Please ensure Javascript is enabled for purposes of website accessibility

Accounting News Roundup: Critical Audit Matters and International Non-GAAP Worrying | 05.13.16

Posted on by Caleb Newquist

Audit reports

Maybe you've noticed that the auditor's report hasn't changed in, oh, 80 years or so. Its usefulness hasn't really kept up with the times and has been called into question repeatedly. Back in 2013, the PCAOB proposed to freshen things up a bit. They suggested that auditors share their findings on "critical audit matters"; the stuff that auditor teams identified as most important during the course of their examination. The proposal never really got off the ground, but now it is being re-introduced with a few changes:

The new proposal narrows the definition of what constitutes a critical audit matter, in response to concerns from auditors and others that the 2013 proposal had defined them too broadly.

Under the new proposal, they would be limited to those matters that an auditor would be required to tell the company’s audit committee about, and the materiality of an issue would have to be considered.

“I believe we have come to the right approach,” PCAOB Chairman James Doty said.

The new proposal also would add some language and disclosures to the audit report, notably one about how long the auditor has worked for the company—decades, in some cases.  

Okay, tenure disclosure is good and interesting, but there's a very big catch here — audit committees hire and fire the audit firm. If there's any question about whether bringing a touchy "critical audit matter" to the attention of the audit committee would put that business in jeopardy, do you think the audit team is going to mention it? I don't know enough about the rules around audit committee communication to answer that, although maybe some of you do. In any case, it sounds like it would be an improvement over the boilerplate report we have now. 

Non-GAAP worries

Perhaps you'd like your non-GAAP accounting worries with a little international flavor? IASB chairman Hans Hoogervorst has you covered:

More than 88% of companies in the S&P 500 currently use non-standard accounting metrics in their earnings releases, Mr. Hoogervorst said. Of those, 82% reported an increase in net income “and are clearly designed to present results in a more favorable light.”

There is growing evidence “of these measures becoming increasingly misleading,” Mr. Hoogervorst said.

Hoogervorst also believes that rulemakers have a role in "cool[ing] the popularity" of non-GAAP metrics: 

“We provide too little guidance in terms of formatting the income statement,” he said.  “The enormous flexibility under existing accounting standards is an open invitation for non-GAAP to step in.”

If you think that non-GAAP metrics are always used for evil, then more guidance (i.e. "We recommend you do this, not that.") would be helpful. But if non-GAAP accounting is informative or useful, then isn't the reconciliation back to GAAP enough for the non-GAAP worriers about the quality of the financial reporting? What more do people want? Annotations? God, not another press release? Please, don't tell me more people want more press releases.

It just seems strange to me that some people would prefer to rein in the gimmicks we can see, versus the gimmicks that are hiding behind the false sense of security that is GAAP.

Elsewhere in worrying: Jim Chanos is concerned about Alibaba's accounting.

Previously, on Going Concern…

I was off yesterday, but on Wednesday I wrote about the future of the CPA brand. And in Open Items, The sexy side of accounting.

In other news:

Get the Accounting News Roundup in your inbox every weekday by signing up here.

Related Posts

Accounting News Roundup: Old Guy Buys Batteries; Comptroller v. Wynne; Career Moves After 50 | 11.13.14

Jean-Claude Juncker Breaks Silence Over Luxembourg Tax Issues [NYT]He takes the meta approach: "On Wednesday, […]

Accounting News Roundup: CSC Settles with SEC; Fake Degree Dooms Marcum Partner; More on Disclosure Overload | 12.30.14

CSC to Pay $190 Million to Settle SEC Accounting Probe [Bloomberg]Although the company won't be […]

Accounting News Roundup: Where’s Your Integrity?; Repatriation Push; The Case of a Mistaken Tax Refund | 06.20.11

Lawyers and Accountants Once Put Integrity First [NYT]
It will take decades to fully untangle the causes of the 2008 financial crisis, but as our economy fitfully heals, it would be prudent to ask whether lawyers and accountants offer the same protection against corporate misconduct that they once did.

Dems are lukewarm on Obama’s push for a payroll tax holiday [The Hill]
“The extended tax credits will help stimulate the economy, and giving tax credits to businesses will in fact help with the unemmes Clyburn of South Carolina, the House’s No. 3 Democrat, said on MSNBC on Wednesday. But other Democrats and liberals say the current payroll tax break for employees, which passed Congress in December, has not given the economy much of a spark. They also expressed concerned about what augmenting the holiday would do to both the revenue stream and Social Security, which is funded by the payroll tax.

Companies Push for Tax Break on Foreign Cash [NYT]
“For every billion dollars that we invest, that creates 15,000 to 20,000 jobs either directly or indirectly,” Jim Rogers, the chief of Duke Energy, said at the conference. Duke has $1.3 billion in profits overseas. But that’s not how it worked last time. Congress and the Bush administration offered companies a similar tax incentive, in 2005, in hopes of spurring domestic hiring and investment, and 800 took advantage. Though the tax break lured them into bringing $312 billion back to the United States, 92 percent of that money was returned to shareholders in the form of dividends and stock buybacks, according to a study by the nonpartisan National Bureau of Economic Research. This money comes from overseas operations and in some cases accounting maneuvers that shift domestic profits to low-tax countries. The study concluded that the program “did not increase domestic investment, employment or research and development.”

Happy Father’s Day to 1.8 million single dads & their head of household tax status [DMWT]
Ties not mandatory.

D.A.: Man stole $110,000 tax refund deposited in error [OCR]
A Laguna Beach man who received someone else’s $110,000 federal tax refund in error spent the money on foreclosure debt and student and car loans, prosecutors said.

Chinese Firms Need to Open Up Books [WSJ]
The Securities and Exchange Commission is investigating accounting and disclosure issues at a number of U.S.-listed Chinese companies that acquired backdoor listings through so-called reverse mergers, and even top-name Chinese companies are inviting new scrutiny. Renren Inc., a social-networking site that launched its shares to much fanfare in early May, now trades at about half its IPO price. Renren itself stirred controversy when it lowered the growth rate of its user base without explanation in its IPO prospectus and the head of its audit committee resigned just before the listing. Shares of Toronto-listed Sino-Forest Corp. have plunged 80% since late May after a short seller alleged problems in the forestry company’s accounting, which the company denies. Hong Kong-listed Chinese companies, too, are drawing new scrutiny over their accounting. Not all Chinese companies are shady. But investors are right to ask: How do you know which aren’t?

An Actor, Inventor, Accountant, and Now, a 9/11 Victim [NYT]
Mr. Borg died last Dec. 15 of complications of pulmonary sarcoidosis, an inflammatory disease of the lungs. The New York City medical examiner ruled that he had died from inhaling toxic substances in the dust cloud thrown up by the collapsing twin towers, and on Friday, Mr. Borg, who was 63, became the 2,753rd official victim of the Sept. 11 attack on the trade center.