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Year-end toolkit: Audit reminders for preparers · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:06
  SPEAKER_01: Hello, and welcome to PWC's Accounting Podcast.
• 0:10
  SPEAKER_01: I'm Heather Horn.
• 0:12
  SPEAKER_01: Today's episode is the next installment of our year-end toolkit series, which covers a range of topics designed to help you through the year-end reporting process.
• 0:22
  SPEAKER_01: And don't worry, even if December 31 is not your year-end or you're not directly involved in reporting, this eight-episode series has something for everyone.
• 0:33
  SPEAKER_01: In this episode, we're focused on reminders about the audit process, which of course plays a key role in year-end accounting and reporting.
• 0:42
  SPEAKER_01: With a lot of standard setting and rulemaking in this space from the PCAOB, we often get the question from preparers: how will we be affected?
• 0:51
  SPEAKER_01: Today's episode will answer those questions for you.
• 0:55
  SPEAKER_02: So obviously, newer amended accounting standards, you've rattled off a couple, and they can significantly impact companies' accounting policies, their financial reporting, and uh their processes and controls.
• 1:06
  SPEAKER_02: So it probably comes as no surprise that we, you know, we find as these changes occur that robust documentation, analysis, consideration of alternatives in the judgments and assumptions are really important relative to getting it right from a financial reporting perspective, including the notes to the financial statements.
• 1:22
  SPEAKER_02: And we do find that thoughtful documentation promotes quality of the judgments and gets to better outcomes.
• 1:29
  SPEAKER_02: And without that communication and documentation, it's easy to end up in a situation where issues remain either unresolved or or perhaps need to be revisited late in the financial reporting process.
• 1:38
  SPEAKER_02: And obviously, that's not good for anyone and can distract from um other other aspects of getting it right from a quality perspective.
• 1:45
  SPEAKER_01: That was Brian Carrodo, PWC's U.S.
• 1:48
  SPEAKER_01: Chief Auditor.
• 1:50
  SPEAKER_01: And of course, if you've been following along with our year-end series, you know that our guest host is Kyle Moffitt, PWC's National Office Professional Practice Group Leader.
• 2:00
  SPEAKER_01: With that, let's tune in to the episode.
• 2:15
  SPEAKER_03: And I I think the way that I I like to kick this one off is really highlighting like, hey, this is not just important for the auditors.
• 2:23
  SPEAKER_03: This podcast is intended really to help preparers as well.
• 2:28
  SPEAKER_03: Think about the impact of the audit and how they can help with the audit uh process.
• 2:33
  SPEAKER_03: And obviously, you and I together worked years ago.
• 2:37
  SPEAKER_03: You worked, you know, multiple times at the SEC, but um in in your time, you know, you and I worked closely together on a number of different matters over the years.
• 2:45
  SPEAKER_03: Um, you know, obviously you were in um the agency's office, Chief Count, and I I was in the Division of Corporation Finance, and of course, kind of our current roles today, the amount of time that we we spend with each other talking about a lot of these issues.
• 2:57
  SPEAKER_03: You know, I I think uh as I think about kind of this the the entire year, what we've seen from the PCOB, what we've seen from the SEC, um obviously post-election, a lot of changes that we expect um in the coming uh next few years.
• 3:12
  SPEAKER_03: Uh you and I attended the AI CPA conference this week, and it it was you know, it's a long week.
• 3:17
  SPEAKER_03: Um it's it's Monday through Wednesday of a lot of content.
• 3:21
  SPEAKER_03: You you spoke on on a panel about PCOB uh standard setting, and I think um I think a lot of the the audience found it incredibly insightful and I think realize how impactful it it was to them, even as preparers.
• 3:34
  SPEAKER_03: And so we heard from a lot of different people.
• 3:36
  SPEAKER_03: We heard from the SEC, PCOB, the FASBE, uh, you know, a representative from Congress, the Chamber, um, preparers and auditors.
• 3:44
  SPEAKER_03: Any key takeaways that you want to highlight from the conference?
• 3:47
  SPEAKER_02: Yeah, sure, Kyle, and and thanks for having me.
• 3:49
  SPEAKER_02: I think you're right.
• 3:50
  SPEAKER_02: There's a ton to talk about here.
• 3:51
  SPEAKER_02: It's not just for auditors, it's for preparers too.
