Focus On Audit Committees, Accounting And The Law - December 2012 - Accounting Standards

This blog provides a legal perspective on developments in accounting standards, financial reporting, auditing and regulation of the accounting profession. Our primary focus is on identifying and analyzing developments that are important to audit committees and their advisers.

Blog author Tom White is a partner in the firm's Corporate practice who regularly advises companies, audit committees and accounting firms on accounting and auditing matters. Tom is co-chair of the National Conference of Lawyers and CPAs.

SEC Approves PCAOB Standard for Auditor Communications

December 18, 2012 11:00 AM

On December 17, the Securities and Exchange Commission approved the Public Company Accounting Oversight Board's Auditing Standard 16—Communications with Audit Committees. The new standard will apply to audits for fiscal years beginning on or after December 15, 2012. Note that AS 16 has also been incorporated into the PCAOB's standard for reviews of interim financial statements (SAS No. 100 or AU 722). Therefore, some aspects of the standard will come into play in the first quarter of 2013 for issuers with calendar fiscal years. In addition, the SEC expressly determined under the requirements of the JOBS Act that application of AS 16 to emerging growth companies is "necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation." (For more information on AS 16, see our newsletter, PCAOB Focuses on Audit Committee Interactions with Auditors.)

News from the AICPA's Annual Conference

December 10, 2012 9:12 AM

The American Institute of Certified Public Accountants' annual conference on Current SEC and PCAOB Developments is always a source of news about accounting and financial reporting matters. Among the noteworthy items at this year's conference, held on December 3-5 in Washington:

PCAOB Inspections and Audit Committee Outreach: James Doty, Chairman of the Public Company Accounting Oversight Board, highlighted the PCAOB's new five-year strategic plan (more on that in a subsequent post), in particular its objective to provide more timely audit firm inspection reports. He also indicated that the PCAOB anticipated issuing summary reports on insights from inspections, and other topics, prepared "with an eye on, among other things, getting useful information to audit committees." Mr. Doty also observed that "[a]udit committees have a role in fostering not just integrity in management's reporting, but the vitality and viability of the independent audit" and stated an audit "is not something to be procured from the lowest cost supplier." (Mr. Doty's keynote address can be found here.)
IFRS: Paul Beswick, Acting Chief Accountant of the Securities and Exchange Commission, had little to report on SEC consideration of International Financial Reporting Standards. He noted that the staff "will work with our new Chairman [Elisse Walter] and our existing Commissioners on determining the next steps in this process. So please stay tuned." (Mr. Beswick's remarks can be found here.)
Disclosure Framework: Mr. Beswick announced that the SEC staff intends to hold a roundtable next year to consider issues relating to the appropriate "dividing line" between what information should appear in the financial statements versus the "broader financial reporting package," such as MD&A.
Auditor Independence: Mr. Beswick noted that some accounting firms are actively growing non-audit consulting practices. He questioned "whether accountants' expanding practices into areas unrelated to their primary competencies weakens public trust." He also expressed concern that such expansion has the potential to "distract a firm's leadership and other personnel from providing appropriate attention to their audit practice" and suggested that it "runs the risk of damaging the accountant's reputation." PCAOB Chair Doty also alluded in his remarks to the fact that large audit firms' revenues from consulting are growing rapidly while audit fees have stagnated and suggested that "[t]his threatens to weaken the strength of the audit practice in the firm overall."
Mandatory Firm Rotation: PCAOB Member Jay Hanson was quoted in press reports to the effect that many obstacles to implementation of mandatory rotation make him believe it is unlikely the PCAOB will go forward. PCAOB Chair Doty reiterated his oft-stated view that it was "important to reexamine how we protect the auditor's independence, including by considering term limits."
Internal Control Over Financial Reporting (ICFR): Both Mr. Beswick and Brian Croteau, Deputy Chief Accountant, noted that even though some smaller issuers and emerging growth companies have been exempted from the ICFR audit requirement of Section 404(b) of the Sarbanes-Oxley Act, management's responsibilities for evaluating and reporting on ICFR are not in any way changed. Mr. Croteau also noted that the Committee of Sponsoring Organizations (COSO) has a project to update its 1992 internal control framework, which is the framework applied by virtually all public companies in designed their ICFR systems. (Mr. Croteau's remarks can be found here.)
PCAOB Standard-Setting: PCAOB Chief Auditor Martin Bauman noted the Financial Accounting Standards Board's project to require periodic management evaluations of the company's ability to continue as a going concern. He indicated that the PCAOB intends to propose a revised standard for the auditor's consideration of going concern shortly after the FASB issues its exposure draft on going concern in 2013. Mr. Bauman also confirmed that the PCAOB intends to issue a proposal for changes in the auditor's report during the first half of 2013. (Mr. Bauman's remarks can be found here.)

