Accounting And Auditing

PCAOB Pushes for More Scrutiny of Related-Party Transactions

May 14, 2013

Auditors will soon have to follow new rules requiring them to dig deeper into transactions that appear out of the ordinary and to scrutinize business dealings with executives' family members, large shareholders, former executives, and other related-party transactions. Some say the PCAOB's proposal on related-party transactions is long overdue. "The proposed new standard gets rid of the old 'don't worry too much about this' mentality," says Brian Mayhew, associate professor at the University of Wisconsin in Madison.
 

Making Changes to Pay Plans? Don't Forget the Accounting

May 07, 2013

When companies make changes to their executive compensation plans they often overlook the accounting consequences. As public companies gravitate toward performance-based plans, for example, they face more mark-to-market accounting. And adding clawback provisions creates other accounting headaches. Some changes leave accountants scratching their heads: "It certainly must not be accountants designing these plans," says Doug Reynolds, a partner at Grant Thornton.
 

In Search of Insolvency Clues

April 30, 2013

Investors have demanded better warning signs for insolvency recently, and the Financial Accounting Standards Board has been working on identifying ways to require companies to send up a red flag when concerns about continuing as a going concern arise. It's no easy task. "Everyone wants to know what the magic warning sign is, but I can't say there's a single one," says Esther DuVal, managing director at CBIZ Corporate Recovery Services.
 

KPMG Insider-Trading Scandal Leaves Some Clients in the Lurch

April 23, 2013

An insider-trading scandal has left KPMG reeling, but it has also created a crisis for audit clients pulled into the fray, including Skechers and Herbalife. The companies must find new auditors and submit to new audits going back as far as 2010, which could require a substantial amount of rework. "The new audit firm would not want to rely on anything that team did," says Brian Fox, founder of audit services firm Confirmation.com.
 

Court Ruling Buoys IRS's Hard Line on Deferred Compensation

April 16, 2013

The Internal Revenue Service is aggressively pursuing those who claim discounted stock options as qualified deferred compensation. The IRS says it doesn't comply with Section 409A, and a Court of Federal Claims recently agreed. The ruling is cause for companies to review their option granting practices. "For the IRS to slap this penalty on a taxpayer who it seems tried to comply with 409A is a little disheartening," says Lori Basilico, a partner at law firm Edwards Wildman Palmer.
 

The End of U.K. GAAP

April 16, 2013

U.S. companies will have to start producing financials for all their British subsidiaries under a new financial reporting rulebook next year, as the United Kingdom phases out its version of Generally Accepted Accounting Principles. While most public U.K. companies moved to International Financial Accounting Standards by 2005, private companies and subsidiaries have had the option to remain on U.K. GAAP. In 2015, that will no longer be an option. More details inside.
 

When Buybacks Get Complex, So Does the Accounting

April 09, 2013

Companies flush with cash are conducting increasingly complex stock buybacks, some with thorny accounting implications. Buybacks with forward repurchases, written put options, and those involving derivatives, for example, can invite accounting scrutiny. "Essentially you are pulling very complicated accounting rules down upon yourself," says Bruce Pounder, director of professional programs at training firm Loscalzos.
 

Internal Audit Continues a Push Into Risk Management

April 02, 2013

The role of internal audit continues to evolve. New requirements from Nasdaq and the Federal Reserve emphasize practices such as analyzing the effectiveness of risk management, monitoring compliance with stated risk tolerances, and other risk-based responsibilities. "Stakeholders are stepping up their expectations of internal auditors," says Richard Chambers, CEO of the Institute of Internal Auditors.
 

PCAOB Proposes Reorganization of Auditing Standards

March 27, 2013

The Public Company Accounting Oversight Board is preparing to reorganize the entire collection of auditing standards into a topical structure under a single numbering system, much the way accounting standards were reorganized and published in a new format in 2009. More details inside.
 

Big Companies Filing More Restatements, But on Smaller Matters

March 26, 2013

The largest public companies filed more financial restatements for the second straight year in 2012, although the significance of their restatements overall continued to decline. More restatements on smaller matters could be due to increased pressure from regulators to improve audit quality. "There is the potential some of what we are seeing here is connected to inspection reports," says Chris Wright, managing director at consulting firm Protiviti.
 

