Tags: accounting | Sarbanes-Oxley | oversight | investor

Sarbox Accounting Oversight Group Discusses Investor Concerns

By    |   Monday, 24 Nov 2014 04:11 PM

The point of this title is to alert investors to the fact that the Standing Advisory Group of the Public Company Accounting Oversight Group, established under the Sarbanes-Oxley Act to oversee accountants and auditors, is thinking about the interest of investors.

It does not mean that investors have become involved in commenting on the issues the staff has raised, which have already been the subject of considerable controversy in the media.

The first of two briefings concerned a practice alert the board issued based on findings by its inspectors as it has examined audits as to their implementation of a new standard on revenue recognition devised by the Financial Accounting Standards Board and the International Accounting Standards Board that give greater scope than previously to judgments and estimates of management.

The IASB strongly prefers principles-based, rather than prescriptive, practice. FASB has agreed on a single standard. Still, the considerable potential exists for fraud, material misstatements, and internal control breaches in this area, which is already prone to it. Auditors are required to understand the products, processes and internal controls, as well as the procedures used by management for making their estimates.

An important area of controversy is service contracts, as the economy continues to move in this direction. One of the briefers, Larry Smith expressed surprise at the number of complaints the new standard has elicited given that many of the issues already existed under GAAP. He expressed astonishment that a bank would stoop to asking how to treat revenue from providing paper statements as opposed to statements posted online. He couldn’t believe that banks consider this a revenue stream. Little did he know that in this era of permanent QE, banks charge extra for each piece of luggage a customer brings to the branch.

A SAG member responded that industry is responding to the sheer number of changes that are occurring at once. He noted that public companies have been reporting similar transactions is widely disparate ways, and this is a cause for concern, especially where judgment is involved. He called for a practice that yields a reasonable band of consistency. Another member lamented that the new standard allows more opportunity for deferring costs and accelerating recognition of revenues than the previous practice did, and he suggested the PCAOB should be concerned.

The second briefing addressed revenue and fair value estimates. Members then discussed the potential for a company to make aggressive revenue estimates that would be consistently higher than those of independent third parties but not so high as to be considered material by auditors, therefore likely to be overlooked.

They said auditors need to find a way to communicate to audit committees and investors that this is happening when they find it. Former FASB Chairman Bob Herz repeated his reference to a finding by a UK auditor that valuation of a put to be “mildly optimistic.” He hoped that American auditors would find ways to provide such “color commentary.”

A leading British auditor fingered financial institutions for attaching valuations to financial instruments that are materially so inconsistent as to put auditors in an awkward situation.

This last point is consistent with a theme of these articles that as long as financial regulators maintain a policy of holding TBTF banks harmless from effective capital regulation, accountants and auditors are marginalized.

How could an auditor question the “going concern” standing of a TBTF bank that has been repeatedly and continuously supported and rescued by the federal authorities? This question should receive more discussion next year as auditors continue to gain experience with the discretion enabled by the new standard.

(Archived video and related materials can be found here. Readers should note that the video has to be accessed by means of Explorer, not Chrome.)

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Robert-Feinberg
The point of this title is to alert investors to the fact that the Standing Advisory Group of the Public Company Accounting Oversight Group, established under the Sarbanes-Oxley Act to oversee accountants and auditors, is thinking about the interest of investors.
accounting, Sarbanes-Oxley, oversight, investor
3785
2014-11-24
Monday, 24 Nov 2014 04:11 PM
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