Here are a few recent articles of interest to auditors:
- Charles Hall discusses common deficiencies in government audits. Issues also apply to single audits for NPOs and all pension audits.
- FASB removes the effective dates from PCC alternatives, which means they can be applied at any time by a private company without going through the preferability analysis.
- FASB starts to think about whether to record expenditures for intangible assets on the balance sheet.
Single Audits
2/15 – Charles Hall at CPA-Scribo – Findings from Peer Reviews of Governmental Engagements – Three items to mention from this article.
First, the AICPA pulled in a selection of peer reviews performed on “must-select” engagements. The oversight was performed by highly experienced peer reviewers, meaning it is our calling CPAs who looked at the audit workpapers and peer review workpapers.
The results? Not good. Consider:
- 10% of the peer reviews identified engagements as substandard
- 40% of the engagements were identified as substandard by the oversight review
Two conclusions jump out from those results. Just under half of must-select engagements in the sample were substandard. Three-quarters of those substandard engagements were missed by peer reviewers.
That is not a good situation.
Second, the middle portion of the article is a list of common deficiencies identified in the oversight project.
Here’s a hint for CPAs desiring to do the best job possible: copy those points, paste into a Word document, and use them as a review tool for your pension and single audit engagements.
Third, this is a major warning to us as a profession. Consider Mr. Hall’s closing comment:
The CPA community must take these concerns seriously. If we don’t, we may end up with a complete change of the present peer review process. Without positive improvement, CPA firms could, one day, be reviewed by governmental regulators — think IRS audits. It is imperative that we self-regulate in an effective manner.
Private Company Council
3/7 – Journal of Accountancy – FASB eliminates effective dates for private company alternatives – The four alternatives that the Private Company Council has carved out of GAAP as options for private companies all have a specified effective date.
The consequence of having an effective date is that if a private company wishes to adopt one of those alternatives after the effective date, they have to clear the “preferability” barrier of ASC Section 250, Accounting Changes and Error Corrections. In an overly condensed phrase, the company must show the PCC alternative is better than not applying the alternative. Conceptually that closes off the PCC alternatives for any company that doesn’t adopt them on the effective date.
FASB adopted a new rule which removes the effective dates. This means a private company can adopt them at any time they want to based merely on a preference that they would like to implement the alternative.
The four alternatives affected, as cited in the article include
ASU No. 2014-02, Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill
ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach
ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination
The transition provisions in the four documents are extended indefinitely.
FASB Update 2016-03 may be found at this link.
Intangible assets
3/21 – Wall Street Journal – Accounting’s 21st Century Challenge: How to Value Intangible Assets – Staff at FASB have started talking about whether expenditures to create intangible assets should be recorded on the financial statements as assets. To illustrate the issue, some studies have suggested that businesses in America are spending more money to develop intangibles than they are spending to develop physical assets.
Intangibles such as patents, brand names, and customer base will work their way into the financial statements when a company is purchased. That acquisition triggers a requirement to recognize fair market value of all assets, including intangibles. On an ongoing basis the value of those intangibles needs to be revisited.
Is a really long time before we could even see discussion of what an exposure draft might look like. Still, it is worth looking at the issue with at least a brief side glance.