Transcript 889294 SEC comment trendsx

SEC Comment Trends
and PCAOB Update
Greg Coy
Audit Partner
Keith Zapp
Audit Senior Manager
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SEC comment trends
SEC review process
• All issuers are reviewed at least once every three years
• Percentage of issuers reviewed:
FY09
FY10
FY11
40%
44%
48%
• Targeted risk-based and corporate governance reviews
• Staff is listening to analyst/earnings calls, reviewing press releases and
websites, and issuing comments
• Emailing comment letters and new closing letters
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SEC comment trends
• Insights into focus areas from
SEC comment process
• New — Frequent comments
on IPOs
• Industry appendices:
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Financial services
Retail
Energy and resources
Life sciences
Technology
Telecommunications
• Available at
deloitte.com/us/SpecialReports
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SEC comment trends (cont.)
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Contingencies
Income taxes
Long-lived assets and impairment testing
Investments and other-than-temporary impairments
Fair value
Management’s discussion and analysis (MD&A)
Non-GAAP financial measures
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SEC comment trends (cont.)
Contingencies
• The overarching theme of the staff’s comments on loss contingencies
is risk
– Settlement may be material
– Accrual may not cover ultimate liability
– Underlying assumptions may change
• Timing of the recognition of a loss contingency
• Disclosures about contingencies should be specific rather than generic
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SEC comment trends (cont.)
Contingencies (cont.)
• The staff often requests:
– More specifics on the nature of a matter
– Increased quantification of:
• Amounts accrued
• Reasonably possible loss or range of loss
– Increased clarity on:
• Judgments and assumptions underlying significant accruals
• Timely reporting of new developments
– Enhanced disclosure of accounting policies for legal costs and recoveries
• Consistency of disclosures both within filings and with other filings and
communications
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SEC comment trends (cont.)
Income taxes
• The staff comments have become increasingly focused on risk.
For example:
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Registrant will have to repatriate earnings to meet current liquidity demands
Historical effective tax rate is not sustainable and may increase materially
Net deferred tax assets are not realizable
Tax positions taken during the preparation of returns will ultimately not be
sustained
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SEC comment trends (cont.)
Long-lived assets and impairment testing
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Timing of goodwill impairment disclosures
Determination of asset groupings used in goodwill impairment testing
MD&A disclosures related to goodwill and critical accounting estimates
Long-lived assets at risk of impairment
– Frequency of impairment tests
– Factors used to evaluate recoverability of assets
– Facts and circumstances leading to impairments
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SEC comment trends (cont.)
Investments and other-than-temporary impairments
• Factors, negative and positive, used to make conclusions on other-thantemporary impairments (OTTI)
• Underlying assumptions used to determine that an investment is not
other-than-temporarily impaired
• Was the OTTI recorded in the appropriate period
• Equity security OTTI: SAB Topic 5.M considerations
• Debt security comments:
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Why longer duration credit losses are not indicative of credit losses
Whether interest payments continue to be received timely
How various significant inputs were considered
Additional questions regarding:
• Cash flow projection assumptions
• Credit ratings and credit spreads
• How credit enhancements affect registrant’s OTTI conclusion
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SEC comment trends (cont.)
Fair value
• Additional disclosures about valuation methods and assumptions
are needed
• Determination of fair value classification in the fair value hierarchy
(i.e., Level 1, 2, or 3)
• Quantitative and qualitative MD&A disclosures about the impact of fair
value measurement:
– Techniques
– Assumptions
– Related financial statement changes
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SEC comment trends (cont.)
Management’s discussion and analysis
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Recurring themes
Introductory or overview section
Early warning disclosures
Liquidity and capital resources discussion
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SEC comment trends (cont.)