• 3:54
  SPEAKER_02: And look, I mean, um, as you know, the conference covered a wide range of topics, including regulatory changes, the you know, changes in the accounting profession, various accounting and reporting matters, updates from the FASBI and the PCOB, discussions on technology, sustainability reporting, but maybe a couple themes that seemed to um, well, they were of interest to me, and I think really garnered a lot of attention at the conference.
• 4:15
  SPEAKER_02: The first related to potential regulatory changes following the election results.
• 4:20
  SPEAKER_02: And uh Congressman French Hill and SEC Commissioner Marcuetas certainly got a lot of attention as they provided some of their thoughts at the conference, really talking about changes that could come about as a result of the new administration.
• 4:32
  SPEAKER_02: So, you know, they talked about a range of things, certainly potential regulatory rollback in the areas of digital asset and climate regulation.
• 4:39
  SPEAKER_02: Uh, there was discussion about the assessment of the effectiveness of the PCOB and exploring various possibilities of what could happen next, all the way from folding it or aspects of its functions under the SEC or streamlining other aspects of its processes.
• 4:54
  SPEAKER_02: I also thought the remarks on uh from Congressman Hill on putting in some um safeguards and guardrails around cost-benefit analysis that would apply to the SEC, PCOB, and others was was very interesting.
• 5:06
  SPEAKER_02: Absolutely.
• 5:06
  SPEAKER_02: Yeah.
• 5:07
  SPEAKER_02: And then uh and then uh you know, really an increased focus on capital formation and then a potential decrease in compliance costs from what they've called excess regulation impacting investors.
• 5:16
  SPEAKER_02: So really um I think that that those remarks really garnered a lot of attention.
• 5:21
  SPEAKER_03: Yeah, it one of the things that as I talked to a lot of of folks that were at the conference, whether they were speakers or you know, attendees, really was the political undertone.
• 5:31
  SPEAKER_03: And I think the more and more we we move on in our profession and and continue, you know, advancing the profession, um, you know, obviously a lot of there's a lot of players that that have interest in in the work we do.
• 5:44
  SPEAKER_03: So the post-election outlook, right, as you think about regulation, it obviously is is all the talk.
• 5:51
  SPEAKER_03: It's it's a lot of conversations I have with you know executives or or boards, audit committees, you know, I know you have the conversation probably more than anyone, um, or you and and maybe Roz Brooks um talking about a lot of regulatory outlooks.
• 6:05
  SPEAKER_03: Um so as I think about kind of our period of time that we worked at the SEC, the various changes in administration, I think over the years, you know, we we saw it it continue to evolve.
• 6:16
  SPEAKER_03: Um, and I think more and more we've seen that, you know, we've seen the SEC and the PCOB transition, leadership transitions.
• 6:23
  SPEAKER_03: Obviously, we're you you mentioned we're gonna see a different approach.
• 6:26
  SPEAKER_03: It sounds as as though we'll also see a different approach with respect to enforcement based on things that Paul Atkins, who is has been uh nominated to be the chair of the SEC, really has been talking about with respect to the enforcement.
• 6:39
  SPEAKER_03: You know, what's your thought on this?
• 6:41
  SPEAKER_03: I mean, it it seems like we might see a more principles-based approach.
• 6:44
  SPEAKER_03: We I think we'll see maybe the same numbers of enforcement actions, but maybe what they focus on the or the bases of of the actions might might be different.
• 6:52
  SPEAKER_03: Certainly would expect to see maybe them focus more on individuals, which I think Atkins is supportive of and maybe less so on on companies or at least being a little bit softer on that.
• 7:03
  SPEAKER_03: And any reaction to that?
• 7:04
  SPEAKER_02: Yeah, look, Kyle, I mean, I think we can all speculate and and for sure there'll be a good amount of change.
• 7:09
  SPEAKER_02: There always is when there's change in administration, and particularly this time, I think we can expect a good amount of re-evaluation, rethinking, and and and changing, and in this case, probably what some would view as rationalization of existing policies, rules, and the like.
• 7:24
  SPEAKER_02: Um I I would just make the point, though, that look, in the end, quality, whether you talk about audit quality or reliable financial reporting, is bipartisan.
• 7:33
  SPEAKER_02: And I think it's really important that, notwithstanding all what could be distraction around change that may be coming, that we focus on what's in front of us and we really focus on the need to maintain quality in the current environment.
