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Josh Jones' Slides Josh Jones' Slides Presentation Transcript

    • Josh Jones
    • Senior Associate Chief Accountant
    • Office of the Chief Accountant
    • U.S. Securities and Exchange Commission
    • December 4, 2008
    The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
  • Agenda
    • Improving the Implementation of SOX 404
      • 2007 and 2008 Activities
      • Reporting Results
      • Frequently Asked Questions
    • Other Initiatives
      • SEC Advisory Committee on Improvements to Financial Reporting (CIFiR)
      • Interactive Data (XBRL)
      • International Financial Reporting Standards (IFRS)
      • US Treasury Advisory Committee on the Auditing Profession
  • Improving the Implementation of SOX 404 2007 and 2008 Activities
  • 2007 and 2008 Activities
    • 404(a): Management Assessment
        • Interpretive Guidance approved by Commission on May 23, 2007
        • Issued - “Sarbanes-Oxley Section 404: A Guide for Small Business”
        • Both available on SEC website at:
    • 404(b): Auditor Attestation
        • Auditing Standard No. 5 (AS 5)
          • Approved by PCAOB on May 24, 2007
          • Approved by Commission on July 25, 2007
        • [Draft Issued – “ Preliminary Staff Views – Guidance for Auditors of Smaller Public Companies” ]
        • Deferral of compliance for Non-Accelerated filers
    • COSO Monitoring Guidance
  • Improving the Implementation of SOX 404 Reporting Results
    • Disclosure Issues
        • Compliance issues
          • Non-accelerated filers – no management report included
          • Management’s report does not include all required components
          • ICFR effective even though material weaknesses are disclosed
          • Relationship of ICFR and DCP
          • Disclaimer language regarding additional information included in management’s report is not included in the auditor’s report (AS 5, C12-C14)
          • Auditor’s report does not disclose impact of the material weakness (adverse opinion) on financial statement audit opinion (AS 5, par. 92)
    Reporting Results
  • Reporting Results
    • Disclosure Issues
        • Transparency considerations
          • Management should also consider providing disclosure that allows investors to understand the cause of the control deficiency and to assess its potential impact, including:
            • The nature of the material weakness
            • An analysis of how the material weakness affects the company’s financial reporting and internal controls
            • Management’s current plans (or the actions management has already taken) to address the material weakness
    • Disclosure Issues
        • Transparency considerations (continued)
          • Does the disclosure allow users to determine whether the deficiency has a pervasive impact on ICFR?
          • Does the disclosure adequately communicate the actual cause of the material weakness (rather than an overly broad description)?
          • If financial statement adjustment led to the material weakness, does the material weakness disclosure adequately describe the ineffective controls, rather than simply describing the financial statement adjustment ?
    Reporting Results
  • Reporting Results Companies with FYE’s after 11/14/07 and filed through 8/31/08 Source: Audit Analytics
    • Disclosure Issues
        • Other Observations
    Year 2 Year 3 Year 4 Material and/or numerous auditor/YE adjustments Accelerated Non-accelerated 62% 64% 69% 33% Restatement or nonreliance on company filings Accelerated Non-accelerated 50% 32% 20% 5%
    • Disclosure Issues
        • Other Observations (continued)
          • Restatement of financial statements without considering original disclosures
          • Discussion of remediation effort often appears to provide additional information about the material weakness or potentially identifies additional material weaknesses not disclosed
          • Auditor’s report contains more or different information than management’s report
    Reporting Results
    • Disclosure Issues
        • Other Observations (continued)
          • No disclosure of the significance of an acquired entity that has been excluded from the assessment in the year of acquisition
          • Limited disclosures about certain changes in ICFR
          • Extensive “inherent limitations” language
    Reporting Results
  • Reporting Results: Year 4 Filers (Companies with FYE’s after 11/14/07 and filed through 8/31/08)
      • Approximately 7,700 filings
        • Domestic (91%), FPI’s (9%)
        • Accelerated (49%), Non-Accelerated (51%)
      • Reported material weaknesses (i.e., ineffective ICFR)
        • Accelerated 6.6%
        • Non-Accelerated 22.3%
    Source: Audit Analytics
  • Reporting Results: Year 4 Filers (Companies with FYE’s after 11/14/07 and filed through 8/31/08)
      • Accelerated filers reporting ineffective ICFR
        • Year 4 6.6%
      • All filers reporting ineffective ICFR
        • Year 3 9.3%
        • Year 2 11.2%
        • Year 1 16.0%
      • Compared with 21.9% of non-accelerated filers reporting ineffective ICFR in Year 4, their first year under 404(a)
    Source: Audit Analytics
  • Reporting Results: Ineffective ICFR Selected Financial Statement Elements Involved * Includes data for only accelerated filers Source: Audit Analytics 16% 20% 19% PPE/Fixed/Intangible Assets Valuation 13% 19% 16% Foreign/Related/Affiliated/ Subsidiary Party Issues 27% 25% 28% 31% 34% Year 2 25% 20% Accounts and loans receivable 19% 24% Liabilities and payables 24% 25% Revenue recognition 30% 30% Income taxes Year 4* Year 3 20% 19% Inventory and cost of sales
