Key Takeaways from the 2019 AICPA Annual Conference
On December 9-11, more than 2,000 finance and accounting practitioners, auditors, and regulators converged in Washington, DC at the annual AICPA Conference on Current SEC and PCAOB Developments. Over the course of three days, conference delegates heard from industry leaders and key decisionmakers about today’s top accounting, auditing, and regulatory developments. From reference rate reform (LIBOR, specifically), to the new credit loss standard to critical audit matters, the conference covered a range of important topics impacting the current finance and accounting landscape. Riveron attended the conference as an event sponsor, meeting with participants and other sponsor firms to discuss and learn more about the trends and challenges affecting the industry and what we can expect to see in the coming year and beyond.
While many topics were discussed throughout the event, several key themes emerged. Here are our key takeaways from the 2019 AICPA Conference.
As the marketplace becomes more complex, so do the challenges and regulations governing auditor independence. According to SEC Chairman Jay Clayton, one way in which the independence challenge is evident is through the increasingly global structure of businesses. With more companies expanding their geographical footprint, auditors must be able to navigate the manifold situations and scenarios in which their global member firms may be providing services or have relationships with international subsidiaries or related parties that may not be permitted under US independence rules.
Independence issues can have a ripple effect on preparers, especially with the risk that efforts to resolve these issues may impact the timeline of a transaction or regulatory filing.
While on the surface auditor independence may seem to be a topic that only impacts audit firms, independence issues can have a ripple effect on preparers, especially with the risk that efforts to resolve these issues may impact the timeline of a transaction or regulatory filing. In order to successfully comply with independence guidelines, management, audit committees, and audit firms must share responsibility of the process and work together.
For example, SEC-compliant financial statements require higher independence standards for auditors than financial statements issued by non-public entities, which means auditors must reassess their independence if their client is engaging in a capital markets transaction such as an initial public offering. What may seem like a straightforward process can take time, as auditors review their global compliance with not only the company and its subsidiaries, but also any affiliates including private equity investors.
While global compliance is complex, the PCAOB and SEC also emphasized the importance of delineating between auditors and management, even in seemingly innocuous areas like typing financial statements. Companies should consider the services provided by the auditor that may need clearer lines drawn between management and auditors in order to avoid the risks of re-audits and delays of timely findings.
The FASB continues to make progress on its standard setting agenda with the goal of issuing improvements to guidance on liabilities and equity and reference rate reform in the first half of 2020, as well as updates to other items on the Board’s agenda, including accounting for goodwill post-acquisition. Still, preparers, auditors and regulators alike face challenges with implementation and post-implementation activities of the major new standards over the past few years.
For many companies that have adopted the new leasing standard, the ongoing process of accounting for leases under the new guidance has proven to be a much larger undertaking than initially expected. For instance, accounting executives from several companies discussed the challenges they continue to face following adoption of the standard, such as establishing a consistent process to identify and evaluate how changes to leased assets, such as leasehold improvements, impact lease accounting.
Implementing the right strategies for long-term lease accounting management is crucial. In order to ensure a smooth transition into Day 2 lease accounting, companies should implement governance principles to address the known and unknown challenges that are yet to occur. For example, creating use cases for common scenarios encountered that impact lease accounting—end-of-term events, payment adjustments, and updates to incremental borrowing rates—will allow preparers to design and implement proper internal controls to identify and account for such events. Additionally, during the session on comment letter trends, panelists discussed the importance of avoiding boiler plate disclosures and including comprehensive information that enables financial statement users to assess the amount, timing, and certainty of cash flows arising from lease arrangements.
As for revenue recognition, although public companies were required to adopt the new standard in 2018, public companies qualifying for Emerging Growth Company status and non-public entities may still be undergoing adoption activities. These companies have the benefit of learning from those that have already adopted, focusing on areas of complexity where others have consulted with the SEC. SEC Professional Accounting Fellow Susan Mercier cited the determination of whether an entity is a principal or an agent and the identification of performance obligations in revenue contracts as the two most common areas of consultation related to the new standard.
Non-GAAP Measures and Supplemental Financial Information
Financial statements provide company stakeholders, including investors and analysts, with crucial visibility into the financial health of an organization—but they are not the only documents to do so. Information that lives outside of those financial statements—such as earnings discussions, Form 8-K filings related to material events, and management discussion and analysis (MD&A)—can provide timely insight into management thinking. In fact, during the conference, equity research professionals shared that this external information (particularly, financial information by segment) is most useful when making investing decisions since it is often available earlier than interim or annual financial statements due to its inclusion in earnings releases and calls.
Given the importance of supplemental information, regulators continue to place a significant focus on the disclosure of non-GAAP financial measures. As Chairman Clayton noted in his remarks, the consistency of this information cannot be underestimated as it ensures comparability for stakeholders. Investors should be confident that changes to these metrics are rare, but are clearly reported when made. Panelists from CFOs to institutional investors noted that they review reconciliations of non-GAAP measures to GAAP measures, which underlies the need for preparers to be timely, accurate, and consistent in their financial reporting processes inside and outside the core financial statements and footnotes.
Since information outside of the financial statements is often used to make strategic and investment decisions, management must ensure it is adequately supported, reconciled to most comparable GAAP measures, and includes proper context in order to provide a complete and accurate story. The information that management carefully chooses to highlight in investor documents, MD&A, and earnings releases should create a consistent message that demonstrates to investors how management analyzes and operates the business.
To learn more about this year’s AICPA Conference on Current SEC and PCAOB Developments, tune into our webinar on Thursday, January 16, where we will provide a detailed overview of these and other key themes that emerged from the event.