• 7:45
  SPEAKER_02: There's a lot of new rules both from a and standards, both from an accounting and auditing perspective, and guidance that's been issued that we need to follow in the meantime and that we need to um stay focused on.
• 7:54
  SPEAKER_02: So we'll all follow closely and we'll also obviously be um looking looking to consider the uh implications of it and making change where change is appropriate.
• 8:03
  SPEAKER_02: Um and and maybe Kyle, just pointing out, you know, um Wes Bricker, who's obviously our global assurance leader, emphasized something that I think is really important.
• 8:10
  SPEAKER_02: Uh he kicked off the conference, as you as you know, and he really emphasized the accounting profession's role in building trust, reducing information asymmetry, and in enhancing investor confidence.
• 8:21
  SPEAKER_02: And I think that's that's paramount.
• 8:23
  SPEAKER_02: So he also emphasized the value proposition of the profession, really, uh including in uh the tangible outcomes such as reducing fraud, lower costs of capital, and the tangible benefits of building long-term trust in the capital markets.
• 8:35
  SPEAKER_02: And so I, you know, I think there's a lot of high road here, and there's a lot of you know, a lot of room for common ground relative to the importance of quality and trust in reliable financial reporting.
• 8:44
  SPEAKER_03: No, I think those are great points.
• 8:45
  SPEAKER_03: And you know, obviously we we did see some some attention to Wes's comments and and obviously some some attention by you know some of the some members of the PCOB or board members of the PCOB.
• 8:56
  SPEAKER_03: So um obviously think that um it it certainly is the all those points are are very relevant.
• 9:02
  SPEAKER_03: You know, one of the things that that we saw at kind of after all of that and and kind of hearing Paul Munter, so Paul Munter is the SEC's chief accountant, you know, still in place.
• 9:11
  SPEAKER_03: There's questions of whether Paul will will remain in that role, um, but he is and and will remain until uh something happens.
• 9:18
  SPEAKER_03: Um, you know, he he highlighted a lot of those messages, right?
• 9:21
  SPEAKER_03: And and I think you know, quality is um their focus, and um, you know, their rent remit is is obviously oversight of the PCOB.
• 9:29
  SPEAKER_03: So it really highlights the important role the profession plays in serving the public interest that, you know, and and protecting investors.
• 9:36
  SPEAKER_03: Um, you'd also emphasize a lot, and I heard this a lot.
• 9:39
  SPEAKER_03: And um, you know, and and I think we heard it a lot, we continue to hear it a lot, which I think is great for the profession is the focus, the importance of of ethical behavior and really encouraging uh accountants and in the audience to, and not this is not just at the conference, but as speeches over the years as well to ensure kind of the credibility and reliability in financial reporting and and obviously ethics and is is a big piece of that.
• 10:03
  SPEAKER_02: Yeah, I I couldn't agree with with all that more, Kyle.
• 10:06
  SPEAKER_02: And maybe another theme that I'll highlight is the need for broad stakeholder engagement and regulation and standard setting.
• 10:12
  SPEAKER_02: I think that was a big theme too.
• 10:14
  SPEAKER_02: Quality financial reporting really does require cooperative efforts, and that's among standard setters, regulatory bodies, investors, preparers, auditors, academics, and really constructive engagement by everyone in the process from a financial reporting ecosystem perspective.
• 10:27
  SPEAKER_02: It's really necessary to uh address the challenges that we have and to improve practices over time.
• 10:33
  SPEAKER_02: So um, you know, the other thing I'll mention maybe is, you know, stakeholders discuss various, you know, kind of more detailed accounting, financial reporting, auditing, and regulatory topics at the conference.
• 10:42
  SPEAKER_02: We don't have time to get into all those, but you know, if you're interested in that, certainly you could refer to the publication that we put out on the highlights of the conference.
• 10:49
  SPEAKER_02: But uh really a lot when you get into the details of the things, again, back to what we have before us today to work together on to get right in the meantime.
• 10:57
  SPEAKER_03: I I love how you framed it as work together.
• 11:00
  SPEAKER_03: And I think that's the message that, you know, as as you think about the connection between the preparers and the auditors and thinking about the audit committee and their role, um, that I think that's a key point.