Non-GAAP financial measures
• Be consistent in use of non-GAAP measures
• Cannot be misleading
• Recent compliance and disclosure interpretations provide greater
flexibility on use
• Non-GAAP financial measures should not be presented with greater
prominence than GAAP measures
• Titles of non-GAAP measures should not be confusingly similar to
GAAP measures
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Question and answer
PCAOB update
PCAOB Update
• Areas of focus
• Auditor independence and firm rotation
• Auditor’s report
• Audit committee communications
• Disclosure of engagement partner and other participants in
audits
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Areas of focus
Board level
Standard setting
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• Auditor independence,
• Audit risks in certain
including consideration of
emerging markets
mandatory firm rotation
• Potential for a 2011 year• Auditor’s reporting model
end audit risk alert
• Communications with audit
committees
• Auditor transparency —
Identification of the
engagement partner and
other public accounting
firms involved in the audit
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Inspection process
International issues
Focus on enforcement
Aggressive standard
setting agenda
Recent practice alerts
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Auditor independence and firm rotation
Objective: To enhance auditor objectivity, independence, and professional
skepticism. However, the concept release focuses on firm rotation.
Doty speech
on topic
June 2, 2011
Comments due
to PCAOB
August 16, 2011
Concept
release issued
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December 14, 2011
Q1 2012
PCAOB public
roundtable
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Auditor independence and firm rotation (cont.)
The PCAOB wants data and analysis through the comment process:
• Analysis of auditor tenure and inspection findings
• Request for data regarding potential costs and disruption
• Other alternatives responsive to improving auditor objectivity and
professional skepticism
One cannot talk about audit quality without discussing independence,
skepticism, and objectivity. Any serious discussion of these qualities
must take into account the fundamental conflict of the audit client
paying the auditor. That leads to consideration of firm rotation as a
counterweight to that conflict.
— PCAOB Chairman James Doty
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Auditor independence and firm rotation (cont.)
Deloitte’s preliminary views on firm rotation
• Objectivity is central to the role auditors play in the capital markets
• Mandatory firm rotation will not benefit investors, as the perceived
benefits will be outweighed by the costs
– Risk that rotation will reduce, not enhance, audit quality
– Limits audit committees’ freedom of action with respect to auditor selection
– Loss of continuity of knowledge coupled with increased costs to issuers
• We will offer alternatives that enhance auditor independence, objectivity,
and professional skepticism
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Auditor independence and firm rotation (cont.)
Engaging in the debate on firm rotation
Discuss the concept release with your colleagues in senior management
and with the audit committee
• Express your views on your experience with auditors, their objectivity,
and impacts of Sarbanes-Oxley
• Consider data about the cost of rotation to your company
• Are there alternatives to firm rotation you would support?
Messages from corporate America will resonate better than the views of
accounting firms on this issue. And letters from audit committees will
resonate the most with the PCAOB.
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Auditor’s report
Objective: To re-evaluate the auditor’s reporting model with a view toward
increasing transparency and relevance to financial statement users.
Concept
release issued
June 21, 2011
Comments due
to PCAOB
September 15, 2011
PCAOB public
roundtable
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September 30, 2011
Q2 2012
Proposed
standard expected
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Auditor’s report (cont.)
Four alternatives presented in the concept release:
• Inclusion of an Auditor’s Discussion & Analysis (AD&A) section
• Required and expanded use of “emphasis of matter” paragraphs in the
auditor’s report
• Reporting on information outside the financial statements
• Clarification of certain language in the auditor’s report
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Auditor’s report (cont.)
Deloitte’s recommendations:
We submitted our comment letter to the PCAOB on September 30.
We support responsible changes to the auditor’s report that meet the
following overarching principles:
• Auditors should not be the original source of disclosure about an entity
• Any changes:
– Need to enhance, or at least maintain, audit quality
– Should narrow, or at least not expand, the expectations gap
– Should add value and not create investor confusion
• Auditor reporting should focus on objective information rather than the
subjective
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Auditor’s report (cont.)
Deloitte’s recommendations:
Our recommendations for changes to the auditor’s report:
• Include an additional paragraph that references those footnotes in the
financial statements which the auditor has determined are the most
important to a user’s understanding of the financial statements
• Require the auditor to provide assurance on the portion of the
Management’s Discussion and Analysis related to critical accounting
estimates
• Provide more information, in a form prescribed for all audits, about what
an audit is and the responsibilities of the auditor, management, and the
audit committee
Overall, however, we believe a holistic approach to improving financial
reporting is necessary and warranted.
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Auditor’s report (cont.)
