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SEC signals continued intensity around internal controls

Tammy Whitehouse | November 29, 2016

With the year-end audit cycle rapidly approaching, regulators are sending signals that their expectations around internal control over financial reporting are not diminishing.

At a recent conference for Financial Executives International, staff members at the Securities and Exchange Commission said they continue to believe there’s more to be done to improve internal controls, and they’re happy to mediate any disputes companies may be having with their auditors. Good dialogue between preparers and auditors is critical to making continued progress, said Wes Bricker, recently appointed chief accountant at the SEC after the retirement of James Schnurr. “Don’t delay the conversation just because you think it’s hard,” said Bricker. “Have the conversation now. Have a reconciliation of views now before you get into the audit period.”

In 2015, the SEC and the Public Company Accounting Oversight met with a number of preparer and audit groups to try to sort out the continued tension over internal controls. PCAOB inspections have driven auditors to increase their demands for audit evidence and documentation, prompting companies to push back and assert the demands were excessive. Kevin Stout, senior associate chief accountant in Bricker’s office, said the staff continues to believe steps outlined by regulators in late 2015 still have the potential to address issues continued issues around internal controls.

“It is apparent the steps have not yet yielded the full benefits we expected,” said Stout, perhaps in part because that informal guidance emerged too late in the year to affect the 2015 year-end audit cycle. “Open, timely communication is critical.”

That’s not to say companies haven’t made any progress in the current year, said Stout. “It’s evident progress has been made,” he said. Last year, the hot button issue was the design and operating effectiveness of management review controls, he said. “That’s has been addressed with some success.”

Today, the focus is more on risk assessments and determining the population of controls that must be tested, said Stout. “Preparers, audit committees, and auditors continue that discussion regarding risk assessments,” he said. “We expect management and auditors may have different perspectives. Dialogue is critical to bridging those differences and getting to an audit strategy that’s effective and efficient.”

The Public Company Accounting Oversight Board will have more to say on the subject when it participates in panel discussion in early December at a conference of the American Institute of Certified Public Accountants. Stout, a Big 4 partner, a corporate controller, and a board member will also participate in the discussion.