Accounting and Year-End Trends: SEC “Hot Topics” Conference Highlights

Exploring themes relevant to the accounting profession, year-end reporting cycles, and other relevant focal points, Cal State Fullerton hosted the 22^nd annual SEC “Hot Topics” Conference this September. The conference featured presentations from the SEC, FASB, industry leaders, experts from top US accounting firms, and the former CFO of Enron. As a sponsor of the regional conference, Riveron attendees included accounting advisory experts from the West Coast and across the United States.

Riveron experts compiled several key takeaways, noting that CFOs and accounting professionals can expect to see a variety of impacts in the coming months. While a keynote speech from the former CFO at Enron was a large draw for conference participants, other speakers explored changes in auditor requirements, accounting for digital assets, geopolitical and sustainability trends, the potential effects of AI, and other relevant matters.

Here are the conference highlights for CFOs and accounting professionals:

Beyond compliance, culture is critical: implications from the Enron fallout

Much of corporate America today remains familiar with Enron, not because it was once the fifth-largest US company but because it perpetrated one of the most significant corporate frauds in history, resulting in massive losses for its shareholders, employees, and numerous firms entangled in its business dealings. So, what does Andy Fastow, the former CFO of Enron who served five years in prison for his involvement, have to say about it now?

During Fastow’s presentation, the primary message that emerged was that Enron’s downfall was not a result of compliance failures but rather a cultural issue. The company’s leadership set the tone at the top, and this tone played a pivotal role in the company’s eventual collapse. It was management’s behavior and their failure to ask a simple question: “Would a reasonable person do this?” that triggered a chain of events impacting the accounting profession and the state of financial leadership today. When Enron’s management decided to move forward with related party transactions that would ultimately alter their credit rating and financial statements, they operated in a gray area focused on gaining an advantage no matter the ethics. They adhered to the regulations and received approvals from various parties, including external auditors, the board, and legal teams. Despite those types of safeguards, operating in the gray area in a “win-at-all-costs” mindset can create thought biases and an inability to properly assess risks, and this can lead to disastrous outcomes.

Fastow’s story serves as a reminder that even when all the rules are followed, an organization’s culture and the values it lives by are crucial in ensuring its long-term success and staying power.

SEC leader explores investor priorities, cyber disclosures, and the future of accounting

Mark Uyeda, who assumed his role as an SEC commissioner in June 2022, was one of the keynote speakers at the conference. The discussion covered a wide spectrum of regulatory subjects, ranging from climate change and ESG regulations to cybersecurity and beneficial ownership disclosures, amendments related to insider trading, PCAOB laws and regulations proposal, and the evolving landscape of digital assets.

Uyeda emphasized the growing demand from investors for comprehensive information, which has spurred proposals for the acceleration of filing deadlines and additional disclosures. Although some of these disclosures may appear superfluous at first glance, they are essential in today’s environment of heightened risk factors. One example included proposals for the acceleration of filing deadlines , which have been part of MD&A for a long time but have gained newfound relevance for investors recently.

The SEC’s cyber disclosure rule mandates that public companies disclose details about their cybersecurity governance practices and impacts associated with material cyber incidents within four days from the incident. While it’s evident that a comprehensive assessment of cyberbreach materiality, especially concerning reputational risks, may not be feasible within this tight timeframe, Uyeda’s perspective is that companies can amend their disclosures later if their assessments evolve due to ongoing investigations.

The discussion surrounding the PCAOB proposal regarding assessments of laws and regulations triggered a debate about the future of the accounting profession. Could it necessitate a dual (accounting and law) degree in the future? If adopted, the proposal would strengthen auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations, including laws and regulations affecting multinational companies across the globe. Uyeda underscored that this regulation is still pending SEC approval and requires appropriate scoping.

Discussions that Uyeda focused on during the conference underscore the critical need for adaptability and vigilance in a rapidly changing environment.

Accounting for modern technology, crypto assets, and other trending topics from the FASB

Vice Chairman of the FASB Jim Kroeker and other accounting leaders discussed recent FASB updates. Crypto assets and the modernization of accounting for software costs were among the items discussed.

The intangible asset model is applied to most crypto assets, but the cost-less impairment model was not designed to address the reality of the crypto world businesses operate in today. It may seem the FASB has been delayed in its response to the evolving nature of crypto markets, but when looking back at the origination of cryptocurrencies and other crypto assets, the future use case of these instruments was not fully known and continues to evolve. While SAB 121 was issued in early 2022 to express the SEC’s view on a company’s obligations to safeguard crypto assets, the FASB is still working toward issuing a final ASU on the accounting for crypto assets. The FASB is targeting the issuance of this ASU later this year.

The FASB is also in the process of modernizing the accounting for software development costs. The two-approach model used today was developed over twenty years ago when software development was significantly different than it is today. While the standard was created to address the accounting for some of the once-prevalent types of software (such as those contained on CD-ROMs), it predates the existence of cloud computing. Periods of agile software development are not as discrete as they once were, and the FASB is working to create a model that will simplify the accounting for the current nature of software development. The timing of the release of the ASU is an ongoing matter, which the Vice Chairman hopes to see resolved before the end of his board term in June 2024.

The conference offered additional discussion around environmental credits, such as embedded features in debt agreements tied to carbon emissions. The accounting for such environmental credits is in the initial stages of board deliberations.

Other Trending Topics from AI to ESG

Other topics discussed at the conference included the impact of geopolitics, ESG reporting trends, and the impacts of AI. Some highlights from these topics include:

A panel of experts in tax and government relations discussed several possible impacts of US politics and other geopolitical trends, speculating during the conference that a US government shutdown seemed inevitable, although news developments since that panel discussion took place have revealed a different outcome. On the international front, the war in Ukraine will likely continue to introduce uncertainty into markets.

Ali Arsanjani, an AI/Machine Learning expert at Google, discussed the differences between generative AI and machine learning —and that accounting and finance professionals should not expect to be replaced by AI. Instead, professionals need to learn to work with AI, with the understanding that the full benefits of AI may not be realized for some time.

A panel of industry, legal and accounting professionals discussed the challenges and trends around ESG reporting, noting that while the SEC climate rule is expected later this year, companies should start thinking about how they will prepare for ESG reporting requirements. ESG approaches should include controls and data management, particularly as a demand for more ESG disclosures is expected in the coming years.

Overall, the SEC “Hot Topics” Conference offered a great overview of the trending topics relevant for accounting and finance professionals. These highlights are especially timely for companies as CFOs and accounting teams balance priorities and prepare for year-end reporting season. Riveron experts look forward to additional updates and guidance from the SEC and FASB throughout the fourth quarter, including at the AICPA & CIMA Conference on SEC and PCAOB Developments in December 2023, where Riveron will once again be attending as a sponsor.