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NEWS DIGEST
Auditing  
July 2013

  The European Union took a step toward requiring mandatory audit firm rotation when the European Parliament’s Legal Affairs Committee voted 15–10 in favor of a draft law that would require public-interest entities such as banks, insurance firms, and listed companies to rotate audit firms every 14 years.

That period could be extended to 25 years when certain safeguards are put into place.

The vote resulted in a toned-down version of reforms previously proposed by the European Commission, which called for mandatory rotation every six years. A majority on the Legal Affairs Committee judged that period to be a costly and unwelcome intervention in the audit market, according to a committee news release.

The proposal still has to go through several steps before it becomes law, beginning with negotiations with the European Council. Sajjad Karim, a European Parliament member from the United Kingdom who drafted the reforms, said during a news conference that he hopes a final vote in Parliament will take place before the end of the year.

The full story on the proposal is available at tinyurl.com/bsbhs6q.


 The PCAOB reproposed an auditing standard and amendments designed to improve the quality of auditing of related-party transactions and significant unusual transactions.

The reproposed standard is designed to increase the auditor’s focus on the evaluation of how a company identifies, accounts for, and discloses its relationships and transactions with related parties.

The reproposed amendments, meanwhile, are intended to help the auditor identify and evaluate a company’s significant unusual transactions. In addition, the reproposed amendments would require the auditor to perform new procedures as part of the process to assess the risk of material misstatement in financial statements.

These procedures would give the auditor an understanding of a company’s financial relationships and transactions with executive officers, the PCAOB said. But the auditor would not be required to make any determination or recommendation regarding how reasonable the compensation arrangements are.

Commenters generally supported the previous proposal, which the PCAOB released on Feb. 28, 2012, according to PCAOB Deputy Chief Auditor Greg Scates. But commenters also offered suggestions for improvements and adjustments, which are included in the new proposal, Scates said.

Several changes in the new proposal, available at tinyurl.com/bqz5sof, include:

  • Clarifying the relationship of the proposal with the PCAOB’s existing risk assessment standards.
  • A requirement to evaluate whether the company has properly identified its related parties and its relationships and transactions with related parties.
  • Removing the requirement that each related-party transaction previously undisclosed to the auditor by management be treated as a significant risk.


The PCAOB’s existing standard, AU Section 334, Related Parties, would be superseded by the reproposed standard. The reproposed amendments would amend other auditing standards, including AU Section 316, Consideration of Fraud in a Financial Statement Audit, and Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement.

Comments are due July 8.


 The AICPA Auditing Standards Board (ASB) has exposed a new, clarified standard that applies to use of the work of internal auditors.

With the issuance of the Proposed Statement on Auditing Standards (SAS), Using the Work of Internal Auditors, the ASB has completed the clarity project redrafting of its last unclarified AU section in the AICPA Professional Standards.

The proposed SAS would supersede AU Section 322 and AU-C Section 610, The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements.

Amendments include significant changes to AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement. An explanatory memorandum describing the most significant changes to the SAS is provided in the exposure draft.

The proposal is available at tinyurl.com/csokk9u. Comments are sought by July 15 and should be addressed to Sherry Hazel at shazel@aicpa.org.

Readers are specifically asked:

  • To respond to the proposed requirements and application guidance relating to using internal auditors in a direct assistance capacity.
  • Whether the changes from the requirements and guidance included in International Standard on Auditing No. 610 (Revised 2013), Using the Work of Internal Auditors, are appropriate.



 Independent auditors sometimes find themselves in conflict with regulator-prescribed forms. In an emerging issue for auditors, some of them have found that the reports they are required to submit to state regulators do not contain the specific elements and wording of generally accepted auditing standards (GAAS) that state accountancy laws require auditors to follow.

The AICPA’s website is providing resources (visit tinyurl.com/cku4efx) to help auditors find solutions to this issue. Many state regulators require that auditors provide an opinion on financial information to a regulator, often by means of an auditor’s report on forms prescribed by the regulator.

If the minimum required reporting elements and wording are not contained in the prescribed form, the auditor is required by GAAS to reword the prescribed form of the report or attach an appropriately worded separate report.

This issue first surfaced in New York with a form required by the New York City Tax Commission. The technical teams of the New York State Society of CPAs and the AICPA crafted a solution that allows auditors to meet the AICPA Auditing Standards Board’s new standards without requiring the city of New York to issue a new form.