• 11:11
  SPEAKER_03: Um, you mentioned the in-depth, uh, you know, I do want to refer some folks to uh you know some of our previous podcasts on a number of topics.
• 11:18
  SPEAKER_03: And and one of them was an accounting podcast where we had our deputy chief accountants uh talk about a number of different topics.
• 11:26
  SPEAKER_03: And, you know, clearly are there a number of external factors such as changes in accounting standards, regulatory developments, or macroeconomic events, and you could talk about the impacts on MDNA, and of course we get into that on other podcasts.
• 11:37
  SPEAKER_03: And, you know, really those they couldn't really warrant that re-evaluation of accounting policies and controls and you know, changes to various agreements or you know, the restructuring of debt, or you know, just modifications.
• 11:51
  SPEAKER_03: Um, for me though, I I think pillar two segmented reporting and revenue accounting, those continue to be the area of focus every year, not just at the conference, um, in comment letters.
• 12:03
  SPEAKER_03: So, you know, it's top of mind.
• 12:05
  SPEAKER_03: What other topics, though, are you focused on specifically?
• 12:09
  SPEAKER_03: You know, what should preparers keep in mind when considering all the the impact of all these types of developments?
• 12:14
  SPEAKER_02: Yeah, sure.
• 12:15
  SPEAKER_02: And as you know, there's really a lot to focus on on here for preparers and auditors as we close out the financial reporting cycle.
• 12:22
  SPEAKER_02: So obviously, newer amended accounting standards, you've you've rattled off a couple, and and they can significantly impact companies' accounting policies, their financial reporting, and uh their processes and controls.
• 12:33
  SPEAKER_02: So it probably comes as no surprise that we find as these changes occur that robust documentation, analysis, consideration of alternatives uh in the judgments and assumptions are really important relative to getting it right from a financial reporting perspective, including the the notes to the financial statements.
• 12:49
  SPEAKER_02: And and we do find that thoughtful documentation uh promotes quality of the judgments and and gets to better outcomes.
• 12:56
  SPEAKER_02: And without that communication and documentation, it's easy to end up in a situation where issues remain either unresolved or or perhaps need to be revisited late in the financial reporting process.
• 13:06
  SPEAKER_02: And obviously that's not good for anyone and can distract from um other other aspects of getting it right from a quality perspective.
• 13:12
  SPEAKER_03: And may delay your reporting as well.
• 13:14
  SPEAKER_03: And that's a good point.
• 13:17
  SPEAKER_02: For sure, it has that potential as well.
• 13:18
  SPEAKER_02: And you so look, in our experience, when there's robust documentation, there's lower likelihood of errors, there's lower likelihood of control deficiencies, and and and as you said, less likelihood of delay.
• 13:29
  SPEAKER_02: Um you mentioned a specific, a couple specific areas.
• 13:31
  SPEAKER_02: So pillar two and segment reporting, for example, there are there are a few matters that come to mind.
• 13:36
  SPEAKER_02: And um certainly this isn't an exhaustive list, but with pillar two, let me just say, even in cases where the current year tax impacts aren't expected to be material, it's still necessary to establish the new processes and systems to capture the underlying data and perform the computations because this is going to set the foundation for the future.
• 13:52
  SPEAKER_02: And as additional countries come on board, the impact may become material.
• 13:57
  SPEAKER_02: Preparers should also keep in mind that even if they're eligible for and rely on the new transitional safe harbor, it's important to note the safe harbor might not always apply.
• 14:05
  SPEAKER_02: The underlying data really does remain important, and as I mentioned, it'll be used to test in the future on a country-by-country basis.
• 14:11
  SPEAKER_02: So, really important to get the right um initial base set up there from that perspective.
• 14:16
  SPEAKER_03: Yeah, and look, there's a lot of consequences, right, to this.
• 14:20
  SPEAKER_03: And it's not just, you know, you're you're reporting, you're it's also the disclosure, uh, you're thinking about MDNA disclosures.
• 14:26
  SPEAKER_03: Um one thing I do want to kind of mention um is we we will have a podcast available um with respect to you know tax accounting and the and reminders for a year.
• 14:34
  SPEAKER_03: And so Jen Spang will be joining me in uh, I think cover a lot of topics.
• 14:39
  SPEAKER_03: Obviously, pillar two is is gonna be that um uh the focus there.
• 14:42
  SPEAKER_03: I know that'll be a great discussion.
