New Revenue Recognition Rule Demands More Auditor Skepticism

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By Laura Tieger Salisbury

Auditors must approach the new revenue recognition rule with no qualms about challenging management’s assumptions, Patrick McNamee, PCAOB’s deupty chief auditor advises.

McNamee reminded auditors of their duty to remain independent, exercise professional skepticism, report to the audit committee and to challenge management’s assumptions.

The new revenue recognition standard has moved from a rules-based standard to a principles-based standard. In its first year, there will be many different judgments and differing views. Auditors must be prepared for that, McNamee told a May 8 Deloitte/Bloomberg BNA conference on revenue recognition.

McNamee cautioned auditors that their professional responsibility to evaluate financial statements for error or fraud means that in this period of uncertainty, auditors can’t capitulate to management’s judgments.

Challenges Greater

Under the new principles-based rule, auditor responsibility to apply professional skepticism to reviews of financial statements has increased. He referred auditors to Staff Practice Alert No. 10: Maintaining and Applying Professional Skepticism in Audits, which he said was “more relevant and urgent today” than when written in 2012.

McNamee said management very often wants to keep the old accounting. The auditor’s professional duty requires it to ask if management has interpreted the new standard correctly. Studies show that auditors often don’t challenge management because they want to avoid conflicts or negative consequences, he said.

Time Pressure Under New Standard

The newness of the standard will lengthen management’s financial statement preparation period, which will “squeeze auditors” in getting ready to review them, McNamee explained.He cautioned auditors against rushing through their evaluation by looking at the easy confirming evidence, which comes from within the company, rather than question outside sources that might take longer but might provide a different view.

The revenue recognition standard has changed but auditing rules haven’t. McNamee told auditors to read:

McNamee’s advice to auditors at the conference echoed language in PCAOB’s Revenue Recognition Staff Practice Alert of September 2014.

“The Board’s staff believes that the auditing matters discussed in this practice alert are likely to continue to have relevance to auditing revenue under the new accounting standard,” the alert said.

To contact the reporter on this story: Laura Tieger Salisbury in Washington at LSalisbury@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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