Financial reporting issues have always been at the heart of the audit committee agenda, and always will be, even as other risks arise to claim their share of attention. With that in mind, half of Protiviti’s recommended 2018 audit committee agenda focuses on financial reporting risks.
Protiviti has identified eight audit committee agenda priorities for 2018, outlined in the latest issue of The Bulletin. For this post, I’ll cover financial reporting challenges that should be getting attention and creating activity within audit committees:
Revenue Recognition — The new revenue recognition accounting standard is now in effect for most public companies, with all companies expected to comply by the end of the year. We’ve covered the transition extensively, including in this post from August. For 2018, audit committees need to monitor implementation to make sure management is getting the job done during quarterly filings so that there are no surprises or failures when full year financials are reported. Internal audit ought to be considering a pre- or post-implementation review of the adoption of the new standard from two vantage points — whether or not the new revenue recognition rules are being applied appropriately, and whether or not the company has, and is operating, a robust methodology for dealing with an accounting change of any kind, especially since there are other accounting changes coming down the pike.
SEC Priorities — The Securities and Exchange Commission (SEC) last year issued guidance to audit committees focused on a number of areas. In 2018, audit committees need to determine whether they understand, and their organizations are sufficiently focused on, the stated SEC priorities, which include diversity, workload, non-GAAP disclosures, valuation issues, asset impairments and cyber disclosures.
PCAOB Audit Issues — Changes to the Public Company Accounting Oversight Board (PCAOB) inspections scope and standards, adopted in 2017, may influence the audit process, which in turn may affect the audit of the company’s financial statements. Although the PCAOB does not regulate companies directly, it does regulate external auditors, with a flow-down effect on the companies they audit. External auditors will, for example, need to begin to identify, and publicly disclose, critical audit matters that could affect a company’s financial condition.
Imminent Change — Audit committees are not the first line of defense, but they are viewed very much as the final line of defense for ensuring that financial reporting is of a high quality. There’s always a current event of some kind — such as the new rules on lease accounting — that may refocus audit committees and their oversight. It is therefore imperative that audit committee members are able to identify, understand, and stay abreast of imminent changes, such as the previously mentioned revenue recognition and PCAOB changes and the new lease accounting standards that will loom large as 2018 progresses.
My colleague Jim DeLoach wrote about the need for audit committees to assess their effectiveness as one of the 2018 priorities. I will add that the beginning of the year offers an opportunity for directors and those who work with directors to assess the composition of the committees and the scope of their work, adding lease accounting and other critical audit matters, as well as areas to consider around culture, with an eye toward improving the control environment and the financial reporting process.
You can learn more by listening to our recorded webinar on demand, and check here again or subscribe for a continuing discussion of this year’s audit committee agenda.