• 14:44
  SPEAKER_02: I know I always learn something when I listen to Jen Spangly.
• 14:46
  SPEAKER_02: Um okay, so for segment reporting, Kyle, let me just mention it's critical to evaluate not only what the CODM regularly reviews, of course, but what's provided to them or could be recomputed from other information.
• 14:57
  SPEAKER_02: So I know gross margins, the example we always kick around is just a good example where if the CODM reviews gross margin but doesn't receive cost of goods sold, companies have to determine whether that's easily recomputable, of course.
• 15:09
  SPEAKER_02: And if it is, it you know, it could meet the significant threshold, uh, even though that specific line item might not be presented.
• 15:15
  SPEAKER_02: So, you know, I think that's another area to be focused on.
• 15:18
  SPEAKER_02: Um, you mentioned revenue recognition, and we spend a lot of time from an audit perspective, obviously, as we assess the accounting for contracts and contract modifications.
• 15:27
  SPEAKER_02: Um, in most cases, any consideration that's exchanged at the time of a modification of a contract won't be recognized immediately, but it'll be attributed to the ongoing arrangement.
• 15:36
  SPEAKER_02: In particular, contract modifications that reduce the scope have to really be carefully evaluated.
• 15:41
  SPEAKER_02: Um, another topic that comes to mind is commercial real estate and other illiquid assets.
• 15:44
  SPEAKER_02: And the PCOB actually did issue a spotlight on this earlier this year, which has been going an ongoing topic of discussion with our engagement team.
• 15:52
  SPEAKER_02: The spotlight, I think, rightfully highlights how the valuation of these assets can be impacted by refinancing risk and the higher interest rates and declining values and refin and refinancing risk.
• 16:01
  SPEAKER_02: So I think there's something like 20 or 22 examples in that auditors can think about as they're working through their audit work in this area.
• 16:09
  SPEAKER_02: So whether it's for CRE or other illiquid assets such as private equity or private credit, including where these asset categories are uh present in company-sponsored pension plans, determining the values may be complex.
• 16:21
  SPEAKER_03: Yeah, that's a great point.
• 16:22
  SPEAKER_03: And and that's the thing that we know the staff at the SEC and their comment letters, they've been issuing a lot of comments on commercial real estate and the exposure.
• 16:30
  SPEAKER_03: Um, and I think, you know, in in our experience at the SEC, right, we, you know, we're always always looking a little harder when you're thinking about valuation and thinking about the use of specialists and so the impacts there.
• 16:41
  SPEAKER_03: And and obviously you mentioned you know documentation and the importance of documentation earlier and other topics.
• 16:47
  SPEAKER_03: But uh again, here I think that the disclosure are disclosures are critical.
• 16:51
  SPEAKER_03: And so you think about critical accounting estimates, are there any impacts there?
• 16:54
  SPEAKER_03: You know, and and I think it evolves, right?
• 16:56
  SPEAKER_03: You revisit it every single year, um, those disclosures and critical accounting estimates.
• 17:02
  SPEAKER_03: So um, I think um very, very important highlights there.
• 17:05
  SPEAKER_03: That's exactly right.
• 17:06
  SPEAKER_02: Yep.
• 17:06
  SPEAKER_02: So we're also carefully assessing the impact of uh relatively high interest rates, although lower than previous, still still higher than probably a lot of initial debt, particularly combined with empirical data suggesting that you know higher rates of default on debt and great and there's a greater need for uh you know assessing goal and concern assumptions.
• 17:23
  SPEAKER_02: And so from an audit perspective, we're really focused on this.
• 17:25
  SPEAKER_02: Obviously, that's more applicable in some circumstances than others, but again, it's where communication and documentation is really key.
• 17:32
  SPEAKER_02: And it's important that management and audit teams have a clear and comprehensive understanding of the financing plans, the projected cash flows, um, and and really understanding the feasibility of these of these plans.
• 17:42
  SPEAKER_02: The treasury function that companies should should obviously be um involved in these discussions, but uh these discussions, the earlier you have these, obviously the better where they're relevant because these are another uh example of an area that uh you don't want to be handling at the end of at the end of the financial reporting cycle.
• 17:58
  SPEAKER_03: Yeah, absolutely.
