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

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:

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