Even with year-end 2015 financial statements, the Securities and Exchange Commission will be looking for disclosures to explain how companies plan to adopt the new accounting standard on revenue recognition in 2018.
In an address to a conference for audit committees, Jim Schnurr, chief accountant at the SEC, said audit committees need to get involved in overseeing corporate implementation of the new standard, which takes effect under both U.S. GAAP and international rules in 2018. Implementation plans should include appropriate disclosures about how the new standard will affect financial statements when it takes effect, said Schnurr. “We expect the level of these disclosures to increase between now and adoption and are looking forward to understanding more about the impacts during our review of the 2015 financial statements,” he said.
Schnurr urged audit committees to ask questions about how the company is implementing the new guidance, a process that is probably behind schedule for many companies, according to a recent survey. “As part of its governance role, I encourage audit committees to review and critically evaluate management’s detailed implementation plan,” he said. The plan should reflect an initial impact assessment, but the assessment is just a first step, he said.
Audit committees should look for a thorough implementation plan with key action steps, estimated timing, and an understanding of how management is tracking against that timing, said Schnurr. The plan must consider not just financial statement effects, but also information systems, business processes, compensation, tax planning strategies, and other contractual arrangements, he said.
Audit committees should ask questions about how management plans to adopt the standard, either under the full or modified retrospective approach, and whether management has the resources it needs to get the job done.
On another front, Schnurr also called on audit committees to get more involved in sorting out concerns around internal controls. Audit committees are in a “unique position,” he said, to understand both management’s financial reporting process and system of internal controls as well as the work done by independent auditors to assess internal controls. That would help the SEC and the Public Company Accounting Oversight Board better understand the current tension in the system over continued pressure from the PCAOB for auditors to improve their audit work.
“I encourage you to engage in a dialogue with your auditors regarding matters such as the auditors’ risk assessment decisions, selection of key controls, and approach to testing these controls in the context of existing guidance from the SEC and PCAOB,” Schnurr said. “You may seek understanding of the critical audit decisions from both the management team and, if necessary, request that the concerns or disagreement between management and the engagement team be elevated to others at the audit firm who may be in a better position to articulate certain aspects of the firm’s audit approach and methodology.”
Better communication would help reduce some of the concerns in the system over internal controls, Schnurr said, who assured audit committees the SEC would continue to “work closely” with the PCAOB on the issue. The SEC met recently with the U.S. Chamber of Commerce to discuss concerns, leading to “a productive start to a dialogue which will continue,” he said.