Update on the current board issues: March 2014

Audit committee issues


Accounting fraud on the rise at US companies

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Accounting fraud and bribery and corruption are two areas that have worsened, according to PwC’s Global Economic Crime Survey of over 5,000 respondents in 99 countries. The survey was conducted between August 2013 and February 2014.

Twenty-three percent of survey respondents reported accounting fraud at their companies while 14% reported bribery and corruption. In 2011, 16% of respondents reported accounting fraud and 7% reported bribery and corruption.

The survey found that, on average, 45% of US organizations suffered from some type of fraud over the past two years, compared to 37% of global companies. And, 86% of US organizations have a whistleblower mechanism, compared to 62% of global organizations.

Other key US survey findings include:

  • More than half of US organizations that experienced fraud in the last two years reported an increase in the number of occurrences in that time period.
  • Economic crime is attributable almost equally to internal actors (50% of crimes) and external actors (45% of crimes), with most internal frauds being committed by middle management.
  • Forty-four percent of organizations that experienced fraud over the previous 24 months were victims of cybercrime, and 44% indicated that they thought it was likely that their organization would be affected by cybercrime within the next 24 months.

SEC chief accountant to audit committees: Audit quality top priority

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One of SEC Chief Accountant Paul Beswick’s recent messages to audit committee members is that audit committees should focus more on audit quality and less on audit fees when selecting external auditors.

In his December speech at the AICPA 2013 Conference on Current SEC and PCAOB Developments, Beswick focused on audit quality as an integral part of the capital market system. He stated that choosing the external auditor is a large part of ensuring the integrity of those markets.

“Anecdotally, when I hear about auditor changes, I very often hear it in the context of fee reductions,” Beswick said. “I worry that audit committees may be focusing too much on the amount of the fee and not focusing enough on the expected audit quality. This is not to say that audit committee members should not focus on making good business decisions. But I believe focusing on audit quality is completely consistent with making good business decisions.”

During the Practising Law Institute’s SEC Speaks event in February, Beswick had a similar message. His talk and slide presentation also focused on the role and responsibilities of the audit committee. He said that audit committees are in a unique position to represent investors and play an important role in promoting high-quality financial reporting.

He listed the responsibilities of the audit committee:

  • Independent review and oversight of a company’s financial reporting processes, internal controls, and independent auditors
  • Resolution of disputes between management and the independent auditor
  • Pre-approval of audit and non-audit services
  • Overseeing written communications between management and the independent auditor

In his presentation, Beswick also pointed out the SEC and listing exchange requirements of audit committees, such as the appointment, compensation, and oversight of the independent auditor; overseeing the independence of audit committee members; and content and disclosure of the audit committee charter.

In addition to Beswick’s comments at the SEC Speaks event, SEC Chair Mary Jo White and the other commissioners spoke about such issues as the regulator’s no-admit/no-deny settlement protocol and increasing financial reporting gatekeeper accountability.

White told attendees that after announcing the change in the settlement protocol for those cases involving egregious conduct where a large number of investors and markets were at significant risk, the SEC was able to resolve some cases with admissions.

“And now that we have resolved a number of cases with admissions, you have specific examples of where we think it is appropriate to require admissions as a condition of settlement,” she said. “My expectation is that there will be more such cases in 2014 as the new protocol continues to evolve and be applied."

Commissioner Kara Stein focused on increasing the accountability of gatekeepers, including accountants and attorneys.

“Gatekeepers fulfill a critical role in allowing participants to access the capital markets,” Stein said. “As the Commission is being tasked with overseeing more, with fewer resources, the focus on gatekeepers is both an efficient and effective approach to policing the securities marketplace.”

“This focus on gatekeepers will empower securities professionals, compliance officers, accountants, and lawyers to actively look for red flags, ask the tough questions, and demand answers. Actions will be brought when professionals fail to fulfill their responsibilities.”


PCAOB to hold roundtable on auditor’s reporting model in April

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The Public Company Accounting Oversight Board (PCAOB) will hold a public roundtable on April 2 - 3 to gather additional feedback on its August 2013 proposal on the auditor's reporting model.

The audit regulator expects the roundtable to include investors, investor advocates, senior executives, audit committee chairs of major corporations, representatives from audit firms, and academicians, among others, according to a PCAOB press release. An agenda and list of panelists will be released shortly before the event. The meeting will be held at The Westin Washington, DC, City Center Hotel and will be available by webcast.

The PCAOB’s proposed auditing standard would require the auditor to disclose additional information in the auditor’s report about the audit and the auditor. Among other matters, the proposed standard would require auditors to include in the audit report a discussion of critical audit matters specific to the audit. For more information about the proposal, read BoardroomDirect August 2013 (Audit committee issues).

"We received many thoughtful, reasoned comments on the Board's proposal and this public meeting is intended to further explore the issues," said PCAOB Chairman James R. Doty.


FASB narrows insurance contracts project scope

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On February 19, the FASB decided to scale back the scope of its project on insurance contracts.

This decision is important for non-insurers, as it narrows the applicability of any new guidance to insurance entities only. For insurers, the FASB voted to narrow the scope to identifying targeted improvements to US GAAP. These decisions likely signal the end of joint efforts with the IASB to issue a new, mostly converged standard on accounting for insurance contracts.

The FASB’s decisions were in large part due to feedback from US investors and preparers who favored targeted improvements to existing US GAAP in the event that substantial convergence with the IASB’s proposed insurance model became unlikely. One of the key unresolved differences was the IASB’s support for, and the FASB’s rejection of, an explicit risk adjustment in the proposed present value of cash flows model.

For more information about the FASB’s insurance contract project, read PwC’s In brief: FASB narrows insurance contracts project scope – Convergence unlikely.