This was accomplished when the commission agreed to accept either footnotes to the city’s form or a separate report attached to the form. Members who encounter this problem are encouraged to contact the AICPA or their state societies for assistance.

Contact Ahava Goldman, AICPA senior technical manager (agoldman@aicpa.org or 212-596-6056), with questions.


 Recently implemented federal rules on disclosure of conflict minerals have mandated new audit requirements for some U.S. issuers.

The AICPA Conflict Minerals Resources webpage (tinyurl.com/cdgwk9p) provides background and other useful information about the use of conflict minerals, which are gold, tantalum, tin, and tungsten.

In addition, new Questions and Answers (available at tinyurl.com/c8n9plt) have been issued to provide nonauthoritative guidance and describe the key similarities and differences between the two services—an examination attestation engagement and a performance audit—that can fulfill the SEC’s mandate of an independent audit of the conflict minerals report.

The mandated conflict minerals disclosure rules are among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203. The SEC’s final rule, adopted in August 2012, requires issuers who use those minerals in their manufacturing processes and supply chain—and have determined that those minerals originated in the Democratic Republic of the Congo or its neighboring countries—to file a Conflict Minerals Report with the SEC and publish the report on the issuer’s website.

The report must be independently audited in accordance with U.S. Government Auditing Standards (The Yellow Book) and can consist of either an examination attestation engagement or a performance audit.


 A new Statement of Position (SOP) released under the authority of the ASB establishes guidance for attest engagements on entities’ greenhouse gas emissions statements.

SOP 13-1, Attest Engagements on Greenhouse Gas Emissions Information, supersedes SOP 03-02, which had the same title. The SOP guides practitioners performing an examination or a review of a greenhouse gas emissions statement containing either a schedule with the subject matter or an assertion relating to information about an entity’s greenhouse gas emissions.

The SOP also provides guidance on the application of AT Section 101, Attest Engagements, to greenhouse gas emissions attest engagements. SOP 13-1, available at tinyurl.com/cyy3t7a, takes effect for reports on greenhouse gas emissions information issued on or after Sept. 15. Early implementation is permitted.
 


NEWS DIGEST
Financial reporting  
July 2013

   Stakeholders have expressed concerns to FASB that certain disclosure requirements for nonpublic employee benefit plans would reveal sensitive proprietary information of private companies.

FASB is addressing that concern by proposing an indefinite deferral of the effective date for certain disclosures about investments held by a nonpublic employee benefit plan in the plan sponsor’s own equity securities.

Comments were due May 31 on Proposed Accounting Standards Update (ASU), Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. The proposal is available at tinyurl.com/d7k8own.

Stakeholders have been concerned that proprietary information about private companies would be divulged through the dissemination of their employee benefit plans’ financial statements on the plan regulator’s website.

The deferral is proposed to allow time for regulators and stakeholders to discuss the specific quantitative disclosures and their potential effect on the plan sponsor as a result of making that information public. The proposed deferral would be effective when the final ASU is issued. At press time, the ASU was expected to be released in June.


  A new FASB standard provides guidance for organizations on when and how to prepare financial statements using the liquidation basis of accounting.

ASU 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting, describes how financial statements must be prepared by a company that is converting its assets to cash or other assets, and is settling its obligations with creditors with the intent of ceasing its activities. The ASU is available at tinyurl.com/ckl8wpp.

In these circumstances, financial statements must be prepared using a basis of accounting that helps financial statement users understand how much the organization will have available to distribute to investors after disposing of its assets and settling its obligations.

Leslie Seidman, who was FASB’s chairman when the standard was issued, said in a news release that the standard will reduce diversity in practice and addresses the concerns of stakeholders who had asked for guidance from FASB.

Organizations will be required under the new standard to use the liquidation basis for preparing financial statements when liquidation is “imminent.”

When liquidation was specified in an organization’s governing documents at inception (as in a limited-life entity), the liquidation basis should be used only if the liquidation plan differs from the original terms.

The standard applies to public and private companies as well as not-for-profit organizations. The ASU takes effect for interim and annual reporting periods beginning after Dec. 15, 2013, and early adoption is permitted.


  GASB approved a new standard designed to help state and local governments report on nonexchange financial guarantees they have offered, and to help governments properly report on guarantees they have received on their obligations.

GASB Statement No. 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, spells out the provisions. A nonexchange financial guarantee is a credit enhancement or assurance a guarantor offers without receiving value in exchange that is equal or approximately equal.

