encourage uniformity of the regulation of accountancy practices. The comment period ends on June 1, 2017.
2. Auditing Standards Board – a. Exposure Draft – Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, issued April 20, 2017. "The purpose of the proposal is to help auditors better understand their responsibilities with respect to these audits and to provide financial statement users with more information about auditors' responsibilities, particularly in limited scope audits." The comment period ends on August 21, 2017.
3. Financial Reporting Executive Committee (FinRec) a. Exposure Drafts – Various Implementation Issues in the Aerospace & Defense, Brokers and Dealers, Timeshare, and Power & Utility industries, arising from ASU 2014-09 - issued at various dates from February 1, 2017, through March 28, 2017. The comment periods end May 1, 2017.

Additional A&A News

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

1. Why an accountant is a cybercriminal’s favourite target
2. U.K. Expects to Follow International Accounting Rules Post-Brexit
3. Auditors’ and accountants’ guide to SEC whistleblower awards
4. Revenue Recognition Disclosure Requirements: A Challenge That Can’t Wait
5. Industry body AAOIFI plans standards for Islamic endowments
6. Auditors Can Be Friendly as Well as Skeptical

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]