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Big Picture Issues May Set Tone for 2014

January 2, 2014

The SEC has gone more than five years without making a clear statement on IFRS.For the accounting standard-setters at the FASB and IASB, the end of 2013 also means that the end of the international convergence effort is in sight. For the audit regulators at the PCAOB, the months and years ahead are likely to see a continuation of the effort to shore up auditor independence as a means toward protecting investors.

The SEC’s last major statement on IFRS came in 2010 when it published Release No. 33-9109,Commission Statement in Support of Convergence and Global Accounting Standards.

The statement wasn’t even close to the clear commitment to IFRS that some auditors sought.Instead, it set the market regulator on a course to publish a series of studies on the international standards that concluded with the July 2012 release of Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Final Staff Report.The document did little more than offer some alternatives for aligning the U.S. and global financial reporting systems.

SEC officials are now saying they want to reopen the IFRS debate, but they have too much other work to do to put the issue on the active regulatory agenda.Several rules from the 2010 Dodd-Frank Act and the 2012 JOBS Act still need to be written, and members of Congress from both parties are pressuring the agency to get them done.At least for the foreseeable future, auditors and financial professionals will have to wait for the SEC to act on IFRS. and

The FASB and international convergence

While the SEC reconsiders what to do with IFRS, the FASB is rethinking how to carry out its statutory mandate to write standards for U.S. GAAP now that its effort to converge with the international reporting standards is nearly done.In early 2014, the FASB and IASB are scheduled to release final standards based upon the guidance in Proposed Accounting Standards Update (ASU) No. 2011-230,Revenue from Contracts with Customers,and the IASB’s Exposure Draft (ED) No. 2011-6,Revenue from Contracts with Customers.The documents should stand out as one of the few success stories that can be traced to 2002, when the boards signed The Norwalk Agreement and committed to removing the differences between U.S. GAAP and IFRS and produce a common set of standards.

The FASB also wants to publish in the year’s first half a final standard based upon Proposed ASU No. 2012-260,Financial Instruments—Credit Losses (Subtopic 825-15).The credit loss guidance began as a joint project with the IASB, but the effort fell apart in mid-2012 when FASB members said the converged proposal wasn’t workable for many U.S. banks.

The related guidance in Proposed ASU No. 2013-220,Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities,is also slated for release in the first half of the year, and some recent decisions by the FASB may test the boards’ commitment to convergence.

The boards remain committed to issuing a converged standard for lease contracts based upon the draft guidance in the FASB’s Proposed ASU No. 2013-270Leases (Topic 842),and the IASB’s ED No. 2013-5,Leases.In November, the boards began reviewing the comment letters submitted in response to the proposals, but it’s unlikely that a final standard can be completed before 2015.

The FASB is also planning to resume in 2014 its consideration of Proposed ASU No. 2013-290,Insurance Contracts (Topic 834),without the IASB.The effort had also been part of a convergence effort until the boards concluded there were too many areas of disagreement.

With the winding down of convergence, FASB Chairman Russell Golden said the accounting board is focused on more thematic issues, such as lowering the cost and complexity of financial reporting.

One element of complexity stemmed from guidance where the “accounting is so dense, it’s difficult to navigate what it is that one is expected to do,” Golden told the December 17, 2013, meeting of the Financial Accounting Standards Advisory Council (FASAC).A second form of complexity consists of “issues where it’s pretty clear what one is expected to do, but perhaps there’s substantial cost and burden to do that, and perhaps that cost is not appropriate in relationship to the information that’s provided to investors.”

Some complexity could be wrung out of U.S. GAAP as the FASB proceeds with its work on its Conceptual Framework, which FASAC members urged it to do.Golden told FASAC members that the Framework addressed what he described as “foundational projects, those projects that will help the board over time think about the future of accounting.”

The PCAOB, auditor independence, and investor protection

The PCAOB appears determined to continue with efforts to promote auditor independence, despite the fierce resistance some its high profile projects have faced.

On December 4, the audit regulator published Release No. 2013-009,Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit.

If the rule is finalized, the name of the lead partner on a client engagement will have to be included in the auditor’s report.The proposal also calls for disclosing the other audit firms and individuals that were hired to do portions of the audit.

The PCAOB said the disclosure rules won’t change an audit firm’s performance obligations to its clients.

The proposed rule “holds the promise of improving audit quality by sharpening the mind and reminding auditors of their responsibility to the public,” said PCAOB Chairman James Doty.

PCAOB officials have noticed with growing alarm the steady increase in audit firm revenues coming from consulting services, and they plan to hold a public roundtable in 2014 to address the issue.Doty told attendees at the AICPA’s National Conference on SEC and PCAOB Developments in Washington on December 9 that it was important to study the issue for its effect on audit firm independence.

On the international front, PCAOB officials have been stymied in their efforts to conduct on-site investigations at Chinese audit firms and gain access to the firms’ documents related to investigations and enforcement actions.Doty and other board officials have had several rounds of negotiations with representatives from the China Securities Regulatory Commission (CSRC) and the Ministry of Finance (MOF) that have produced few concrete results.The concern about Chinese auditors comes in response to the wave of accounting frauds at Chinese companies in the past few years.

The impasse with the Chinese puts U.S. regulators in a difficult position.U.S. exchanges, in order to remain competitive internationally, are seeking listings from Chinese companies.But the opaque nature of the Chinese regulatory and financial reporting system undermines the investor protections that the SEC and PCAOB are supposed to enforce.At the same time, U.S. regulators have had limited opportunities to investigate Chinese auditors and punish wrongdoing by them.

“We have, together with our colleagues at the SEC, a challenge,” Doty told a November 13 meting of the PCAOB’s Standing Advisory Group (SAG).”How do we enforce the rules and the regulations that we both must uphold, consistent with not unduly penalizing innocent people?”