Volume 5, Issue 8

August 2011

I. PricewaterhouseCoopers and Denver Host CAQ’s 3rd Annual Audit Symposium

The “Mile-High City” was the setting for the CAQ’s 3rd Annual Audit Symposium on August 7. The event, held on the eve of the American Accounting Association’s (AAA) Annual Meeting, is the cornerstone of the CAQ’s ongoing dialogue with the academic community on areas where research can enhance audit practice.

PricewaterhouseCoopers LLP (PwC) served as host of this year’s Symposium, which included panels on “The Future Role of the Auditor” and “Practical Applications of Academic Research: Use of Nonfinancial Measures to Assess Fraud Risk.”

Bob Moritz, Chairman and Senior Partner of PwC and a member of the CAQ’s Governing Board (left), moderated a panel discussion on “The Future Role of the Auditor” during the CAQ’s Audit Symposium in Denver. Panelists were (from left to right): Bill Kinney of the University of Texas at Austin, Zoe-Vonna Palmrose of the University of Washington and Sam Ranzilla of KPMG LLP.

The Symposium provided a unique opportunity for senior practice leaders from the eight largest public company audit firms and academics to discuss the quality of information provided by management, and whether auditor association with that information would improve investor confidence. Another issue covered was whether management, audit committees, and auditors should provide more detailed disclosures about accounting judgments and estimates and, if so, how that might affect their behavior. Many of the academics were able to highlight existing research that could begin to inform these issues, but the discussions also identified a number of areas for further exploration. As CAQ Executive Director Cindy Fornelli pointed out, “The profession and the academic community need to talk to each other, learn from each other, and generate ideas for future research that has value inside and outside the classroom.”

Kathryn Kadous of Emory University offers an observation during a Symposium Brainstorming session as KPMG’s Walt Conn looks on.

During the AAA’s Annual Meeting the following day, Fornelli raised these issues with a wider audience during a panel discussion exploring the role of the auditor. Joining Fornelli for the 90-minute conversation were Bob Moritz, Chairman and Senior Partner, PwC, Sam Ranzilla, National Managing Partner, Audit Quality and Professional Practice, KPMG LLP and Ira Solomon, Dean of the A.B. Freeman School of Business of Tulane University.

II. CAQ Provides Feedback on SEC’s Support of Convergence and Global Accounting Standards

The CAQ on July 28 responded to the Securities and Exchange Commission’s (SEC) request for feedback on the SEC’s Statement in Support of Convergence and Global Accounting Standards and, in particular, the May 26, 2011 SEC Staff Paper Work Plan for the Consideration of Incorporating International Financial Reporting Standards [IFRS] into the Financial Reporting System for U.S. Issuers, Exploring a Possible Method of Incorporation.

In the letter, the CAQ noted that, “the Staff Paper presents a balanced approach that moves the United States forward towards closer convergence with IFRS, with a significant commitment to not create further differences. Incorporation of IFRS into the U.S. financial reporting system is an important matter for investors, issuers and auditors in the U.S. and global communities. We look forward to an announcement of the Commission’s intended direction and timing on this topic.”

The letter goes on to make specific observations in three topic areas: Dual Compliance; Role and Authority of the FASB; and Transition.

Regarding dual compliance, the Staff Paper describes a model that could enable U.S. issuers to assert that they comply with both U.S. GAAP and IFRS on an ongoing basis once the transition period is completed. “We agree with this goal, but we note several practical challenges which could limit the effectiveness of the proposed approach in achieving this objective,” the CAQ's letter states.

Although the FASB would not set new accounting standards under the proposed approach, it would have the authority to modify or supplement IFRS if required to protect U.S. investors (similar to the SEC’s existing ability to override the FASB’s accounting standards). “While the Staff Paper notes that FASB changes to IFRS standards are expected to be rare and generally avoidable, the SEC will need to provide clear direction so that the FASB can build an appropriate framework, including due process, for incorporating IFRS into U.S. GAAP, including the circumstances upon which departures from IFRS might be necessary. Setting the appropriate threshold for permitting changes will be required to help achieve the end-goal of a single set of high-quality, globally accepted accounting standards,” the CAQ asserted.

Lastly, under the approach in the Staff’s Paper, the FASB would incorporate IFRS into the Codification during a transition period. In the CAQ’s view, “Any transition period should be of sufficient length to give issuers enough lead time to implement the new standards, and flexible enough to allow issuers the ability to transition in an effective and cost efficient manner. We believe a transition period of five to seven years is reasonable. We also believe it will be important for the FASB to develop a transition plan that is comprehensive, well-planned and well-communicated to ensure investors understand the state of the standards in use in any one period. Constantly changing standards could result in ‘standards fatigue’ for issuers and could create unnecessary confusion for investors.”

III. Fornelli Addresses NASBA’s International Forum on the Role of the Auditor

Cindy Fornelli was a guest speaker at the National Association of State Boards of Accountancy’s 4th annual International Forum in Vancouver last month on the topic of “U.S. Developments on the Role of the Auditor.”

Fornelli’s July 25 address took into account both the Public Company Accounting Oversight Board’s (PCAOB) concept release on the auditor’s reporting model and the CAQ’s ongoing discussion series with stakeholders regarding the role of the auditor.

In her remarks, Fornelli observed, “I think there is some consensus about potential improvements to the reporting model. The CAQ’s initial comment letter generally aligns with much in the PCAOB’s concept release. And it is consistent with the message we are hearing at our roundtables: investors want more qualitative information from management and where appropriate want the auditor to weigh in on the adequacy of the process management used to develop that risk information. Some participants also suggested that auditors might also comment on whether the information is an accurate representation of facts, assumptions, etc. These are ideas that need to be explored.”

Fornelli also told the gathering the CAQ plans to share what has been heard at the roundtables with the PCAOB and other policy makers later this year. “The roundtables are encouraging hard thinking around the cost‐benefit of various proposals, including determining whether modifications to current standards and regulatory frameworks will truly have a positive impact on the capital markets and the public’s confidence and perception of the role of the auditor as opposed to simply piling on more disclosures,” she explained. “Let me assure you that the public company auditing profession is listening hard to what investors are saying and is prepared to implement change under a framework that will provide for consistency of approach. The need for consistency transcends U.S. markets; our global markets require consistency of reporting and auditing frameworks to the fullest extent possible.”