Skip to content
US Securities and Exchange Commission

Accounting Firms Ask Regulators for Clarification on Auditors’ Role in Proposal About Q4 Data

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

Large accounting firms in comment letters asked the SEC to work with the PCAOB on what the auditor’s role should be if the commission moves ahead with its plans to get rid of the requirement that public companies disclose selected quarterly financial data, which means that fourth quarter results will no longer be discretely presented in the financial statements.

Their request comes as the SEC published a proposal intended to streamline information required in the management’s discussion and analysis (MD&A) and selected financial data in Release No. 33-10750, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, issued on January 30, 2020.

The capital market regulator proposes to eliminate Item 302 of Regulation S-K, which spells out the reporting requirements under the Securities Act of 1933.

Item 302(a)(1) requires disclosure of selected quarterly financial data of specified operating results and Item 302(a)(2) requires disclosure of variances in these results from amounts previously reported on a Form 10-Q. In particular, Item 302(a) requires certain information for each full quarter within the two most recent fiscal years and any subsequent period for which financial statements are included, according to Release No. 33-10750.

The SEC said it is proposing to eliminate Item 302 because the information can be readily accessed in previous filings and elsewhere through the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System. (See SEC Proposes to Streamline MD&, Financial Data in the February 3, 2020, edition of Accounting & Compliance Alert.)

KPMG LLP said it supports the proposed elimination of Item 302(a), but companies might still choose to voluntarily present selected quarterly information, including fourth quarter data in their annual reports.

But PCAOB Auditing Standard (AS) 4105, Reviews of Interim Financial Information, requires auditors to review the fourth quarter interim financial data only when it is in an annual filing. The standard is silent about what auditors have to do with information that is voluntarily provided.

“If providing fourth quarter information becomes voluntary under a final rule, the auditor’s responsibility relating to that information is not clear,” KPMG wrote. “If Item 302(a) is eliminated in the final rule as a proposed, we recommend the SEC coordinate with the PCAOB as necessary to clarify the auditor’s responsibility over voluntarily-provided fourth quarter information.”

More Research Needed

In the meantime, some audit firms asked the SEC to consider alternative approaches because the proposal could shortchange investors.

RSM US LLP said the SEC should ask investors to find out what level of assurance they want on fourth quarter information and then decide whether Item 302(a) should be eliminated.

“If investors do not see a need to retain Item 302(a) generally, we recommend the Commission consider retaining a more narrow requirement to disclose the Item 302(a) information when there is a material retrospective change to be reflected in the current and prior years’ quarter,” RSM said.

Ernst & Young LLP believes that Item 302(a) should be retained and even be improved to benefit investors.

The Big Four firm said a company discloses retrospective revisions to amounts disclosed in prior quarterly reports on Form 10-Q. Companies make revisions because of errors, changes in accounting principles, and discontinued operations.

“Absent the Item 302(a) disclosures, an investor may not see the adjusted quarterly information until the subsequent year’s quarterly reports on Form 10-Q,” EY wrote. The firm said the SEC should also revise the current required line items to conform to the key subtotals in the company’s interim income statement.

Currently, Item 302(a)(1) can create an inconsistency between the quarterly data and the financial statements because companies are only required to include gross profit in their quarterly data yet may not present that in their interim financial statements according to SEC Staff Accounting Bulletin (SAB) Topic 11.B, Depreciation and Depletion Excluded from Cost of Sales.

Investors, including the SEC’s Investor Advisory Committee, told the commission to leave Item 302(a) alone because it shifts the burdens from companies to them in getting the information. (See Investor Advisory Committee Recommends SEC to Rethink Plans to Streamline MD&A and Financial Disclosure Rules in the May 26, 2020 edition of ACA.)


This article originally appeared in the June 16, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

Subscribe to our Checkpoint Daily Newsstand email to get all the latest tax, accounting, and audit news delivered to your inbox each weekday. It’s free!

More answers