The Most Important Financial Reporting Stories of 2014


by Edith Orenstein

Financial accounting and regulatory reporting standard-setters and rule-makers had a busy year.

Launching projects like the U.S. Securities and Exchange Commission’s forthcoming Concept Release on Audit Committee disclosures or completing major projects like the joint converged Revenue Recognition standard from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (although the standard could be ‘reopened’ in 2015.) There was also a round of activity from SEC enforcement and rule making initiatives of the Public Company Accounting Oversight Board (PCAOB).

These items and more are highlighted among our pick of our ‘top ten’ posts of 2014:

SEC Chief Accountant Has a Fourth Alternative on IFRS . ‎We called it on this one, hands-down.  What other route other than permitting (or, we recognized, a long-shot, requiring) "supplemental" reporting using International Financial Reporting Standards (IFRS) would stand up to serious concerns among the legal and regulatory community. Not least of which, the LIFO-FIFO option currently available under U.S. Generally Accepted Accounting Principles.

But many other concerns relating to longstanding reporting and usage of U.S. GAAP-based reports in the economy. Questions about the cost-benefit balance, particularly for smaller public companies and in fact any company not currently required to prepare IFRS-based financial reports, remained. In addition, there were  questions about training auditors, academics, students, audit committee members, investors, analysts, and future preparers of financial reporting. Some of the training related questions are not about if but when. But under the current environment, many believed it would be premature to mandate a shift to IFRS.

The SEC Chief Accountant, Jim Schnurr, told attendees at the AICPA's annual conference on current SEC and PCAOB developments that he would be speaking with SEC Chairman Mary Jo White and the other Commissioners 'in the coming months' and that any 'rulemaking proposal' would seek public comment.

Rev Rec Could Return to Standard-Setting  One of the last major chapters in the FASB-IASB's decade-plus of convergence efforts closed with the release of the final revenue recognition standard, in May, 2014. Recognizing transitioning from many sets of standards to the new all-encompassing standard could pose implementation challenges, immediately upon issuance of the standard, the boards announced the formation of a Transition Resource Group.

To say the volume and intensity of transition questions raised have been significant, would be an understatement. To their credit, the FASB has stated it will consider whether to delay the effective date of the new standard. Remarks of the SEC Chief Accountant at FEI's Current Financial Reporting Issues Conference strongly suggested that due to some particularly thorny implementation issues raised, the boards may need to formally clarify particular aspects of the standard. The commonly held belief is that a delay in the standard would go hand-in-hand with a decision to reopen the standard to address such clarifications.

Concerns Linger About FASB’s Going Concern Standard Although the long debated shift in responsibility for making the going concern ‘call’ was moved from auditors to management via the release of FASB’s final standard on going concern, which placed this issue firmly within U.S. Generally Accepted Accounting Principles, not all issues on this topic are going, going, gone. Earlier this year, the PCAOB issued an alert reminding auditors that their responsibilities in this area remain unchanged this year. More recently, PCAOB staff have indicated that as part of making conforming updates to auditing standards, they are considering, based on calls from investors, and perhaps considering what some perceive to be a higher threshold “probable” for arriving at a ‘going concern’ opinion in the new GAAP standard, the question of whether an earlier warning should be made (i.e. short of reaching a ‘probable’ stage), and if so, the auditor’s role in any such ‘early warning.’

‏‎ The Return of the Activist PCAOB? ‎ Investor have called upon the PCAOB to take more aggressive action to complete various standard-setting projects. This call has been supported on the one hand by recent remarks of SEC Chief Accountant Jim Schnurr and Deputy Chief Accountant Brian Croteau, with the SEC calling on the PCAOB to advance their core standard-setting agenda. On the other hand, where the SEC, preparers and auditors appear to differ with certain investor advocates is the former group appears to seek out that the PCAOB ‘return to its knitting’ - with the SEC Chief Accountant’s specific request that the audit standard-setter focus on subjects relating to auditor’s ‘performance’ standards, and presumably focus less on the controversial standard-setting projects related to the auditor’s reporting model, engagement partner disclosure, and possibly audit quality indicators as well. At the recent U.S. Chamber of Commerce conference, some questioned whether the PCAOB was attempting to engage in de facto standard setting via its inspection process, a claim quashed by PCAOB Chairman Jim Doty.

Denial Is Not a Strategy, Whistleblower Watchdog Warns Following the announcement of a $400,000 whistleblower award by the SEC, we brought you this exclusive interview with Sean McKessy, Chief of the SEC’s Office of the Whistleblower. McKessy’s strong advice to public companies to not be in denial about the existence of financial reporting fraud and the need to follow up on leads, from whistleblowers or otherwise, was backed further by the agencies reinvigorated Enforcement stance targeting - and charging – companies, auditors, and other gatekeepers including audit committee members and attorneys.