  • Ineffective ICFR: Selected Issues Identified * Includes data for only accelerated filers Source: Audit Analytics 6% 7% 8% Ethical compliance issues with personnel 6% 6% 6% Senior management resources, competency, reliability issues 10% 14% 15% Journal entry control issues 12% 17% 16% Segregation of duties/design of controls 16% 22% 21% Nonroutine transaction control issues 27% 23% 21% IT, software, security issues 23% 27% 29% Untimely or inadequate account reconciliations 63% 58% 58% Acctg personnel resources, competency, training 100% 100% 99% Acctg documentation, policy, and/or procedures Year 4* Year 3 Year 2
  • Improving the Implementation of SOX 404 Frequently Asked Questions
  • Frequently Asked Questions
    • Non-Accelerated Filers F/S Audits
        • Auditors are not required to evaluate the effectiveness of ICFR (i.e., perform an ICFR audit under 404(b))
          • Does not preclude dialogue
        • What should the auditor do if management does not perform an assessment or if management’s assessment is believed to be inaccurate? For example:
          • Management reaches an incorrect conclusion as to effectiveness of ICFR
          • Management does not disclose all identified material weaknesses
  • Frequently Asked Questions
    • Non-Accelerated Filers F/S Audits (continued)
        • Audit Considerations (e.g. if the auditor identifies deficiencies as part of the financial statement audit):
          • Understand how management has considered the information in its assessment
            • Be mindful that management may have considered compensating controls or other matters in its assessment
          • If, after understanding management’s response, the auditor still believes that management has not adequately considered the deficiency, consider discussion with the audit committee
          • Any residual concerns require the auditor to consider whether management’s assessment contains a material misstatement of fact, and follow the guidance outlined in AU 550.06 (SAS 8)
  • Frequently Asked Questions
    • Staff Guidance
        • Staff FAQs address issues such as FIN 46R, equity method investments and Type 2 SAS 70 reports.
        • SEC Staff speeches
    • Contacts
        • The SEC's Office of the Chief Accountant is happy to assist with Section 404 questions. You can submit a question by email to [email_address] .
          • More information can be found at:
        • For help with other compliance issues of importance to smaller companies, visit the Division of Corporation Finance's Office of Small Business Policy website at , or email us at [email_address] .
  • Other Initiatives
  • Other Initiatives
    • SEC Advisory Committee on Improvements to Financial Reporting (CIFiR)
    • Interactive Data (XBRL)
    • International Financial Reporting Standards (IFRS)
    • US Treasury Advisory Committee on the Auditing Profession
  • SEC Advisory Committee on Improvements to Financial Reporting (CIFiR)
    • Background
        • Emanated from concerns about complexity of financial reporting
        • Examined the U.S. financial reporting system to identify possible improvements
        • Chaired by Robert Pozen
        • Composed of preparers, investors, audit committee representatives, auditors, attorneys and regulators
        • Observed by FASB, PCAOB, IASC, Federal Reserve Board and Department of Treasury
        • Issued “developed proposals” in February 2008, final recommendations on August 1, 2008
  • Interactive Data (XBRL)
    • E X tensible B usiness R eporting L anguage
        • Extensible – allows for customization
        • Business Reporting – Exchange of interactive business information over the Internet
        • Language – XML-based language for defining information
    • XBRL is tagged data (machine readable)
  • Interactive Data (XBRL)
    • Proposing Release Phase-In
      • Largest domestic and foreign accelerated filers that use US GAAP would provide an additional exhibit containing financial statements, and any applicable financial statement schedules, in XBRL beginning with fiscal periods ending on or after December 31, 2008
        • Approximately 500 largest companies
      • Companies also would be required to post this information on their websites
      • All other domestic and foreign large accelerated filers using US GAAP would phase-in beginning with fiscal periods ending on or after December 31, 2009
      • All remaining filers using US GAAP and all FPI’s that prepare their financial statements using IFRS, as issued by the IASB, would phase-in beginning with fiscal periods ending on or after December 31, 2010
      • The required tagged disclosures would include companies’ primary financial statements, footnotes, and financial statement schedules
        • Financial statement footnotes and schedules initially would be tagged individually as block text
        • After a year of such tagging, a filer would be required to tag the detailed disclosures within the footnotes and schedules
  • International Financial Reporting Standards (IFRS)
    • Significant Milestones
      • April 2005 – SEC staff publishes IFRS “Roadmap”
      • March 2007 – SEC staff roundtable
      • July 2007 – Proposing Release on acceptance of IFRS financial statements without reconciliation to US GAAP for foreign private issuers (FPIs)
      • August 2007 – Concept Release on allowing IFRS for US issuers
      • November 2007 – Commission approved elimination of reconciliation to US GAAP by FPIs using IFRS as issued by the IASB
      • December 2007 and August 2008 – SEC staff roundtables
      • November 2008 – SEC publishes for public comment a proposed “Roadmap” for the potential use of IFRS by U.S. issuers
  • Treasury Committee
    • Objective was to provide advice and recommendations on the sustainability of a strong and vibrant public company auditing profession
    • Committee was co-chaired by Arthur Levitt Jr. and Don Nicolaisen
    • Three subcommittees
        • Human Capital
        • Firm Structure and Finances
        • Concentration and Competition
    • SEC and PCAOB were official observers of the committee
    • Issued final report October 6, 2008
        • Recommendations
  • Questions