SEC Trends & Developments - Winter 2011 - News

  • According to Audit Analytics, approximately 175 companies in the S&P 500 have used the same auditing firm for over 25 years and 7 have used the same firm for over 100 years.  According to a concept release expected to be issued by the PCAOB, this may change in the future.  The concept release is expected to propose a requirement that companies rotate auditing firms.  Currently, auditing firms must rotate the partners every five years, but there is no limit on the length of time a firm can audit a registrant.  Lynn Turner, former Chief Accountant at the SEC and head of the PCAOB Subcommittee that recommended the mandatory rotation, feels that auditors might be inclined to perform tougher audits if they knew their work would be checked when their term ends and a new audit firm comes in.  Approval of the change is far from certain.  Auditing firms are expected to push back and any PCAOB rule would have to be followed by rules which would need to be approved by the SEC.  In addition, audit fees would be higher due to the higher cost needed for auditing firms to become familiar with a registrant's operations.  The European Commission is also reviewing a similar rule.
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) provided the SEC with the authority to pay financial rewards to whistleblowers that provide new and timely information about violations of securities laws, provided that the information leads to a successful SEC enforcement action with a monetary sanction in excess of $1 million.  Now, the SEC has created a new webpage where these violations can be reported.  The page can be found at  The webpage provides information on the various eligibility requirements, directions on how to submit a tip or complaint to the SEC, instructions on how to apply for a whistleblower award, and answers to frequently asked questions.  In a statement, the SEC said “With fewer than 4,000 employees to regulate more than 35,000 entities, the SEC cannot be everywhere at all times.  With a robust whistleblower program, the SEC is more likely to find and deter wrongdoing at firms it may not have otherwise uncovered.”  Prior to Dodd-Frank, the SEC had the authority to reward whistleblowers only in insider trading cases.
  • The SEC has formed a committee to focus on the interests and priorities of small businesses and smaller public companies.  The Advisory Committee on Small and Emerging Companies intends to seek advice on SEC rules and regulations as they relate to such businesses and provide the SEC with recommendations for privately held small businesses and publicly traded companies with less than $250 million market capitalization. The committee will focus on the areas of capital raising through private placements and public securities offerings, trading in the securities of small and emerging and small publicly traded companies and public reporting requirements of those companies.  The committee is planning to have up to 20 voting members, balanced in terms of points of view represented and functions to be performed. 

    A recent survey suggests that registrants are more focused on risk oversight, which results in more board members in charge of overseeing risk.  The key trends identified suggest that more committees other than audit committees are now involved in risk oversight (88 percent in 2011, 82 percent in 2010) and that more companies disclosed how the board is involved with the company's risk appetite decisions (11 percent in 2011, 8 percent in 2010).  The financial services industry is further along than other industries, primarily due to the nature of their business and the regulatory requirements of Dodd-Frank and the Basel Accords.  Other steps for boards to consider include revisiting their risk governance and oversight practices periodically; keeping the development of their practices on top of the agenda and ensuring sufficient funding to continuously improve oversight practices; using competitors, peers, and market leaders' risk-related disclosures in proxy statements as benchmarks; and ensuring that their disclosures to shareholders tell the full story of risk oversight efforts.
  • The PCAOB published an alert to increase the awareness of auditors of risks when they are conducting audits of companies with operations in emerging markets such as China.  The alert is Staff Audit Practice Alert No. 8, “Audit Risks in Certain Emerging Markets.” “While this practice alert is for auditors, it also is a good reminder to investors and audit committees of the heightened fraud risk found in some emerging market companies that trade on U.S. exchanges, especially those in countries where the PCAOB is blocked from conducting inspections of auditors' work,” said PCAOB Chairman James R. Doty in a press release. The conditions, situations, and fraud risks described in the alert have been observed in audits of companies in certain emerging markets, but the PCAOB has warned auditors to consider them as they might also be present at companies in other markets. Through their oversight activities, the PCAOB has observed these situations that might indicate to auditors a heightened fraud risk. Included on the list of examples are discrepancies between a company's financial records and audit evidence obtained from third parties; auditor difficulties in confirming cash and receivable balances; and the recognition of revenue from contracts or customers whose existence cannot be corroborated. Auditors should consider how to respond to these circumstances based on the specific facts for each situation.
  • The revenue recognition exposure drafts from the FASB and the IASB have been revised and reissued for public comment.  Comments of the revised exposure drafts are due in March 2012.  The concept that an entity would recognize revenue from contracts with customers when it transfers promised goods or services to the customer, which is the core principle of the drafts, remains the same.  The revisions to the original proposal are based on the numerous responses received on that proposal.  The changes made by the FASB and the IASB include adding guidance on how to determine when goods or service are transferred over time, simplifying the proposals on warranties, simplifying the determination of the transaction price (including collectability, time value of money, and variable consideration), modifying the scope of the test for long-term services, adding the ability to recognize an expense for the cost of obtaining a contract (if one year or less), and providing exemption from some disclosures for non-public entities that apply U.S. GAAP.
  • The SEC has released two papers regarding IFRS under the major title of “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.”  The first paper was published by the Office of the Chief Accountant in the Division of Corporation Finance and is subtitled “An Analysis of IFRS in Practice.”  This paper presents the observations of the SEC's staff regarding the application of IFRS in practice to assist the SEC in its future deliberations regarding IFRS. The second paper was published by the Office of the Chief Accountant and is subtitled “A Comparison of U.S. GAAP and IFRS.”  This paper summarizes the results of an analysis by the SEC staff of IFRS, compared to U.S. GAAP.  Both papers can be found on the SEC's website at 

SEC Trends & Developments - Winter 2011 Issue  

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