Financial Reporting and Regulatory Update

Fourth Quarter 2017

From the PCAOB

New Chairman And Board Members

On Dec. 12, 2017, the SEC appointed a new board of four members and a chairman, William D. Duhnke III, to the PCAOB. Duhnke is currently the staff director and general counsel to the U.S. Senate Committee on Rules and Administration, and he previously served as staff director and general counsel to the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the Committee on Appropriations.

The four new board members include:

  • J. Robert Brown, currently a professor of law at the University of Denver, where he is director of the corporate and commercial law program and is the Lawrence W. Treece professor of corporate governance
  • Kathleen M. Hamm, currently the global leader of securities and fintech (financial technology) solutions and senior strategic adviser on cyber solutions at Promontory Financial Group
  • James G. Kaiser, currently a partner and the global assurance methodology and transformation leader at PricewaterhouseCoopers
  • Duane M. DesParte, soon to retire as senior vice president and corporate controller of Exelon Corporation. He previously was an audit partner at Deloitte & Touche and, prior to that, at Arthur Andersen.

Auditor’s Reporting Model (Arm)

Staff Guidance for Phase One and Overview of Phase Two

On Dec. 4, 2017 (and updated on Dec. 28, 2017), the PCAOB published staff guidance describing changes to the auditor’s report that are effective for phase one of implementation, which includes audits for fiscal years ending on or after Dec. 15, 2017. The guidance, updated Dec. 28, addresses these key changes to the auditor’s report:

The guidance also provides an overview of the requirements for CAMs, which are not required to be reported until phase two of implementation, for audits of fiscal years ending on or after June 30, 2019 (for large accelerated filers), or Dec. 15, 2020 (for all other companies to which the requirements apply).

Major Accounting Standards

Staff Guidance for the Revenue Recognition Standard

On Oct. 5, 2017, the PCAOB released Staff Audit Practice Alert 15, “Matters Related to Auditing Revenue From Contracts With Customers,” to provide guidance for auditors to consider during their interim reviews and annual audits of financial statements with regard to the revenue recognition standard. The revenue recognition standard is effective for calendar year-end public business entities (PBEs) beginning in the first quarter of 2018, with the exception of PBEs that qualify as a PBE solely due to a requirement to include or the inclusion of its financial statements or financial information in another entity’s SEC filing (refer to ASU 2017-13).

The practice alert addresses the following topics:

  • Form of the auditor’s report – requires the opinion section to be first, immediately followed by the basis for the opinion; in addition, requires section titles
  • Addressee – requires the report to be addressed to the shareholders and the board of directors
  • Auditor independence – requires a statement that the auditor is registered with the PCAOB and is independent
  • Auditor tenure – requires a statement containing the year the auditor began serving consecutively as the company’s auditor
  • Auditor reporting regarding internal control over financial reporting (ICFR) – requires explanatory language when management’s report is not required to be audited and makes conforming amendments when management’s report is audited
  • Explanatory and emphasis paragraphs – addresses when an explanatory paragraph is required and the use of emphasis paragraphs
  • Information about certain audit participants – permits the auditor’s report to include information regarding the engagement partner and/or other accounting firms participating in the audit
    • Management’s transition disclosures in the notes to the financial statements
    • Transition adjustments
    • Internal control over financial reporting
    • Fraud risks
    • Revenue recognition in conformity with the financial reporting framework
    • Revenue disclosures