Auditing Standard 16 Developments

December 3, 2012 9:13 AM

The Public Company Accounting Oversight Board's new Auditing Standard 16—Communications with Audit Committees—remains pending before the Securities and Exchange Commission. Only a handful of comments on the standard have been filed. The comment letter filed by the United States Chamber of Commerce objected to AS 16 on the principal ground that the PCAOB did not conduct an adequate cost-benefit analysis to support applying AS 16 to emerging growth companies, as defined in the Jumpstart Our Business Startups (JOBS) Act. The JOBS Act exempts emerging growth companies from new PCAOB auditing standards, unless the SEC affirmatively finds that applying the standard to audits of such companies "is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation." Interestingly, the PCAOB filed a written response disagreeing with some of the Chamber's comments. The deadline for SEC action on the standard is December 17.

Meanwhile, audit committees, companies and their advisers should focus on the new standard's requirement that the auditor inquire of the audit committee "whether it is aware of matters relevant to the audit, including but not limited to violations or possible violations of laws and regulations." Auditors already have responsibilities to implement audit procedures to consider the effect of possible legal violations by the audit client. Section 10A of the Securities Exchange Act imposes obligations on public company auditors with respect to the detection, investigation and reporting of illegal acts. Current Auditing Standard 12 requires auditors to make inquiries of audit committees regarding matters related to fraud, alleged fraud or suspected fraud affecting the company, as well as tips or complaints about the company's financial reporting (including through the whistleblower hotline) and the audit committee's responses to such tips and complaints. Similarly, management is required to provide information in response to inquiries from the auditors about compliance with laws and regulations and to make certain representations regarding legal compliance in its management representation letter. AS 16 adds another formal step to this process. Audit committees will need to respond forthrightly to the auditor's inquiries but at the same time should be carefully advised about how to respond. Among other things, committee members will need to ensure that they present information in a way that does not risk encroaching on attorney-client or attorney work-product privileges.

FASB Standard-Setting Activity

November 30, 2012 12:30 PM

Randy McClanahan of Johnson Barton Proctor & Rose LLP in Birmingham, Alabama, regularly provides the ABA Business Law Section Law and Accounting Committee with invaluable summaries of the status of major accounting standards under consideration by the Financial Accounting Standards Board. These summaries are a great way for non-accountants to follow standard-setting developments. Read Randy's November 2012 summary.

DOJ and SEC Issue FCPA Guidance

November 20, 2012 3:30 PM

On November 14, the Department of Justice and the Securities and Exchange Commission jointly issued guidance on the Foreign Corrupt Practices Act. As discussed in this WilmerHale Client Alert, the guidance provides detailed information on the agencies' joint FCPA approach and priorities. This guidance is important for audit committees for several reasons. Many committees have oversight responsibilities with respect to legal and regulatory compliance, which can encompass anti-corruption laws. And the FCPA's requirements for public companies to maintain accurate books and records and effective internal accounting controls—which are separate from the FCPA's anti-bribery provisions—relate directly to the company's financial reporting. In fact, the guidance explains that internal controls over financial reporting includes "various components" such as "the tone set by the organization regarding integrity and ethics," "risk assessments," "policies and procedures designed to ensure that management directives are carried out," "information and communication" and "monitoring." The DOJ and SEC provide detailed information in the guidance on the elements of an adequate FCPA compliance program. Audit Committees and/or Boards should review their companies' compliance programs with management in light of the guidance. The guidance also provides suggestions with respect to appropriate FCPA due diligence in M&A transactions.
-- Tom White with Kimberly Parker