Cybersecurity Disclosure and Investor Protection: Is Less, More? ‎ ‏‎ If the cyber-attacks on TJMaxx, Target, and other companies wasn’t enough to place the topic at dinner table and water cooler conversations, the cyberattack on Sony Pictures toward year-end made ‘cybersecurity’ a household word. Following on increasing focus by the FBI, Homeland Security, and other agencies, the SEC conducted a public hearing early in 2014 to address if companies were complying with existing disclosure rules aimed at investors (vs. private disclosure to agencies like Homeland Security and others), and if additional SEC rulemaking was in order. It will be interesting to see what further action, if any, may follow from the SEC; as others have said, although sunshine is a disinfectant, too much sunshine burns, and the Catch-22 for the Commission may be balancing investors ‘need to know’ with protecting companies or financial institutions from disclosing sensitive data to their detriment – i.e. putting TMI in the hands of those looking to launch cyberattacks. There could also potentially be a flurry of short sale activity or other sudden decrease in investor confidence, depending on the nature of information disclosed – information that is not already in the public domain or known to those directly impacted, due to other regulatory requirements.

AICPA, SEC Discuss COSO Transition ‎ Unless you spent 2014 under a rock, you know that COSO’s new internal control framework (“COSO 2013”) officially superseded COSO’s landmark 1992 framework, as of Dec. 15, 2014. This impacts every public company – and many private companies as well. Public companies required to attest to the effectiveness of their internal controls under the Sarbanes-Oxley Act, and parallel attestations by their auditors regarding all but the smallest public company clients’ internal controls, need to identify in their year-end filings if they are attesting against the new COSO framework, or remain on COSO 92. Although the updated COSO framework was dubbed “Evolutionary, Not Revolutionary” by Pfizer’s Ray Purcell, who chaired FEI’s Working Group on COSO, some companies and auditors have expressed the need to take a little more time to implement the new standard, which added 17 required principles (and over 70 suggested points of focus) to the COSO vernacular. SEC officials have stated at multiple industry gatherings over the past year, that although they will not ‘challenge’ companies that are still using the ’92 framework, questions will begin next year (not for this year-end), and the longer companies take to move to the new framework, the more likely they will be on the receiving end of not only SEC (and PCAOB) questions, but also challenges from their auditors, investors, and audit committee members.

SEC: FASB Lease Project a ‘Fundamental Sea-Change’ From our coverage of SEC staff comments on the FASB-IASB Leases project at the PLI ‘SEC Speaks’ conference last year, to our coverage of mounting evidence of divergence between the two boards on this project, the anticipated culmination of this standard-setting project in 2015 will be a game-changer, moving billions of dollars of lease obligations from off-balance-sheet footnote disclosures, to the balance sheet itself. The move has been called for by some investor advocates and regulators for decades; others maintain the footnote disclosures were sufficient. Recently, some FASB board and staff members have told industry conferences they retain hope of a more converged solution with the IASB, particularly on income statement matters.

SEC Looks at Changing Audit Committee Reports ‎ ‏‎ We reported when SEC Chairman Mary Jo White announced to the Financial Accounting Foundation – parent of FASB and GASB – her intentions for the SEC to improve audit committee reporting. Jim Schnurr, selected by Chair White this fall to fill the vacancy of Chief Accountant of the Commission, has made audit committee reporting a priority, and his recent remarks at FEI’s CFRI conference and the AICPA SEC conference have signaled that a Concept Release is likely to be issued in early 2015.

Higgins Frames SEC’s Disclosure Project ‎ Following on the SEC’s Congressionally mandated study and Chair White’s announcement at last year’s NACD conference that she intends to make improvements to the SEC’s disclosure regime a priority, Keith Higgins, Director of the SEC’s Division of Corporation Finance described in a fair amount of detail the scope of the Commission’s Disclosure Effectiveness project. Some, like Commissioner Dan Gallagher, have urged that the SEC not abandon one of the early goals of this project – disclosure simplification.

Here are some of the runner-up issues that we covered this year.

Who Drives the Costs of Compliance? FASB, SEC or PCAOB? Cost-benefit. Principles-rules. These are some of the claimed dualities in the world of accounting and regulatory standard-setting. Earlier this year, the FAF released its Post-Implementation Review of one of FASB’s most widely-known standards, the Fair Value Measurement Standard formerly known as FAS 157. Some of the aforementioned dualities – along with questions of procyclicality, countercyclicality, or ‘decision neutral’ information, were among the topics considered as part of FAS 157’s PIR. In a world in which at least three major regulatory forces rein: FASB, SEC and PCAOB, questions regarding ease of implementing on a consistent basis, and auditability come into play in determining the ultimate cost of compliance . As such, this subject is relevant not only to FAS 157 and the knock-on effects relating to auditing fair value and estimates, but also relates to issues being considered around the new rev rec standard, and the upcoming leases standard.

SEC’s ‘Dear CFO’ Letter on XBRL Calculation Requirements  Public companies were reminded via a widely released ‘Dear CFO’ letter to pay closer attention to the calculation requirements behind electronically tagged information that has been required by the SEC for a number of years now, in eXtensible Business Reporting Language or XBRL. We provided some follow-on insights in an exclusive interview with XBRL US’ Campbell Pryde, and Calcbench’s Alex Rapp.