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Nov. 15 — Auditors shouldn’t manage company efforts to apply new revenue recognition rules, a senior staff accountant at the Securities and Exchange Commission said Nov. 15.
Securities regulators cautioned auditors and companies that such actions may risk violating auditor-independence rules. Auditors and companies, therefore, should guard against outside accountants aiding companies in shifting to the new standard.
“Auditors can still be helpful as long as they’re mindful of independence rules” that bar auditors from making management decisions to the point that auditors end up signing off on their own work, said Kevin Stout, a senior associate chief accountant in the SEC’s Office of Chief Accountant.
Tens of thousands of companies globally must apply the 2014 standard—ASC 606—which was issued jointly by the Financial Accounting Standards Board and its international counterpart.
Many companies face big changes to their accounting practices—including beefed-up disclosures—to record and describe what is called the most important line in financial statements.
Companies in sectors such as aerospace and defense, telecom, technology, biopharmaceutical and media and entertainment could experience substantial financial impacts.
Public companies must start following the far-reaching revenue recognition standard in January 2018.
Stout and Wesley Bricker, the SEC’s interim chief accountant, nonetheless said some advice by external auditors on implementing the revenue standard could be appropriate. They spoke Nov. 15 at an annual conference of Financial Executives International in New York.
“Auditors will obviously have to do their job working through the evaluation of the appropriateness of the application of the new standard,” Stout said. The external audit firm also must “effectively identify audit risks to perform its audit,” he said.
The auditor must understand what management has done to implement the new accounting rules and to gauge what systems and processes have changed to do that, Stout said. Because of the changes, “auditors may be asked to provide important feedback to management on its implementation of the new standards,” he said.
“So, certainly, do support the auditor input there, because investors can obviously benefit when auditors and management engage in that dialogue,” Stout said.
Stout and Bricker stressed that investors’ confidence in financial reporting hinges on the auditor’s commitment to maintaining independence in both fact and appearance.
The auditor, in talking with companies about shifting to the new revenue rules, “needs to recognize that there are boundaries to their involvement,” Stout said.
He cited provisions in SEC rules—Section 201 of Regulation S-X—that lay out principles for auditor independence. Those tenets guard against auditors acting like management. They shouldn’t be involved in decision-making to the point they are auditing their own work, Stout said.
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