The guarantor agrees to pay an obligation holder if the issuer of the obligation is unable to pay the obligation holder, as required. Examples of nonexchange financial guarantees include guarantees by a state for bonds issued by local governments within that state, and guarantees of mortgage loans to individuals, if equal or approximately equal value is not received in exchange.

A state or local government guarantor will be required to recognize a liability on its financial statement when it is more likely than not that the guarantor will be required to make a payment to the obligation holder under the agreement.

The standard took effect for reporting periods beginning after June 15, 2013, and is available at tinyurl.com/c47lpwq.


NEWS DIGEST
International  
July 2013

The International Accounting Standards Board (IASB) proposed an interim standard that would allow entities to preserve their existing accounting policies for rate-regulated activities—with some modifications to enhance comparability—while the board considers whether it should develop specific guidance.

Feedback from the IASB’s agenda consultation led the board to launch a project to consider whether it should develop specific guidance for rate-regulated activities. The board also is trying to determine what information financial statement users would need about the consequences of rate regulation if specific guidance is developed.

Industry sectors such as transportation and utilities are subject to rate regulation in many jurisdictions, and rate regulation can significantly affect the timing and amount of an entity’s revenue. But existing IFRS does not provide specific guidance for rate-regulated activities.

The exposure draft for the proposed interim standard, Regulatory Deferral Accounts, seeks comments by Sept. 4 and is available at tinyurl.com/bqrhrg3.


NEWS DIGEST
Personal financial planning  
July 2013

Problems created by financial stress aren’t limited to people’s pocketbooks. A new survey found that money-related stress is also taking a toll on Americans’ waistlines, friendships, and sleep habits.

The telephone survey, conducted March 14–17, asked 1,011 U.S. adults to name all the ways financial stress is affecting their lives. Of those who rate their financial stress “very” or “somewhat high,” almost half, or 47%, said they are sleeping less. Another 43% said they have less patience with friends or are seeing them less often, while 31% are eating more junk food or gaining weight.

The survey also found that about one-fifth of respondents (21%) who rate their financial stress as at least “somewhat high” are arguing more with their spouse or significant other. And about one-sixth (17%) said they are getting sick more often, according to the survey results.

Harris Interactive conducted the survey for the AICPA in recognition of National Financial Capability Month, which is observed in April.

While the economy has improved since the darkest days of the Great Recession, an increase in payroll taxes that kicked in at the start of the year intensified financial concerns for many Americans. The increase effectively cut take-home pay for most workers by 2% and prompted more than two-thirds (68%) of those employed to cut spending, reduce savings, or make other sacrifices, according to a news release about the survey that was issued by the AICPA.


NEWS DIGEST
Professional issues  
July 2013

Baker Tilly Virchow Krause LLP, one of the 20 largest U.S. accounting firms, merged with Holtz Rubenstein Reminick LLP in a deal that gives Chicago-based Baker Tilly a significant foothold in New York City.

The merger closed June 1. It creates a firm with more than 1,600 professionals and $300 million in annual revenue, said Timothy L. Christen, CPA, chairman and CEO of Baker Tilly, in a news release. Holtz Rubenstein Reminick, with 145 professionals at offices in Manhattan and on Long Island, as of June 30, 2012, was ranked 24th on Crain’s latest annual list of the largest New York accounting firms.

“We’ve been looking for the right merger partner in New York, and we found that partner in Holtz Rubenstein Reminick,” said Christen, who will lead the combined firm. “They have a strong reputation, considerable technical excellence, and a record of success.”

The combined firm is based in Chicago under the name Baker Tilly Virchow Krause LLP, and two Holtz Rubenstein Reminick representatives are joining the board. Holtz Rubenstein Reminick’s managing partner, Barry Garfield, CPA, will head Baker Tilly’s New York operations. Baker Tilly currently has a small New York office.

Baker Tilly is hoping to use its expanded New York base as a platform to help the firm expand further on the East Coast, specifically in the mid-Atlantic area between New York and Washington, where the firm has a significant presence. “With anchor offices in D.C. and New York, the merger will allow us to better serve existing clients and pursue strategic growth opportunities in the highly active corridor that connects our nation’s capital with the largest commercial market in the United States,” said Baker Tilly’s executive managing partner, Ed Offterdinger, CPA, who will lead efforts to integrate the firms.

The deal is the latest in a series of mergers involving top 20 accounting firms (see chart).


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