Auditors have gotten the cattle prod from their profession to take a hard look at whether corporate disclosures about pending new accounting standards are adequate.
The Center for Audit Quality issued an alert to all public company auditors to remind them that the Securities and Exchange Commission is taking a dim view of vague or boilerplate disclosures under Staff Accounting Bulletin No. 74. That’s the SEC directive that tells companies they must alert investors about new accounting standards they will adopt in future periods and how the company’s balance sheet may change as a result.
“Auditors should focus on evaluating the adequacy of these SAB 74 disclosures and related controls,” the CAQ advises.
Companies have plenty of major new accounting standards they’ll be adopting over the next few years. New requirements for recognizing revenue in financial statements take effect in 2018, followed by new requirements for bringing leases on to the balance sheet in 2019. New rules for measuring and classifying financial instruments and a new method of recognizing impairments on financial instruments also are on the horizon.
The SEC has said through numerous venues that it will be expecting companies to make both quantitative and qualitative disclosures about the expected effects of all that accounting change, and that it expects disclosures to include incrementally more detail as effective dates approach.
The CAQ alert tells auditors to keep in mind the SEC’s expectations with respect to a comparison of accounting policies under the current and pending new accounting, the status of implementation, and the effects on not only the balance sheet and income statement but also footnote disclosures. That’s in addition to disclosure of the quantitative effect of the new accounting if it can be estimated, or disclosure that expected impact can’t be estimated if that’s the case.
The CAQ tells auditors that timely progress on effective implementation of new accounting standards is critical. “Preparers, their audit committees, and auditors should discuss the status of implementation, including changes in internal control over financial reporting,” the CAQ advises. “Registrants should ensure implementation of new accounting standards is a high priority within the organization.”
The alert goes further to remind auditors that registrants need to consider whether they have adequate controls in place to assure robust SAB 74 disclosures. It also suggests auditors should be reviewing SAB 74 disclosures during reviews of interim financial information.