Courts Making It Harder to Blame the Auditor for Fraud

March 19, 2013

With a string of recent successes by audit firms in fending off fraud claims, public companies may find themselves shouldering the legal burden alone when injured investors file litigation. Several decisions by courts have set a tougher legal standard on claims against auditors. "The Supreme Court has thrown up some serious hurdles in claims against auditors," says Trace Schmeltz, a partner with law firm Barnes & Thornburg.
 

PCAOB Inspections Find Modest Improvement in Small Firm Audits

March 12, 2013

Inspections by the Public Company Accounting Oversight Board have found that smaller firms are reducing the number of audit deficiencies, even as larger ones have more. Audit experts say the results don't necessarily mean that smaller firms are making bigger improvements in audit quality. "It's hard to compare why there are more deficiencies with larger firms than smaller ones," says Gaylen Hansen, a partner with Colorado regional audit firm EKS&H.
 

Clock Ticking on Applying Income Reclassification Standard

March 05, 2013

The Financial Accounting Standards Board approved a new method last month to explain to investors where companies have reclassified amounts out of "other comprehensive income" into net income. While the standard is fairly straightforward, calendar year-end companies will have to apply it to first-quarter financial statements. "It's not often we see guidance come out that is effective so quickly," says Stuart Moss, a partner at Deloitte & Touche.
 

FASB Goes With 'Three-Buckets' Approach to Financial Instruments

February 26, 2013

The Financial Accounting Standards Board has finalized its proposal on financial instruments, calling for a mixed use of historical cost and fair value. Some changes in value will be recognized in earnings and others through equity, depending on how a company manages or plans to use the instruments. "The idea is to reduce the number of models and reduce complexity," says Sydney Garmong, a partner with Crowe Horwath.
 

Many Companies Unprepared for Coming Derivatives Regulation

February 20, 2013

Non-financial companies are just starting to awaken to the complexities of new derivatives regulation. The added requirements include burdensome documentation rules, and with some rules still not finalized, uncertainty is adding to the struggle. "Companies that use derivatives to hedge normal business risks ... are playing catch up," says Gail Bernstein, special counsel at law firm Wilmer Hale.
 

Audit Firms Passing PCAOB Scrutiny to Clients

February 12, 2013

The Public Company Accounting Oversight Board has been pushing external audit firms to get tougher on internal controls. Now, auditors are, in turn, turning up the heat on companies. "It stands to reason that if the PCAOB is finding reasons to be critical of the work external auditors have done in controls or financial reporting, the auditors would place expectations on the company," says Hal Garyn, vice president of the Institute of Internal Auditors.
 

Taking Measure of a Multitude of Measures

January 29, 2013

Sure, accounting can be complex, but after considering all the different measurement models accountants need to apply, the system seems downright Byzantine. It seems as if there are almost as many measurement attributes as there are things to measure. Inside, Columnist Scott Taub highlights several models and their variants as he argues for a simpler—or at least smaller—group of accounting measures.
 

Auditors Are Seeking More Information From Internal Investigations

January 29, 2013

External auditors, under pressure to improve audit quality, are increasingly demanding to see behind the curtain of internal investigations that could affect financial statements—a request often at odds with the interests of lawyers conducting the investigations who want to keep the information privileged. "Privilege has always been a barrier to seeing what's going on in an investigation," says Peter Bible, a partner with audit firm EisnerAmper.
 

No Clear Solutions in Audit Standoff With China

January 23, 2013

As U.S. regulators press forward with their pursuit of access to documentation from audits conducted in China, public companies with units or subsidiaries there are becoming increasingly concerned that the countries won't be able to resolve the conflict. As few solutions emerge, some are wondering if Big 4 and other leading global audit firms could see their China affiliates barred from practicing before the SEC. More inside.
 

FASB Wants Companies to Predict and Book Future Credit Losses

January 15, 2013

The Financial Accounting Standards Board has issued a proposed accounting standards update that will require companies to predict credit losses and likely book higher reserves, even before cash flow begins to suffer. While the standard will apply to all companies, the change is intended to give investors an earlier warning that a financial firm may be headed for trouble based on its debt securities and loan portfolio. More details inside.
 

Time for Voluntary Disclosure Agreements on Unclaimed Property?