FASB Moving Forward on Going Concern Standard

November 14, 2012 4:47 PM

The Financial Accounting Standards Board (FASB) has decided to proceed towards developing a new financial reporting standard for management's assessment of going concern. Historically, US auditing standards have required an auditor to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern for at least one year. However, accounting standards have not included a requirement for management to assess a company's ability to continue as a going concern. FASB has been considering whether to adopt such rules for several years.

As described in FASB's Action Alert summarizing its November 7 meeting, under the new model:

Management would assess at each reporting period (including interim periods) an entity's potential inability to continue as a going concern and the need for related disclosures. Management would consider the likelihood of an entity's potential inability to meet its obligations as they become due for a reasonable period of time.
Management would be required to provide financial statement disclosures when management concludes that it is more likely than not that the entity will not be able to meet its obligations in the ordinary course of business for a reasonable period of time. In assessing the need for disclosure, management would be able to consider the effect of mitigation plans, unless they involve actions outside of the ordinary course of business.
If management concludes it is probable that the entity will not be able to meet its obligations in the ordinary course for a reasonable period of time, it must state that there is substantial doubt about the entity's ability to continue as a going concern. In making this determination, management may consider the effect of all management plans.
For these purposes, a reasonable period of time would be 12 months from the end of the reporting period. In addition, management's assessment would consider the effect of existing events or conditions that are probable of resulting in an entity's inability to meet its obligations beyond the initial 12 months, but not to exceed a total period of 24 months.
FASB does not specify any bright-line percentages for defining more likely than not and probable.

FASB intends to hold additional discussions on the going concern project in December 2012 and issue an exposure draft implementing the standard by March 2013.

CAQ Issues Guide on PCAOB Inspections

November 12, 2012 11:38 AM

The Center for Audit Quality, which represents accounting firms that audit public companies, has issued a Guide to PCAOB Inspections (October 2012) that describes the Public Company Accounting Oversight Board's process for inspecting firms that audit public companies and for reporting on the results of the inspections. The Guide covers some of the same territory as the PCAOB's recent release on Information for Audit Committees on the PCAOB Inspection Process. The Guide states that the PCAOB's reviews have "a significant influence on audit quality" and concludes that "[I]nvestors can take comfort from the fact that audit firms are subject to rigorous and regular PCAOB inspections."

Court Considers Sarbanes-Oxley Act Privilege for PCAOB Inspections

November 1, 2012 3:15 PM

A recent case from the Western District of Missouri highlights the significant privilege issues that surround the Public Company Accounting Oversight Board's inspection and disciplinary processes. In Bennett v. Sprint Nextel Corp., the court held that documents and information prepared by KPMG for a PCAOB inspection were privileged under Section 105(b)(5)(A) of the Sarbanes-Oxley Act and therefore not subject to production in civil litigation. The documents in question included direct communications between the PCAOB inspectors and KPMG about KPMG's audit of Sprint, the PCAOB's comment about inspection issues and KPMG's draft and final responses, documents that would have revealed specific questions or inquiries from the PCAOB, documents prepared internally by KPMG to gather information about the audit for purpose of the inspection and a presentation which was used by KPMG at the kick-off meeting with the inspectors and later provided to a handful of Sprint employees. The court concluded that all of these documents were privileged under the Sarbanes-Oxley Act because they were prepared "specifically for" the PCAOB within the meaning of Section 105(b)(5)(A), since, absent the inspection, they would not have existed.