• 17:59
  SPEAKER_03: I you know it's it's the other thing that you kind of think about with respect to those types of disclosures is it's not a kind of a one-and-done, right?
• 18:06
  SPEAKER_03: You really have to be thinking about this kind of every period, right?
• 18:09
  SPEAKER_03: Every quarter.
• 18:10
  SPEAKER_03: And certainly the the current business environment that does require companies to be um increasingly uh dynamic.
• 18:16
  SPEAKER_03: Um and and so there should be changes to operations, newer revised business arrangements.
• 18:21
  SPEAKER_03: We talked a little bit about that previously, leadership shifts, right?
• 18:24
  SPEAKER_03: Or changes in in maybe who who the CEO is or even the reporting that they're getting and how that impacts kind of the not just the accounting, but reporting, um, newer discontinued products and services, which we've certainly seen a lot of, talked about them on other other podcasts as well.
• 18:40
  SPEAKER_03: You know, in these instances, preparers do need to really reassess their previous accounting models.
• 18:44
  SPEAKER_03: There, it's not a static.
• 18:45
  SPEAKER_03: Um, they they need to be thinking about the impacts.
• 18:48
  SPEAKER_03: And I can tell you as a reviewer of filings, if if there was something material and material meaning it was disclosed, if I saw something was disclosed and I saw changes, um, you know, I'd you know, considering the current facts and circumstances, you're gonna take a step back and look and understand, you know, are there changes in accounting that that need to be reflected?
• 19:06
  SPEAKER_03: And so you have to always revisit it.
• 19:07
  SPEAKER_03: And we we've uh, you know, really important to maintain that transparent communication and sharing of documentation with the auditor throughout the process.
• 19:15
  SPEAKER_03: And and I I always hear you say that.
• 19:17
  SPEAKER_03: And I think it's not just the message for for our auditors, which we hear a lot in our our own internal sessions, but it's the messaging to companies is that's really like key.
• 19:28
  SPEAKER_03: Um, and it's it's key evidence that auditors obviously need, but it's companies will benefit from that.
• 19:35
  SPEAKER_03: Um and so throughout the process, it's really engaging and keeping the auditors in the loop.
• 19:39
  SPEAKER_03: So are there other considerations to keep in mind?
• 19:42
  SPEAKER_03: Any any sleeper issues or well, look, I think I think you've said it all really well.
• 19:47
  SPEAKER_02: Importantly, you know, you wouldn't want to, you know, just wait for your auditor to be asking you these questions.
• 19:51
  SPEAKER_02: These are questions you want to be thinking about on your own and evidencing to your auditor that you have a process to think about whether there have been changes and have you addressed them.
• 19:58
  SPEAKER_02: Have you thought about your controls around them?
• 20:00
  SPEAKER_02: And for example, are you implementing new controls over a growing growing revenue stream or controls over the identification of and accounting for internal use software in cloud platforms, for example, or controls over uh that are specific to non-controlling interest and investment arrangements, you know, the things that are changing within your company, have you really stepped back and thought about where do I need to evolve my controls and and not waiting um and having just to try to uh evidence that for your auditor at the time of the audit?
• 20:26
  SPEAKER_03: Yeah, yeah.
• 20:27
  SPEAKER_03: So along with a lot of these changes, that you know, as we've mentioned, does, you know, often comes the execution or modification, which I think is is a bit of one that that people kind of sneaks up on people of significant agreements and contracts and and really does introduce complexity um to the accounting and the reporting, um, and and obviously the the auditing um there.
• 20:48
  SPEAKER_03: And I think, you know, certainly we talked about the delays that that could be caused as well.
• 20:52
  SPEAKER_03: So um, as we think about prior podcasts that that we've done, um, we have addressed some of the accounting consequences um that should be considered.
• 21:01
  SPEAKER_03: Um, but what else do you think that preparers should should keep in mind as they execute?
• 21:06
  SPEAKER_02: Yeah, look, Kyle, and at risk of repeating things from other podcasts, as you said, evaluating significant contracts and agreements can be an area of complexity.
• 21:13
  SPEAKER_02: And it is really important for companies to thoroughly consider any accounting impacts of modifications to revenue, leases, debt, or equity instruments.
• 21:22
  SPEAKER_02: Uh engaging with the accounting group within the company and your auditor prior to signing can really help identify key terms that might have an adverse uh accounting consequence.
