Integra International Audit & Accounting Alert – February 2021 (Issue 2)

by Caras & Shulman | Feb 25, 2021 | Audit & Accounting Alert

AT-A-GLANCE

For the past quarter century, every two years the Association of Certified Fraud Examiners (ACFE) has issued a comprehensive analysis of the impact of financial fraud. However, with the rise of the coronavirus pandemic this past year, the ACFE has supplemented the biennial report with quarterly updates assessing specifically the impact of COVID-19 on fraud within organizations. This issue of the Audit & Accounting Alert summarizes the latest findings.

Our Worldwide Update is again split into two sections. The first covers COVID-19 news from organizations across the globe, while the second covers other news.

Gerald Herter – Editor

Challenges to Financial Reporting and Audit Oversight

Insights from a PCAOB insider and recent SEC and FEI reports

The United States Securities and Exchange Commission (SEC), as the financial reporting watchdog, and the Public Company Accounting Oversight Board (PCAOB), as overseer of the auditors, are continually challenged to maintain a consistent approach in performing their regulatory function. For example, in January 2021, the SEC approved a revision to the auditor independence rules that the PCAOB had issued in November pursuant to SEC changes instituted last summer. The new rules loosened up loan relationships between individuals related to a company and its auditors that were deemed inconsequential and not jeopardizing independence. Auditors welcomed what was considered an onerous and overreaching regulation while investors were understandably wary.

Recently, J. Robert Brown, upon stepping down from his position as a Board Member of the PCAOB, gave his impressions in an article titled The Future of Audit Oversight. Also in January 2021, the Anti-Fraud Collaboration (AFC) issued a new report, Mitigating the Risk of Common Fraud Schemes: Insights from SEC Enforcement Actions. The AFC was formed by the by the Center for Audit Quality (CAQ), Financial Executives International (FEI), The Institute of Internal Auditors (The IIA), and the National Association of Corporate Directors (NACD). Rounding out the January coverage, the FEI shared the viewpoints of those inside the corporate ranks, with their report, Where Are We Now? The Story of ICFR at Large Public Companies as Told by Financial Executives.

Brown offers suggestions to drive more effective fulfillment of the PCAOB’s responsibility for investor protection in the midst of the monumental changes brought about by the pandemic, continued undetected financial frauds, investors seeking assurance elsewhere, and the growing influence of environmental, social and governmental factors. Brown points out that while the PCAOB was established to take over where self-regulation had fallen short, the standards initially employed by the PCAOB were largely taken from those governing self-regulation, and are still in need of updating. At its core, the PCAOB is designed to provide the independence lacking at the audit firm level, where maximizing adherence to standards stands in conflict with the goal to maximize profits. Also, a balance of principles and rules is necessary. To illustrate, Brown indicates the lack of precision in describing terms such as inconsequential and material, as well as questioning whether required “unpredictable” audit procedures have in reality become too predictable.

Brown goes on to encourage stepping back to consider the big picture issues during inspections, so as not to get bogged down with a checklist approach to standards and requirements compliance. Following up on enforcement matters should include assessing audit firm disclosure requirements and maintaining the public database of auditor information. Especially relevant nowadays are the Chinese audit firms which are tasked with gaining Chinese governmental approval for the release of workpapers to the PCAOB inspectors.

Overriding Brown’s concerns is the need for the audit profession to take steps to retain relevancy. With investors now having a variety of other readily available sources for company information and analysis, auditors need to aggressively embrace continual technological changes and implement updated audit techniques. The PCAOB is called upon to involve and communicate with investors to stay apprised of their needs and desires.

The Anti-Fraud Collaboration’s report offers insights into the financial reporting fraud that Brown includes in his concerns. The AFC reviewed a couple hundred of the SEC’s Accounting and Auditing Enforcement Releases (“AAERs”) from the 2014-2019 timeframe with a goal to “provide observations on higher risk areas that are susceptible to fraud and insights into what companies can do to identify and mitigate these types of fraud risks more effectively.”