The court also held that KPMG had not waived the Sarbanes-Oxley privilege. While the Sarbanes-Oxley Act and PCAOB rules do not provide that disclosure to third parties waives the PCAOB privilege, the court looked to waiver principles under the attorney-client privilege and work product doctrine. The court cited emails and board minutes as showing that KPMG had informed Sprint that the inspection had taken place, but the evidence did not show that the details or substance of the investigation was divulged. And even though the kick-off presentation was divulged to Sprint employees, this "limited communication [was] inadequate to cause a wholesale waiver."

The Bennett case illustrates why accounting firms are often reluctant to disclose the PCAOB's non-public findings regarding their quality control systems. Under the Sarbanes-Oxley Act, these findings are not made public by the PCAOB if the firm remediates the quality control issues to the satisfaction of the PCAOB within 12 months. While firms are not barred from disclosing the PCAOB's non-public findings to their audit client, doing so runs the risk that plaintiffs in civil litigation will assert that such disclosure waived the privilege applicable to the non-public inspection reports and other internal and external communications about the PCAOB's inspections.

Contributed by Jaclyn Moyer

IFRS Foundation Issues Analysis of SEC Staff Report on IFRS

October 29, 2012 2:15 PM

On October 22, 2012, the Trustees of the IFRS Foundation, the governing body of the International Accounting Standards Board, issued a Staff Analysis addressing the Final Staff Report issued in July 2012 by the SEC's Office of Chief Accountant regarding the SEC staff's Work Plan to study incorporation of International Financial Reporting Standards into the US financial reporting system. The IFRS Foundation's analysis responds to various concerns raised in the SEC staff report, including the role of the IASB as global accounting standard-setter, issues related to IFRS as global accounting standards, means of transitioning to IFRS, and other challenges in the transition to IFRS.

Notably, the IFRS Foundation's analysis questions the viability of incorporating IFRS into US GAAP on a standard-by-standard basis (the so-called "condorsement" method). The analysis concludes: "While the size of the US economy relative to other jurisdictions presents significant challenges that are unique to the US, the experience of other countries suggests that many of the challenges can be overcome with the appropriate political will to make a commitment to the mission of a single set of global standards."

PCAOB Holds Third Public Meeting on Mandatory Audit Firm Rotation

October 23, 2012 3:10 PM

On October 18, 2012, the Public Company Accounting Oversight Board held its third public meeting on mandatory audit firm rotation in Houston. Back in August 2011, the PCAOB, concerned about what it saw as continuing instances of lack of independence, objectivity and professional skepticism by auditors, issued a Concept Release regarding possible fundamental changes in the audit process such as mandatory periodic rotation of audit firms. The Board held previous hearings on the subject in Washington in March and San Francisco in June.

The Board heard from academics, public company financial and accounting officers, audit committee members, institutional investors, and representatives of the accounting profession and accounting firms. The Board also heard from a representative of the European Commission, who described the EC's proposal to require mandatory rotation for auditors of certain public companies. (The participants' written statements can be found here.)

As at prior meetings, the public company executives and audit committee members (including the CEO of the National Association of Corporate Directors) did not favor mandatory rotation. They also expressed skepticism about alternatives such as "mandatory retendering," where an issuer would be required to put the audit out to bid periodically, but could decide to retain the incumbent. Much of the discussion focused on the role of the audit committee and whether audit committee oversight can be strengthened to help address the concerns identified by the PCAOB. Many participants expressed support for some degree of enhanced disclosure by audit committees about their decisions to select and retain auditors.

At the conclusion of the meeting, PCAOB Chairman James Doty appeared to indicated that the Board will continue to consider the subject. Notably, referring to the over 600 comment letters opposing MFR, he said that "numerosity should not determine this issue."