• 21:29
  SPEAKER_02: And for example, equity instruments can have a particularly complex outcome, and there could be instances where the modification could result in an equity instrument being reclassified as a liability instrument.
• 21:39
  SPEAKER_02: So as always, you know, consider controls.
• 21:41
  SPEAKER_02: You want to think about particularly for evaluating uh and executing and retaining the documentation, the key considerations related to new contracts or contract modifications.
• 21:50
  SPEAKER_02: And revenue contracts are an area I wanted to pause on in particular, Kyle.
• 21:54
  SPEAKER_02: Really, anytime there are um modifications to revenue contracts or even um, you know, beginning.
• 22:00
  SPEAKER_02: To sell new product or transact with the customer in a new way under existing contracts, preparers really need to focus on making sure they've got processes to evaluate and monitor the potential impacts and the effect that it may have on their revenue recognition model, including with respect to our evaluation of the completeness of the evaluation of performance obligations, which, you know, some of which may not become operative until subsequent years.
• 22:22
  SPEAKER_02: As auditors, we really are looking to understand if the processes associated with these controls are executed and documented consistently and comprehensively.
• 22:31
  SPEAKER_02: And so the assessment or the reassessment where there's modifications is key for each reporting period, including quarterly, really to reduce the potential of material change in accounting later in a later financial statement.
• 22:42
  SPEAKER_02: So really important area, Kyle, and I think one that deserves some doubling down of some attempt of attention.
• 22:47
  SPEAKER_03: I'm glad you you mentioned that because I think those we talked a little bit about this, or at least kind of the accounting consequence of this for under revenue, and we do have a podcast for that as well.
• 22:58
  SPEAKER_03: We didn't necessarily spend as much time to your point about kind of thinking about the the documentation and and all of the considerations there.
• 23:06
  SPEAKER_03: So that I think that's very helpful.
• 23:07
  SPEAKER_03: Um, you know, in and kind of thinking about like a lot of of what you know we hear you say quite often is is completeness and accuracy.
• 23:16
  SPEAKER_03: And so um, and I think that you know, when you talk about the financial statements, you know, a lot of our our audience is listening right now and they're they're in the process or will be in the process of preparing financial statements um and their disclosures.
• 23:29
  SPEAKER_03: What what are some reminders for preparers to be focused on to achieve complete and accurate disclosures within the financial statements?
• 23:36
  SPEAKER_02: Yeah, that's that's great, Cause.
• 23:37
  SPEAKER_02: So we and we are very focused, of course, on understanding and assessing the company's process and controls for annual reporting, including those related to the disclosures, which you know, some of those often only occur once per year or perhaps quarterly in some cases.
• 23:49
  SPEAKER_02: And this means breaking down these controls can is important and it can become challenging to address for both preparers and auditors.
• 23:55
  SPEAKER_02: And one really um important point in practice we've uh noted is for preparers to have controls that are specifically designed to determine whether there's any inconsistent, omitted, or contradictory information in the financial statements.
• 24:08
  SPEAKER_02: And the controls that are specifically designed to determine whether the appropriate disclosures have been made are are really critical.
• 24:14
  SPEAKER_02: And in other words, it's not just ticking and tying the numbers in your notes, it's really you know determining that the notes are appropriate and that they're internally consistent and thinking about the descriptions provided and whether they provide the whole picture.
• 24:26
  SPEAKER_02: So there's a lot to think about relative to disclosure controls.
• 24:29
  SPEAKER_02: And you know, these are matters that we also assess as part of our evaluation of the fair presentation of the financial statements.
• 24:34
  SPEAKER_02: So having you know consistently executed controls that achieve the objective really help uh improve the financial reporting and audit experience.
• 24:41
  SPEAKER_02: Um, you know, as disclosures and amounts reported and filings change, preparers need to reevaluate the level at which the controls or control activities operate.
• 24:49
  SPEAKER_02: Obviously, controls can become more uh more important as materiality changes.
• 24:54
  SPEAKER_02: And we also find sometimes that financial statement controls, particularly in the notes, can be aggregated at too high a level when when it there may be a very uh very important difference for certain control activities or having broken out controls into multiple controls, where for instance, you know, the controls over tax footnote or leases might be different than those over fixed assets or inventory, just given the increased complexity.
