SEC Trends & Developments - Spring 2013 - News

According to a recent survey by the Institute of Internal Auditors, approximately 24% of companies surveyed plan to increase their internal audit departments and approximately 71% plan to maintain their internal audit departments.
The NASDAQ Stock Market LLC has proposed a change that would require listed companies to establish an internal audit function by December 31, 2013. This would be for companies listed on or before June 30, 2013.  For companies listed after that date, an internal audit function would be required prior to listing. The proposal requires the internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. This process can be outsourced to third-party service provider other than the company’s independent auditor. NASDAQ stated that the proposed rule is to ensure companies have a mechanism in place to regularly review and assess internal controls, identify weaknesses, and develop appropriate remediation. The NYSE has a similar requirement already in place.

A recent survey by the Institute of Internal Auditors of over 500 executives in the U.S. and Canada found that more than 75% of chief audit executives report to the full board of directors or the audit committee.  These findings indicate that the internal audit function is becoming more independent and objective, and less influenced by the CFO.

According to a recent paper released jointly by Robert Half and the Institute of Internal Auditors, the seven attributes of a highly effective internal auditor include:

  1. Integrity
  2. Building trust and credibility
  3. Partnering
  4. Communication skills
  5. Working well with others
  6. Having a global mindset
  7. Nonstop curiosity, which leads to continuous learning

A recent poll by the Center for Audit Quality indicated that audit committee members are satisfied with the information they are getting from external auditors.  That poll included 228 audit committee members, two-thirds of whom serve on companies with revenues in excess of $750 million. Another trend that is continuing is that more than half of those polled said that their companies had retained an audit consultant.  The PCAOB recently released Auditing Standard No. 16, which is effective for fiscal years beginning after December 15, 2012, which gave auditors specific instruction on how they should interact with audit committees and what information they should provide.

The PCAOB is looking to reorganize its auditing standards.  The current plan would place the PCAOB’s auditing standards into a topical structure with a single, integrated numbering system. PCAOB Chief Auditor Martin Baumann feels that the current structure does not present an orderly classification of the board’s standards. The “AS” standards and the interim “AU” standards that were adopted by the board and have not been superseded would be placed together in a four-digit numbering system designed to follow the flow of an audit. Current PCAOB standards, according to Chairman James Doty, exceed 2,000 pages. Mr. Doty felt that navigating those standards can prove daunting. The proposed new numbering system would group the standards under the following categories:

  1. General auditing standards
  2. Audit procedures
  3. Auditor reporting
  4. Matters related to filings under federal securities laws
  5. Other matters associated with audits

Each category would have its own digit in the thousands place in the numbering system, so general auditing standards would constitute the 1000 standards, audit procedures would constitute the 2000 standards, and so forth.

The SEC approved a 9% increase in fees paid by registrants to fund the PCAOB. With the additional funding, the PCAOB plans to hire additional staff, perform inspections of broker-dealers, perform more international inspections, perform deeper analysis of inspection reports and improve its inspection program.

The SEC may implement a pilot program to test whether larger trading increments would promote more active trading of smaller stocks.  Under the program, the ‘‘tick size,’’ or minimum increment for quoting shares, for smaller public companies would increase.  Wider tick sizes would increase the spread between bid and offer prices, boosting profits for market makers, which might increase interest in funding analyst research on smaller stocks which would generate greater interest in those stocks.

According to Audit Analytics, restatements for registrants continued to fall in 2012, but restatements by larger companies rose for the second straight year.  The number of restatements in 2012 was 768, having fallen from 820 in 2011, a reduction of over 6%.  Restatements for accelerated filers rose from 202 in 2011 to 245 in 2012.  The largest number of restatements, 15%, was due to problems related to debt, quasi-debt, warrants and equity security issues.  The next largest number, 14.6%, was due to tax issues. Cash flow statement classification errors accounted for the third most common cause of restatements.

The SEC is working on new computer software to help it identify accounting anomalies and fraud in registrant’s financial statements.  The software will scan the registrant’s financial filings, assess risk factors, and generate a score based on a model developed by the SEC. Some of the items the software will look for are frequent changes in auditors and delays in release of earnings.  The software is based on a model used by the SEC to evaluate hedge funds returns and identify fraud by looking for performance results that are inconsistent with the hedge funds investment strategies.  It is expected that this software will be available in the last quarter of 2013, as it is in the final testing phase.

The IRS released is annual list of tax scams commonly committed by, and on, taxpayers.  The list includes:

  1. Identity theft
  2. Phishing
  3. Return preparer fraud
  4. Hiding income offshore
  5. Free money from the IRS and tax scams involving Social Security
  6. Impersonation of charitable organizations
  7. Inflated income and expenses
  8. False Form 1099 refund claims
  9. Frivolous arguments
  10. Falsely claiming zero wages
  11. Disguised corporate ownership
  12. Misuse of trusts

In the first quarter of 2013, according to an article in The Wall Street Journal, 36% of IPOs were priced above the price range discussed in the initial filing. 

The FASB has released a proposed ASU that aims to make the disclosure of discontinued operations relevant by redefining discontinued operations.  This proposed ASU would substantially alter the definition under U.S. GAAP with IFRS.  Disclosure would only be required when the change results in a significant change in the company’s strategy.

The SEC has adopted rules requiring broker-dealers, mutual funds, investment advisors, and certain other entities to adopt programs to detect red flags and prevent identity theft. The SEC adopted the rules with the Commodity Futures Trading Commission in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The rules:

  1. Require financial institutions and creditors to develop and implement a written identity theft prevention program designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts and new accounts;
  2. Include guidelines to assist in the formulation and maintenance of programs that would satisfy the requirements of the rules; and
  3. Establish special requirements for any credit and debit card issuers to assess the validity of notifications of changes of address.

Cybersecurity legislation that creates a framework for companies and the federal government to share information was recently approved.  The Cyber Intelligence Sharing and Protection Act was approved despite concerns that the legislation could give the government access to private information about consumers.  The President has threatened to veto the bill because the measure does not require companies to remove personal data, to the extent possible, before passing it on to the government and other businesses.  House Minority Leader Nancy Pelosi said she would vote against this bill. "They can just ship the whole kit and caboodle over," Pelosi said of companies' obligations on data sharing. "We are saying, minimize what is relevant to our national security. The rest is none of the government's business."

The PCAOB recently updated its agenda to include a proposal that has been discussed for years that would require audit firms to include the name of the engagement partner in audit reports.  The PCAOB has indicated that it will act on this matter sometime between April 2013 and September 2013.  The PCAOB most recently addressed this issue in October 2011; it was first addressed in a July 2009 concept release.  Then the PCAOB asked for thoughts on the Treasury Advisory Committee on the Auditing Profession recommendation from 2008 that engagement partners be required to sign the audit report.  Cindy Fornelli, executive director of the Center for Audit Quality, told the PCAOB she believed the identification of the engagement partner would not improve accountability, but instead would potentially increase liability for auditors.  “Engagement partners are already held accountable to multiple parties,” she wrote, including their firm, audit committees, regulators, and investors.  “These multiple layers of accountability provide a significant incentive for engagement partners to conduct high quality audits in accordance with professional standards,” wrote Ms. Fornelli.

SEC Trends & Developments - Spring 2013 - Issue 

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