New Guide for Audit Committee Annual Evaluation of the External Auditor

October 23, 2012 3:08 PM

A group of seven leading governance and professional organizations has issued an important Guide for Audit Committee Annual Evaluation of the External Auditor (October 2012). Audit committees' prescribed functions have always encompassed evaluating the performance of the audit in connection with a decision to retain the auditor for a succeeding period. This guide provides a framework and specific recommendations for a process to be followed by the audit committee in conducting an annual assessment of an issuer's external audit firm and the firm's personnel. The guide highlights important areas for the assessment to cover, and suggests specific questions for the audit committee to ask in each area. The areas covered include:

Quality of the services and sufficiency of resources provided by the auditor
Communication and interaction with the auditor
Auditor independence, objectivity and professional skepticism

The guide indicates that it is appropriate to obtain observations about the audit from management, internal audit and others within the company. It provides a sample survey for obtaining this input.

Finally, the guide suggests that "audit committees should consider advising shareholders that they perform an annual evaluation of the auditor and explain their process and scope of the assessment." Such disclosures are not currently required by SEC rules.

CAQ Issues Practice Aid on Communications About PCAOB Inspections

October 23, 2012 3:06 PM

On October 10, the Center for Audit Quality, a professional organization composed of public company auditing firms, issued a practice aid to assist accounting firms in discussing the Public Company Accounting Oversight Board's inspection process with audit committees. In August the PCAOB issued a release designed to provide information to audit committees about its inspection process for registered public accounting firms and to suggest inquiries committees might make to their auditors about inspections. The CAQ practice aid addresses the process from the audit profession's perspective. Its recommendations are consistent with and reinforce the PCAOB's guidance.

The practice aid encourages an audit firm to provide timely information to the audit committee if the company's audit was selected for inspection. The practice aid also encourages the firm to provide information on changes in quality control systems as a result of the PCAOB inspection process. The guidance covers communications about:

Whether the issuer's audit was selected for inspection and, if so, the status of the inspection and any adverse findings by the PCAOB about the audit, the issuer's financial statements or internal control over financial reporting, or the auditor's independence
Information about the firm's response to the PCAOB's findings about the audit of the issuer, including whether or not the firm performed additional audit procedures
Information described in the PCOAB inspection report that, while not involving the issuer's audit, involves issues and audit approaches similar to those that arose in the audit of the issuer's financial statements
What steps the firm is taking to address issues identified—in PCAOB reports or other quality inputs—with respect to its system of quality control
Whether issues described in PCAOB reports describing inspection results generally related to the issuer's audit and how the firm is addressing those issues.

SEC Commissioner Walter Comments on IFRS

October 23, 2012 3:01 PM

In an October 2 speech to the ABA International Law Section, SEC Commissioner Elise Walter discussed the prospects for incorporation of International Financial Reporting Standards in the U.S. Addressing international coordination of securities regulation, Commissioner Walter cited IFRS as an example of circumstances where the SEC's efforts "might take longer than perhaps our foreign colleagues would hope." She said, "While I continue to believe that converged standards are important to serving the interests of investors in the increasingly global capital markets, we cannot incorporate IFRS unless and until we are confident that it will serve U.S. investors well. For IFRS, I continue to think that we will get there eventually, but the timeframe is uncertain."

Auditing Aspects of Conflict Minerals Rule

September 13, 2012 10:35 AM

On August 22, the Securities and Exchange Commission adopted its long-awaited rule on Conflict Minerals Disclosure. The rule was mandated by the Dodd-Frank Act to respond to human rights violations by armed groups in the Democratic Republic of Congo (DRC), who are financing their activities through trade in certain "conflict minerals" originating in that country. It requires new public disclosures with the Securities and Exchange Commission by companies for which conflict minerals are necessary to the functionality or production of products they manufacture or contract to manufacture. Such companies must conduct a reasonable inquiry to determine the minerals' country of origin. If, based on that inquiry, the company knows or have reason to believe the minerals originated in the DRC or an adjacent country, the company must perform due diligence to determine whether or not the minerals finance or benefit the activities of armed groups identified as perpetrators of human rights abuses. The required due diligence measures include an independent private sector audit of the conflict minerals report, performed in accordance with U.S. government auditing standards. The auditor must meet the qualification and independence standards prescribed in government standards.

