Focus On Audit Committees, Accounting and the Law

Impact of New Derivatives Regulations on Nonfinancial Companies

January 9, 2013 11:05 AM

Companies that use derivatives should note that the Dodd-Frank Act's sweeping new derivatives provisions are beginning to be implemented. Many of the Dodd-Frank Act's requirements apply to nonfinancial public and private companies that use derivatives. Some companies may be able to rely on an "end user" exception from some of the regulations' requirements, especially the requirements that derivative transactions be cleared through a registered derivatives clearing organization and traded on a regulated exchange or exchange-equivalent. Importantly, a public company that wishes to rely on this exception will need approval by its board of directors or a committee to which the decision is specifically delegated. For more information, see WilmerHale's new guide, The New Swaps Regime: A Primer for Nonfinancial Companies. WilmerHale will also present a webinar on this subject on January 22, which will address in greater detail the Dodd-Frank Act's implications for nonfinancial corporations that use derivatives. Register for the webinar.

SEC Names New Chief Accountant

December 26, 2012 10:05 AM

The Securities and Exchange Commission has named Paul Beswick as its Chief Accountant. Mr. Beswick has been Acting Chief Accountant since July. The SEC's Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy, and for overseeing the professional performance of public company auditors generally. Among other things, the Office has taken the lead in studying the adoption of International Financial Reporting Standards in the US and is responsible for oversight of the Public Company Accounting Oversight Board.

US/China Regulatory Dispute Intensifies

December 26, 2012 10:00 AM

Companies with operations in China, and their audit committees, should keep an eye on the dispute between securities and accounting regulators in the United States and China. Recently, the Securities and Exchange Commission sued five Chinese accounting firms (all associated with global accounting networks) for failing to produce documents related to SEC investigations of Chinese companies listed in the US. Meanwhile, members of the Public Company Accounting Oversight Board have expressed frustration about the PCAOB's inability to inspect Chinese registered public accounting firms that audit Chinese companies listed in the US. Both the SEC's and the PCAOB's efforts have been impeded by their inability to reach satisfactory cooperation agreements with the China Securities Regulatory Commission. China, for its part, has objected to disclosure of documents to US regulators and inspection of China-based accounting firms on sovereignty and state secrecy grounds.

The SEC's lawsuit seeks sanctions against the firms under its Rule 102(e), which can include barring the firms from auditing financial statements of US issuers. Members of the PCAOB have also implied that the PCAOB may take regulatory action against Chinese firms if the Board is unable to inspect those firm as required by the Sarbanes-Oxley Act; this could include deregistering the firms or other restrictions on their activities. Any sanction by the SEC or the PCAOB can only be imposed after an adjudicatory proceeding, and the agencies have substantial discretion in deciding what sanctions to impose. It is important to bear in mind, however, that such sanctions could do more than just prevent Chinese accounting firms from issuing audit reports on Chinese companies listed in the United States and cause the delisting of such companies in the US. The sanctions could, depending on their nature and scope, also create problems for auditors of US companies who must rely on Chinese accounting firms to audit, or perform audit procedures relating to, financial statements of the Chinese operations of the US companies.

SEC Approves PCAOB Standard for Auditor Communications

December 18, 2012 11:00 AM

On December 17, the Securities and Exchange Commission approved the Public Company Accounting Oversight Board's Auditing Standard 16 Communications with Audit Committees. The new standard will apply to audits for fiscal years beginning on or after December 15, 2012. Note that AS 16 has also been incorporated into the PCAOB's standard for reviews of interim financial statements (SAS No. 100 or AU 722). Therefore, some aspects of the standard will come into play in the first quarter of 2013 for issuers with calendar fiscal years. In addition, the SEC expressly determined under the requirements of the JOBS Act that application of AS 16 to emerging growth companies is "necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation." (For more information on AS 16, see our newsletter, PCAOB Focuses on Audit Committee Interactions with Auditors.)

News from the AICPA's Annual Conference

December 10, 2012 9:12 AM

The American Institute of Certified Public Accountants' annual conference on Current SEC and PCAOB Developments is always a source of news about accounting and financial reporting matters. Among the noteworthy items at this year's conference, held on December 3-5 in Washington:

PCAOB Inspections and Audit Committee Outreach: James Doty, Chairman of the Public Company Accounting Oversight Board, highlighted the PCAOB's new five-year strategic plan (more on that in a subsequent post), in particular its objective to provide more timely audit firm inspection reports. He also indicated that the PCAOB anticipated issuing summary reports on insights from inspections, and other topics, prepared "with an eye on, among other things, getting useful information to audit committees." Mr. Doty also observed that "[a]udit committees have a role in fostering not just integrity in management's reporting, but the vitality and viability of the independent audit" and stated an audit "is not something to be procured from the lowest cost supplier." (Mr. Doty's keynote address can be found here.) IFRS: Paul Beswick, Acting Chief Accountant of the Securities and Exchange Commission, had little to report on SEC consideration of International Financial Reporting Standards. He noted that the staff "will work with our new Chairman [Elisse Walter] and our existing Commissioners on determining the next steps in this process. So please stay tuned." (Mr. Beswick's remarks can be found here.) Disclosure Framework: Mr. Beswick announced that the SEC staff intends to hold a roundtable next year to consider issues relating to the appropriate "dividing line" between what information should appear in the financial statements versus the "broader financial reporting package," such as MD&A. Auditor Independence: Mr. Beswick noted that some accounting firms are actively growing non-audit consulting practices. He questioned "whether accountants' expanding practices into areas unrelated to their primary competencies weakens public trust." He also expressed concern that such expansion has the potential to "distract a firm's leadership and other personnel from providing appropriate attention to their audit practice" and suggested that it "runs the risk of damaging the accountant's reputation." PCAOB Chair Doty also alluded in his remarks to the fact that large audit firms' revenues from consulting are growing rapidly while audit fees have stagnated and suggested that "[t]his threatens to weaken the strength of the audit practice in the firm overall." Mandatory Firm Rotation: PCAOB Member Jay Hanson was quoted in press reports to the effect that many obstacles to implementation of mandatory rotation make him believe it is unlikely the PCAOB will go forward. PCAOB Chair Doty reiterated his oft-stated view that it was "important to reexamine how we protect the auditor's independence, including by considering term limits." Internal Control Over Financial Reporting (ICFR): Both Mr. Beswick and Brian Croteau, Deputy Chief Accountant, noted that even though some smaller issuers and emerging growth companies have been exempted from the ICFR audit requirement of Section 404(b) of the...