The January 2021 issue of the Audit & Accounting Alert covered the Association of Certified Fraud Examiners (ACFE) broad-based global report on occupational fraud. The AFC report focuses more narrowly on financial statement fraud uncovered in SEC public company filings. The most prevalent frauds found were:

improper revenue recognition
reserves manipulation (e.g., inadequate reserves for known liabilities)
inventory misstatement
impairment issues

While there were multiple root causes, the study also found misleading or inaccurate financial statement disclosures, material weaknesses in internal controls, and unsupported journal entries. Characteristics that often played a part in the frauds involved tone at the top, high-pressure environments, business challenges, and lack of adequately experienced personnel. The motivations tended to be familiar ones, such as pressure to meet analyst expectations, increased supplier costs, and slowing demand for products. With the pandemic, these circumstances can only expect to become more prevalent.

The AFC report concludes that “the key to protecting companies against fraud is vigilance, a continued resolve to exercise skepticism, and attention to the potential risks. Companies should remain focused on the fundamentals—controls, processes, and environments that impact financial recordkeeping and decision-making—and company-specific risks by conducting regular risk assessments.”

Over and against the PCAOB and SEC positions, the Financial Executives International (FEI) published a report on January 19, 2021, Where Are We Now? The Story of ICFR at Large Public Companies as Told by Financial Executives, that airs the objections of those from within the corporate domain, citing the onerous and impractical documentation requirements coupled with a lack of adequate guidance. Nevertheless, when considering Internal Controls over Financial Reporting (ICFR), Andrej Suskavcevic, CAE, President and CEO of Financial Executives International and Financial Education & Research Foundation, emphasized that finance executives “remain committed to fostering a healthy ICFR ecosystem.”

The FEI report states that the COSO framework is widely followed, but that additional concrete guidance and real-world examples are sought. Especially difficult areas for designing, implementing, and operating controls include non-routine transactions, the income tax provision, and access to data. Conversely, documentation requirements are sensed as excessive for control areas such as routine estimates, data processing and disclosures. Furthermore, while acknowledging the need to better keep up with technological changes, respondents were hesitant to implement new advances, voicing concerns for a lack of qualified personnel and the prospect of additional control risks brought on by the changes. Even so, the new technologies are expected to have a helpful impact on reducing risk in areas such as those addressing the failure to prevent material misstatements, unauthorized alteration of accounting information, failure to detect material misstatements by the external auditors, and failure to detect material misstatements internally.

The ongoing commitments of the PCAOB, SEC and FEI, and the positive tension among these and similar organizations, as they mutually pursue efforts toward the improvement of financial reporting, bodes well for the benefit of companies, auditors, regulators and investors, alike.

Further details can be found at The Future of Audit Oversight, Mitigating the Risk of Common Fraud Schemes: Insights from SEC Enforcement Actions, and Where Are We Now? The Story of ICFR at Large Public Companies as Told by Financial Executives.
(The Future of Audit Oversight | PCAOB (pcaobus.org)), (Mitigating the Risk of Common Fraud Schemes – Mitigating the Risk of Common Fraud Schemes (thecaq.org)), and (FERF Report Reveals Biggest ICFR Pain Points for Large Public Companies – FEI (financialexecutives.org)).

Covid-19 related actions and activities by audit and accounting organizations throughout the world.

Coronavirus (COVID-19) Updates

Covid-19 related actions and activities by audit and accounting organizations throughout the world.

IASB – International Accounting Standards Board (www.ifrs.org)

Coronavirus Information and resources – link – https://www.ifrs.org/news-and-events/2020/03/the-coronavirus-and-the-foundations-work/

IFAC – International Federation of Accountants (www.ifac.org)

COVID-19 Resources from IFAC’s Network – link – https://www.ifac.org/knowledge-gateway/series/COVID-19-resources-ifacs-network
International Ethics Standards Board for Accountants (IESBA) – Ethical and Auditing Implications Arising from Government-Backed COVID-19 Business Support Schemes, guidance released jointly on January 26, 2021, with the UK Financial Reporting Council (FRC), highlights ethical and auditing implications arising from government-backed business support programs which have been utilized at unprecedented levels during the COVID-19 pandemic.

