Here’s a friendly word of caution to companies hoping for help from their auditors in adopting the new revenue recognition standard. They are pretty limited in what they can do.
At a recent Financial Executives International conference on current financial reporting issues, Kevin Stout, senior associate accountant at the Securities and Exchange Commission, said he’s been hearing questions recently about whether auditors can help companies implement the new revenue standard, which takes effect in 2018. Companies reported through a recent survey that many are working through their assessments of how the new rules will affect their financial statements, but a handful are still lagging in getting started on the adoption effort.
As the enormity of the implementation effort becomes clearer and the go-live date gets closer, companies may be feeling a little resource-constrained to get the job done. Auditors, however, will have their hands tied in taking on any kind of proactive role in helping companies adopt.
Auditor independence rules are meant to assure a public company’s external auditors will remain objective in their scrutiny of a company’s financial statements. That means they are prohibited from taking a leading role in helping companies establish any accounting policies, processes or procedures, so they won’t be in a position of auditing their own work.
“When it comes to implementation of the new standard, it’s important to start with the premise that it’s management that takes the lead on the implementation work,” said Stout. “It shouldn’t be the auditor driving that effort.” And companies can reasonably expect the SEC will be on the lookout for auditor independence violations, given its recent focus and enforcement activity of the past few years.
That doesn’t mean companies should plan to shut auditors out of the process either, said Stout. Auditors will need a good understanding of what companies have done to adopt the rules — what processes, systems, and controls have changed — to inform their risk assessments and help them plan their audits. That suggests companies should give auditors plenty of visibility into the implementation effort.
Auditors will need to evaluate what management has done in order to identify audit risks and perform their audits, said Stout. “Auditors may be asked to provide feedback to management on its implementation effort, so we certainly do support auditor input there,” he said.
Some companies are getting nervous about how auditors will assess implementation efforts and whether they may arrive at different views than companies have developed, which is a recipe for tension as the effective date gets closer. Wes Bricker, interim chief accountant at the SEC, said staff is monitoring auditor interpretations as it is the rest of the implementation effort with a goal of keeping everyone on the same page.
The key, says Bricker, “is having a good dialogue now so you have that auditor perspective before financial statements are prepared.”