The January 1, 2018 implementation date for new accounting rules on revenue recognition is just around the corner, and the Public Company Accounting Oversight Board (PCAOB) has been issuing guidance to help companies prepare.
The latest PCAOB Practice Alert, issued earlier this month, addresses areas to which organizations need to pay particular attention. The alert is aimed at external auditors, but the information and insights are equally helpful for the preparers and issuers of organizations subject to audit.
Here are some of the recommended focus areas:
- Transition disclosures in financial statement notes – Companies will need to be clear in their disclosures related to the transition to the new revenue recognition standard. Inaccurate or incomplete disclosures could adversely affect the auditor’s report on the financial statements and internal controls.
- Transition adjustments –. The PCAOB alert directs auditors to assess risks of material misstatement related to an organization’s transition to the new standard and implement audit responses that address those risks. Auditors will also likely scrutinize data that may not have been audited previously, and any prior-period misstatements found in the current period’s audit. Companies will need to be diligent in the preparation of the transition adjustments, especially as it relates to completeness and accuracy of the actual adjustments as well as mitigation of other potential financial reporting and disclosure risks.
- Internal control over financial reporting (ICOFR) – Management’s evaluation of ICOFR across the organization and among outsourced services – and its actions to address shortcomings – is a key area on which the PCAOB is particularly focused, especially: information systems (and the data that is produced), manual processes, management review controls, and review of interim financial information.
- Identifying and assessing fraud risks – Preparers and issuers need to be mindful that their auditor will be envisioning elements that would create the conditions for management and others to commit fraud, such as incentives, pressures or opportunities, or a culture that rationalizes cutting corners. Management should be proactive in assessing and mitigating potential fraud risks.
- Required disclosures – The alert makes special reference to a handful of key disclosures that auditors should look for, including: disaggregation of revenue; contract assets and liabilities; information about performance obligations, including when a company satisfies its performance requirements significant judgments, and modifications to subjective areas, made in applying the requirements to contracts.
While the basics of the PCAOB report are generally what was expected, there are some significant fresh insights, no doubt sparked by regulatory scrutiny of early adopters. Read a more detailed analysis of the PCAOB alert in our Flash Report, available for download here.