A conflicts mineral audit differs from, and will not be part of, a company's financial statement audit. The SEC does confirm in its release that a reporting company can retain the same firm that audits its financial statements to perform the conflict minerals audit, without violating the SEC's auditor independence rules. However, the audit of the conflict minerals report would be considered a "non-audit service" subject to the SEC's audit committee pre-approval requirements. In addition, the fees related to the audit would need to be included in the "All Other Fees" category of the reporting company's principal accountant fee disclosures in its proxy statement.

PCAOB Adopts New Auditing Standard on Audit Committee Communications

August 15, 2012 11:46 AM

On August 15, the Public Company Accounting Oversight Board adopted a new Auditing Standard No. 16 that prescribes the communications that an auditor must make to the audit committee of its client. The new standard seeks to enhance the "relevance, timeliness and quality" of the information conveyed by the auditor to the audit committee, particularly with respect to the auditor's assessment of significant risk of financial statement misstatement and other matters that could affect the integrity of the financial statements, and to promote constructive dialogue, as opposed to "check the box" communications, between the auditors and the committee. While the Board emphasized that it has no authority over audit committees as such, it expressed the view that its new standard should assist the committee in fulfilling its oversight responsibilities.

Auditing Standard 16 is the first PCAOB standard adopted since passage of the JOBS Act. The JOBS Act provides that new auditing standards may be applied to audits of emerging growth companies only if the SEC specifically determines that the application of the standard "is necessary or appropriate in the public interest, after considering the protection of investors, and whether the action will promote efficiency, competition and capital formation." The PCAOB's standard by its terms will apply to emerging growth companies, and the PCAOB will ask the SEC to approve that.

In many respects, Auditing Standard 16 codifies communications practices already followed by many auditors and audit committees. Subject to SEC approval, it will be effective for audits for periods beginning after December 15, 2012.

Meredith Cross Comments on Contingency Disclosures

August 3, 2012 11:45 AM

At the ABA Business Law Section annual meeting on August 3, Director of the SEC Division of Corporation Finance Meredith Cross provided her perspective on loss contingency disclosures in light of the FASB's recent decision to drop its disclosure project. Cross indicated that the FASB action probably will not change Corp Fin's approach to the subject in comment letters. She said that Corp Fin was generally satisfied with the improvement in disclosures on loss contingencies but emphasized that companies needed to continue to pay attention to the issue. She said she did not expect that contingency comments will be included in every comment letter, though (consistent with a theme she articulated in other remarks) whether to include such comments will be a matter of "professional judgment" for the staff reviewer. The staff will continue to look closely at situations where a company announces a big settlement without having foreshadowed it at all in previous disclosures. She also said that the staff is sensitive to the need not to impair a company's litigation posture and has been willing to allow aggregation of disclosures as one means of addressing the problem.

ABA Panelists Comment on JOBS Act Accounting Provisions

August 3, 2012 11:44 AM

On August 3, a panel on the JOBS Act at the annual meeting of the ABA Business Law Section in Chicago discussed the Act's accounting standard deferral provision for emerging growth companies. That provision allows EGCs to take advantage of delayed effective dates for private companies of the applicability of new accounting standards. Panelists observed that to date few EGCs appear to have opted in to this provision. That is not totally surprising since as of now there are no new accounting standards with deferred effective dates and therefore no benefit to an EGC. The panelists noted, among other things, that not adopting new standards may create issues for EGCs such as lack of comparability to other companies, questions from investors as to what their financial statements would look like if "full public-company GAAP" were applied, and unfavorable disclosures about the effect of the deferral. These considerations may outweigh the temporary benefits of avoiding application of a new standard for a relatively short period, often just one fiscal year.

Apropos of this, Director of the SEC Division of Corporation Finance Meredith Cross indicated that EGCs who elect the accounting standard deferral should not expect transition relief for when they lose EGC status. A company that exceeds $1 billion in revenues in a fiscal year, it will have to report using public-company GAAP for that fiscal year. An EGC will have to carefully monitor its revenue projections and plan for converting to full-public company GAAP reporting if it appears that it will top the revenue threshold. This possibility also likely will impede use of the accounting standard deferral.

