A golf coach at Stanford University once said, “At Stanford we don’t recruit golfers based on talent, but on their ability, when faced with challenges, to see obstacles as opportunities.” When the ball (not the golf one) drops in Times Square on New Year’s, 2018, preparers, in relation to their internal control frameworks, will be granted the fortuity to realize a similar perspective as we usher in a new era of revenue recognition.
Getting the accounting and disclosures right – to include providing timely disclosure about the anticipated effect of transition–is just one important aspect of successful implementation of new GAAP standards. Equally important to successful implementation are enhanced processes and effective internal controls to mitigate the risk of material misstatement, including misstatements due to fraud.
-- Sylvia Alicea, Professional Accounting Fellow at the Office of the Chief Accountant with the U.S. Securities and Exchange Commission (SEC) at the May 8, 2017 Bloomberg BNA and Deloitte co-hosted Revenue Recognition conference at the Newseum in Washington D.C.
The transition to a new, principles-based standard will create new areas of risk and reshape the landscape of current ones. Reactionary policies that wait for external auditors, and subsequent governing bodies, to help define broad areas of risk will be both idiosyncratically and systemically detrimental. Companies must perform internal evaluations to most effectively and efficiently assign corporate resources to internal control functions.
With respect to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control–Integrated Framework, Alicea stated, “This guidance illustrates the importance of the integration of control activities with the risk assessment. I believe that this linkage is important for all companies—regardless of the framework used or the company's size–in achieving the objective of reliable financial reporting.”
This is a good illustration of high school math professor reiterations--sometimes the process of getting somewhere is more important than the results themselves. For many companies, their financial statements won’t see quantitative, material changes. However, the internal controls necessary to facilitate accurate revenue information could, and probably will, see material adjustments. The bond between internal auditors, audit committees, and information technology departments will become vital, dependent on a constant, clear stream of communication.
Alicea also highlighted the importance of companies addressing the increased management subjectivity as a result of the new standard. “Companies should consider whether the potential for management bias in reasonable judgments required to apply the new guidance may lead to the identification of new fraud risks.” Internal controls are the other variable in this equation and as in algebra, if the answer remains the same and one variable changes, so must the other. So must the other.
By: Todd Cheney, CPA, Accounting Policy and Practice Editor
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