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com)

Coronavirus Information and resources – link – https://www.accaglobal.com/us/en/cam/coronavirus.html

CIMA – Chartered Institute of Management Accountants (www.cimaglobal.com)

Update on the Coronavirus and Impact for Association Activities – link – https://www.cimaglobal.com/Members/Update-on-Coronavirus/

IIRC – International Integrated Reporting Council (www.theiirc.org)

No new developments

WORLD ECONOMIC FORUM (www.weforum.org)

The COVID Action Platform – link – https://www.weforum.org/platforms/covid-action-platform – focuses on three priorities: 1. Galvanize the global business community for collective action. 2. Protect people’s livelihoods and facilitate business continuity. 3. Mobilize cooperation and business support for the COVID-19 response.

Africa, Europe, India and the Middle East (AEIME)

FRC – Financial Reporting Council of the UK (www.frc.org.uk)

FRC guidance for companies and auditors during COVID-19 crisis – link – https://www.frc.org.uk/covid-19-guidance-and-advice.

ICAEW – Institute of Chartered Accountants in England and Wales (https://www.icaew.com/)

Coronavirus – updates – link – https://www.icaew.com/insights/coronavirus.

EFRAG – European Financial Reporting Advisory Group (www.efrag.org)

No new developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA – American Institute of Certified Public Accountants(www.aicpa.org)

AICPA Coronavirus (COVID-19) Resource Center – link – https://www.aicpa.org/news/aicpa-coronavirus-resource-center.html

FASB – Financial Accounting Standards Board (www.fasb.org)

FASB Response to COVID-19 – link – https://www.fasb.org/COVID19

GASB – Governmental Accounting Standards Board(www.gasb.org)

GASB Response to COVID-19 – link – https://www.gasb.org/COVID19

COSO – The Committee of Sponsoring Organizations of the Treadway Commission(www.coso.org)

No new developments

PCAOB – Public Company Accounting Oversight Board (www.pcaob.org)

PCAOB Response to COVID-19 – link – https://pcaobus.org/Pages/response-to-COVID-19.aspx

SASB – Sustainability Accounting Standards Board (www.sasb.org)

No new developments

SEC – Securities and Exchange Commission (www.sec.gov)

SEC Coronavirus (COVID-19) Response – link – https://www.sec.gov/sec-coronavirus-covid-19-response

CAANZ – Charted Accountants Australia New Zealand (https://www.charteredaccountantsanz.com/)

Financial Reporting and Audit Guide: Financial reporting and audit issues stemming from COVID-19 – link – https://www.charteredaccountantsanz.com/tools-and-resources/client-service-essentials/reporting/financial-reporting-and-audit-guide-financial-reporting-and-audit-issues-stemming-from-covid19

Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.

IASB – International Accounting Standards Board (www.ifrs.org)

Exposure Draft – Regulatory Assets and Regulatory Liabilities, issued January 28, 2021. For companies subject to rate regulation, the new standard “would introduce a requirement for companies to give investors such information by reporting regulatory assets and regulatory liabilities in their balance sheet, and related regulatory income and regulatory expense in their income statement.” The comment period ends June 30, 2021.

IFAC – International Federation of Accountants (www.ifac.org)

International Ethics Standards Board for Accountants (IESBA) – The International Code of Ethics for Professional Accountants – Revisions to the Code Addressing the Objectivity of an Engagement Quality Reviewer [EQR] and Other Appropriate Reviewers, issued January 14, 2021, “addressing the eligibility of an individual to serve in an EQR role, focusing on the critical attribute of objectivity.” Effective December 2022.
International Ethics Standards Board for Accountants (IESBA) – Exposure Draft, Proposed Revisions to the Definitions of Listed Entity and Public Interest Entity in the Code, issued January 29, 2021, proposes to “broaden the definition of a public interest entity (PIE) to include more categories of entities, given the level of public interest in their financial condition, for the purposes of additional independence requirements to enhance confidence in their audits.” The comment period ends May 3, 2021.
The International Public Sector Accounting Standards Board (IPSASB) – Exposure Draft (ED) 75, Leases and Request for Information, Concessionary Leases and Other Arrangements Similar to Leases, issued January 15, 2021, “proposes an IFRS 16, Leases aligned model for lease accounting in the public sector…The Request for Information will provide the IPSASB with further information on the issues that need to be considered in accounting for concessionary leases and other arrangements similar to leases that are quite common in the public sector.” The comment period ends May 17, 2021.

