SEC Developments Conference Day 1Posted: January 4, 2016
I had the privilege of attending the 2015 AICPA SEC & PCAOB Developments Conference last month in Washington DC. As many companies are in the middle of their annual reporting process this month, I thought it would be a timely reminder to go over some of the key themes I heard at the meeting.
On day one, the theme was definitely on Internal Control over Financial Reporting (ICFR). We heard this issue discussed time and again by many speakers including:
- Cindy Fornelli, Executive Director, Center for Audit Quality
- May Jo White, Chairman, SEC
- Jim Schnurr, Chief Accountant, SEC
- Brian Croteau, Deputy Chief Accountant, SEC
In fact, there was an entire panel dedicated to the subject. Of course, the topic of the PCAOB dictating changes to management’s document and controls through changes it is forcing auditors to implement as a result of its review process came up a lot during the discussion. I think Michael Gallagher, Partner at PwC, put it best when he said “don’t accept the answer that ‘the PCAOB’ (or national office) is making me do it from your audit engagement team. They need to be able to articulate what the change in the control or documentation is trying to accomplish and how it relates to the audit, and if they can’t you have every right to push back.” While I think that is very good advice, I do think that leaves the elephant in the room untouched. That elephant is that it is quite possible that auditors were signing off on inadequately documented controls for years. Of course that means we as management are also just as much at fault; after all we are the ones responsible for the inadequate documentation in the first place.
One other topic that was discussed, was the role of the audit committee. It is clear that the role is getting harder. There seemed to be some concern that the assignment of other issues to audit committees, such as cybersecurity, may detract from the critical roles developed through the Sarbanes-Oxley Act – auditor selection, overseeing ICFR and responsibility for accurate financial reporting. It is interesting how it actually tied back to the ICFR issue I already discussed as well. The bottom line is that boards and investors needs to consider the critical role the audit committee plays in the financial reporting process, and make sure they have time to properly play their role, even if that means giving some duties to other committees or the board as a whole.