Comment letter themes
Investors
Issuers and audit
committees
Auditors
• Want more information
directly from auditors
• Concerned with
suggestion that auditors
be the direct source of
information
• Believe current assurance
model is the correct model
• Support auditors providing
more information
regarding audit
procedures performed
• Open to providing more
information about
procedures performed and
clarifying auditor’s report
• Do not want to be direct
source of information
• Concerned about
expanded reporting within
current filing deadlines
• Suggest management
reporting and audit
committee reporting be
considered at same time
• Concerned about making
current audit committee
communications public
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Management estimates
Critical accounting policies
Risk areas
Difficult or contentious
issues
Audit procedures
performed
Name of partner
Other firms/networks
involved in the audit
Better explanation of
reasonable assurance and
responsibility for fraud
detection
Auditor communications
with the audit committee
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Audit committee communications
Objectives:
• Enhance relevance and effectiveness of communications
• Emphasize the importance of effective, two-way communications between the
auditor and the audit committee
Proposed
standard issued
March 29, 2010
PCAOB public
roundtable
May 28, 2010
Initial
comments due
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September 21, 2010
Q4 2011
PCOAB to
re-propose standard
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Audit committee communications (cont.)
Communications required by the proposed standard
New or expanded
requirement
Significant issues discussed with management before the auditor’s
appointment or retention
Establish a mutual understanding of the terms of the audit
Expanded
Overview of the audit strategy and timing of the audit
New
Accounting policies, practices, and estimates
Expanded
Auditor’s evaluation of the quality of the company’s financial reporting
Expanded
Other information in documents containing audited financial statements
Management consultations with other accountants
Going concern
New
Corrected and uncorrected misstatements
Departure from the standard auditor’s report
New
Disagreements with management
Difficulties encountered in performing the audit
Other matters significant to the oversight of financial reporting process
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New
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Audit committee communications (cont.)
Additional requirements in proposed standard:
• Auditor to evaluate two-way communications with the audit committee
• If communications not adequate, auditor to consider:
– Communicating with full board
– Modifying opinion
– Withdrawing from engagement
Communication requirements in other standards would remain in place:
• Material weaknesses and significant deficiencies in internal control
• Fraud and illegal acts
• Management representations
• Communications in connection with interim reviews
• Preapproval of services
• Independence matters
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Audit committee communications (cont.)
Comment letter themes
Investors
Issuers and audit
committees
Auditors
• Support the proposal and
the new requirements
• Believe current auditor
communications
appropriate and effective
• Concerned new
requirements will:
– Stifle communications
– Impede ability to focus
on most important
issues
– Lead to information
overload
• Proposal fails to recognize
role played by
management
• One way evaluation of
communications not
meaningful
• Willing to provide more
information to audit
committees
• Do not believe increasing
requirements will make
communications more
effective
• Concerned about
evaluating
communications
– No criteria
– Implications unclear
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Disclosure of engagement partner and other participants
in audits
Current
status
Objective
Proposed
amendments
by the
PCAOB
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• PCAOB proposed amendments for comment on October 11, 2011
• Comment letter period closes on January 9, 2012
• To increase transparency of public company audits by providing
investors with information about certain participants in the audit
• Require disclosure of the name of the engagement partner:
– In the audit report
– In Board’s Annual Report Form 2
• Require disclosure in the audit report of:
– Other independent public accounting firms
– Other persons that took part in the audit
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Question and answer
Deloitte publications and resources
• Subscribe to free publications:
– Heads up — Periodic updates of accounting developments
– Accounting roundup — Monthly summary of standard-setting and regulatory
projects
– Roadmap — Interpretive accounting manual on particular accounting topics
– Numerous other publications at www.deloitte.com/us/subscriptions
• Register to receive notifications for free Dbriefs webcasts
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– Register at www.deloitte.com/us/dbriefs
• Subscribe to our online library of accounting and financial disclosure
literature (Technical Library: The Deloitte Accounting Research Tool)
– See more information at www.deloitte.com/us/techlibrary
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Contact information
Greg Coy
[email protected]
(317) 656-4309
Keith Zapp
[email protected]
(317) 656-4379
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