ACCA – Association of Chartered Certified Accountants (www.accaglobal.com)

No new developments.

CIMA – Chartered Institute of Management Accountants (www.cimaglobal.com)

No new developments

IIRC – International Integrated Reporting Council (www.theiirc.org)

Revisions to the International <IR> Framework, published January 19, 2021. The first revisions since the original Framework in 2013, “focus on a simplification of the required statement of responsibility for the integrated report; improved insight into the quality and integrity of the underlying reporting process; a clearer distinction between outputs and outcomes; and a greater emphasis on the balanced reporting of outcomes and value preservation and erosion scenarios.”

WORLD ECONOMIC FORUM (www.weforum.org)

No new developments

Africa, Europe, India and the Middle East (AEIME)

FRC – Financial Reporting Council of the UK (www.frc.org.uk)

No new developments

ICAEW – Institute of Chartered Accountants in England and Wales (https://www.icaew.com/)

No new developments

EFRAG – European Financial Reporting Advisory Group(www.efrag.org)

No New Developments

Americas, Asia, Australia & New Zealand (AAANZ)

AICPA – American Institute of Certified Public Accountants(www.aicpa.org)

Auditing Standards Board – Exposure Drafts – Proposed Statements on Quality Management Standards: A Firm’s System of Quality Management and Engagement Quality Reviews; Proposed Statement on Auditing Standards: Quality Management for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards Performing a Third-Party Assessment Engagement Under a Third Party Assessment Program, issued February 4, 2021, “The proposed standards bring important changes to the way firms are expected to manage quality for its accounting and auditing practice. The proposed standards include a new proactive risk-based approach to effective quality management systems within firms, which improves the scalability of the standards because it promotes a system tailored to the nature and circumstances of the firm and its engagements.” The comment period ends June 11, 2021.
Performing a Third-Party Assessment Engagement Under a Third Party Assessment Program, non-authoritative guidance published January 12, 2021, “emphasize[s] that practitioners need to comply with the AICPA Code of Professional Conduct and the requirements or instructions of the third-party assessment program. It also addresses two questions: What is a third-party assessment program? Which professional standards is the member required to apply to the third-party assessment engagement? The guidance clarifies when the practitioner is required to perform the assessment engagement in accordance with AICPA Statements on Standards for Attestation Engagements and also states that the Statement on Standards for Consulting Services may be applied. Further, it reminds practitioners of the various independence requirements that apply when performing third-party assessment engagements.”

FASB – Financial Accounting Standards Board (www.fasb.org)

Franchisors—Revenue from Contracts with Customers (Subtopic 952-606) – Practical Expedient, ASU 2021-02, issued January 28, 2021, “simplifies how private company franchisors analyze certain activities when determining their performance obligations in a franchise agreement.
When a business owner (the franchisee) opens a new branch of a franchise, the franchise agreement generally stipulates that the franchisor will support certain pre-opening activities to support the new branch. Those activities may include services such as training or site selection. The practical expedient permits certain pre-opening services listed within the guidance to be accounted for as distinct from the franchise license.” Effective generally in 2020 for new adopters of the Revenue Accounting standard, and generally in 2021 for adopters already using the Revenue Accounting standard, with early adoption permitted.

GASB – Governmental Accounting Standards Board (www.gasb.org)

No new developments

COSO – The Committee of Sponsoring Organizations of the Treadway Commission (www.coso.org)

No New Developments

PCAOB – Public Company Accounting Oversight Board (www.pcaob.org)

No new developments

SASB – Sustainability Accounting Standards Board (www.sasb.org)

No New Developments

SEC – Securities and Exchange Commission (www.sec.gov)

No new developments