PCAOB Releases Information For Audit Committees on Its Inspection Process

August 1, 2012 9:05 AM

On Wednesday, August 1, the Public Company Accounting Oversight Board issued a release on "Information for Audit Committees About the PCAOB Inspection Process." The release explains how the PCAOB conducts its inspections of auditors and what the reported results of an inspection signify. The PCAOB also provides suggestions to audit committees about matters that an audit committee should address with a company's auditor. These include:

whether the audit overseen by the audit committee was selected by the PCAOB for an inspection and whether any findings were made;
potentially relevant inspection findings on other audits performed by the firm;
the firm's response to PCAOB findings; and,
the firm's remedial efforts in light of any quality control deficiencies that may have been identified by the PCAOB.

The PCAOB release is likely to be viewed as outlining best practices for audit committees in this area. Audit committees should review the release carefully and include these matters on their agendas for communications with auditors.

SEC Staff Issues IFRS Report

July 16, 2012 4:35 PM

Late on Friday, July 13, the Staff of the SEC's Office of Chief Accountant issued its final report on its Work Plan to study incorporation of International Financial Reporting Standards into the U.S. financial reporting system. The Staff's report brought to a close the latest phase of the SEC's long running exploration of possible adoption of IFRS in the US. That phase began in February 2010, when the Commission reaffirmed its support for the goal of convergence of US generally accepted accounting principles and IFRS, and released a Staff Work Plan that laid out areas of inquiry for the SEC's consideration of the issue. At that time, the SEC indicated it aimed to make a decision on adoption of IFRS by 2011 (a target it obviously did not meet).

The report concluded that adoption of IFRS as the US system of accounting standards was not favored by the vast majority of participants in the US capital markets. The Staff did find support for exploring other methods of incorporating international standards. This may include the so-called "condorsement" approach outlined by the staff in 2011. Under condorsement, US. GAAP and IFRS would remain separate systems but the Financial Accounting Standards Board would adopt international standards over time.

It remains to be seen what the Commission will do next concerning IFRS.

Not coincidentally, Friday the 13th was the last day for SEC Chief Accountant James Kroeker. Deputy Chief Accountant Paul Beswick has been appointed Acting Chief Acountant.

FASB Drops Contingency Disclosure Project

July 10, 2012 4:28 PM

On July 9, the Financial Accounting Standards Board brought to an end its longstanding project to consider expanding the disclosures to be included in financial statements about contingencies, particularly litigation contingencies. FASB initiated the project in 2007 based on concerns that companies' disclosures were not adequately informing financial statement users about the potential impact of litigation on a company's financial condition. FASB issued proposals to modify the standard—formerly known as "FAS 5" and now codified at Accounting Standards Codification 450-20—in 2008 and 2010—to provide significant additional disclosures about pending or threatened litigation. Both proposals engendered strong opposition from the business and legal communities due to concerns that expanded disclosures about a company's litigation posture could prejudice the company's position and invade the attorney-client privilege.

By a 5-2 vote, the FASB decided not to pursue the project further. The majority concluded that improving disclosures of loss contingencies was a matter of enforcing compliance with the existing disclosure standard, not adopting new standards.

Since 2010, the SEC staff has scrutinized companies' contingency disclosures and issued numerous comment letters addressing whether companies were complying with the letter of ASC 450-20. In particular, the SEC has emphasized compliance with the existing requirement of ASC 450-20 that where a loss is "reasonably possible," the reporting company must provide an estimate of the possible loss or range of loss, or explain why an estimate cannot be made. The staff has also stressed the need for reporting companies to reassess their disclosures each period to take into account developments in a lawsuit.

While FASB has decided to stand down, the SEC can be expected to continue its efforts to compel compliance with the standard. Auditors also can be expected to continue to focus on loss contingency disclosures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

United States: Focus On Audit Committees, Accounting And The Law - December 2012