January 08, 2013

Cash-strapped states are waging a campaign to seize unclaimed property, prompting legal experts and auditors to alert the most vulnerable companies to explore voluntary disclosure agreements or brace for oppressive, costly audits. "They want absolute proof—basically a criminal standard—that property isn't unclaimed," says Diane Green Kelly, a partner at law firm Reed Smith.
 

2013 to Bring More Waiting on Accounting and Audit Answers

January 02, 2013

Answers to the big accounting questions, such as a decision on International Financial Reporting Standards, seem as far off as ever. In the coming year many of the same uncertainties in accounting and auditing as the one just ended will linger, giving public companies good reason to buckle up for another wild ride. Inside, we look at what the coming year holds for accounting and audit developments.
 

Auditors to Focus on Internal Controls After Poor Inspection Results

December 18, 2012

Public companies can expect extra scrutiny of their internal control over financial reporting in the upcoming audit cycle after regulators warned auditors to fix lingering problems. The Public Company Accounting Oversight Board said the percentage of audits with inadequately supported opinions on internal control over financial reporting rose to 22 percent of cases examined in 2011, from 15 percent in 2010. "Those numbers are too high," said PCAOB member Jeanette Franzel.
 

Lawsuit Exposes Gaps in Loss Contingency Disclosures

December 18, 2012

Yahoo announced in late November that it was facing a $2.7 billion penalty as a result of a lawsuit in Mexico it lost against a phone directory company. The verdict surprised investors, since Yahoo hadn't reported the potential outcome as part of its loss contingency disclosure. The Financial Accounting Standards Board and the SEC have made such disclosures a top priority in recent years, after complaints about too many litigation surprises. Details inside.
 

Audit Firm Rotation Idea Scrapped?

December 10, 2012

For more than a year, audit regulators have threatened to impose mandatory audit firm rotation. But now that drastic idea seems finally to be heading to the dustbin—at least for the foreseeable future. At a recent conference two Public Company Accounting Oversight Board members suggested that a way forward for mandatory audit firm rotation would be difficult. "I struggle to see how we would ever do a mandatory rotation standard," said PCAOB member Jay Hanson.
 

H-P's Autonomy Debacle Raises Several Accounting Questions

December 04, 2012

The battle over accounting fraud allegations between Hewlett-Packard and former executives of the Autonomy unit that it acquired last year grows more bizarre by the day. In the latest volley, Autonomy founder Michael Lynch blames potential problems on differences in U.S. and international accounting rules. The episode raises a series of questions, including who's to blame when the due diligence for a major acquisition goes wrong.
 

Next Wave Prepares to Report Uncertain Tax Positions

November 27, 2012

Companies are preparing to close the books on 2012, and this year a new set of companies will be swept into reporting uncertain tax positions. That means tax departments are busy shoring up uncertainties and planning how they will deal with varied unresolved tax issues. The best way to comply just may be eliminating the need by clearing up tax positions and correcting mistakes. Full details inside.
 

Internal Audit Departments Preparing for Rapid Change in 2013

November 20, 2012

Chief audit executives are developing their 2013 audit strategy, and the plans are shaping up to look very different than they did in 2012, say audit advisers. Companies expect to devote more resources to internal audit next year, given the larger mandate to focus on areas like data security. "Internal audit is being asked to play a more active role in that space," says Jason Pett, internal audit services leader for PwC.
 

Prepare for a Grilling by Auditors During This Year's Close

November 13, 2012

Financial reporting executives are beginning plans for the year-end close, and it could be a rocky one. Revenue recognition, impairments, allowances for loan losses, subjective accruals, and other items are expected to attract attention from audit firms this year. "Anywhere there are subjective estimates that companies are using to support future growth or profitability, there will be pressure," says Mike Santay, a partner at Grant Thornton.
 

When Permanent Reinvestment Assertions Just Don't Hold Up

November 06, 2012

Companies are bracing for big changes to U.S. tax policy on earnings held offshore, and they are considering how to convey the risks of those potential changes to investors. Meanwhile the SEC, and auditors, are testing company assertions that foreign earnings should be free of U.S. income tax. "Regardless of who wins the election, there is going to be significant change in tax law," says Don Jones, a partner at accounting firm Crowe Horwath.
 

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