• 25:15
  SPEAKER_02: And similar to what we've discussed in executing these controls, you know, you really do want to focus as as you've mentioned on accuracy, completeness, and and and all the points that I've mentioned.
• 25:26
  SPEAKER_02: So uh it's an area for obviously ongoing focus.
• 25:28
  SPEAKER_03: Yeah, no, I it's look, I mean, uh it's it's a little bit overwhelming for some preparers as they're really thinking about.
• 25:34
  SPEAKER_03: I mean, obviously most financial statement preparers are always thinking about internal controls over financial reporting.
• 25:40
  SPEAKER_03: But one of the things I think that you um kind of have have intertwined or woven into this conversation is kind of the importance of disclosure controls, right?
• 25:48
  SPEAKER_03: And so I think of also disclosure controls and procedures that apply broadly to the entire document that's being filed with the SEC, internal accounting control, internal accounting control provisions that have been around for years and years and years, books and records provisions.
• 26:03
  SPEAKER_03: So there's a lot to think about, right?
• 26:05
  SPEAKER_03: That it's it's not just a financial statement focused thing.
• 26:08
  SPEAKER_02: Yeah, you're speaking my language now.
• 26:09
  SPEAKER_02: And obviously, we've been talking a lot about the financial statements and ICFR controls.
• 26:14
  SPEAKER_02: Important to keep in mind your disclosure controls and procedures, and importantly, their information communication, making sure information is bubbling, surfacing to the top, that it's being considered by the disclosure committee.
• 26:24
  SPEAKER_02: That you know, that that's one of the things from time to time we we see that that important information exists within the company that doesn't get considered at the right levels to make sure that the appropriate disclosures are made, whether those are financial statement disclosures or disclosures that need to be made in other parts of the filing or otherwise.
• 26:39
  SPEAKER_03: Cybersecurity is one of them.
• 26:40
  SPEAKER_03: There you go.
• 26:40
  SPEAKER_03: Right.
• 26:41
  SPEAKER_03: So yeah, you may have brainwashed me, Brian, about 10 years ago.
• 26:44
  SPEAKER_03: So I tried my staff.
• 26:46
  SPEAKER_03: Um so so so look, I and I think one one other uh sleeper issue is, and I say sleeper issue because we as auditors get it, we know it, right?
• 26:55
  SPEAKER_03: And and you certainly there are things that you see that where there are violations and and that happens.
• 27:01
  SPEAKER_03: But I think the other piece is the preparers understanding their role, right?
• 27:06
  SPEAKER_03: Or audit committee understanding their role in independence.
• 27:10
  SPEAKER_03: And it's really fundamental to what we do as auditors.
• 27:13
  SPEAKER_03: Um, it always warrants some mention.
• 27:15
  SPEAKER_03: You know, my experience companies are are often making changes in advance of or shortly after a year end, and uh, you know, they can make many changes, right?
• 27:22
  SPEAKER_03: Directors, officers, affiliates, maybe you know, restructuring of of their legal entities or things that potentially could impact.
• 27:28
  SPEAKER_03: Um, and so what are the potential implications there of these changes if they're not timely communicated to the audit team?
• 27:35
  SPEAKER_02: Yeah.
• 27:36
  SPEAKER_03: Well, Kyle, you'll probably remember back.
• 27:38
  SPEAKER_02: I mean, we've dealt with a couple of these together probably when we were both at the SEC, and certainly I dealt with a lot of them as I used to administer the rules.
• 27:44
  SPEAKER_02: And the worst case scenarios are scenarios where you had to communicate from the SEC that the company would need either a re-audit or change in auditors.
• 27:50
  SPEAKER_02: Obviously, those circumstances were few and far between, thankfully.
• 27:53
  SPEAKER_02: But uh that, you know, it it can be significant relative to implications.
• 27:57
  SPEAKER_02: So look, it's an area that's it's a shared responsibility.
• 28:00
  SPEAKER_02: It requires management, auditors, audit committees to work together to make sure that there's ongoing communications, making sure that information is being shared timely with auditors relative to potential changes.
• 28:11
  SPEAKER_02: So when you think about changes in directors or affiliates or asset acquisitions or the hiring of a former, you know, audit and auditor employee, or changes to legal and tax and financial reporting groups within the company, all those, all those kinds of things can have significant implications on how we assess our independence as auditors.
• 28:27
  SPEAKER_02: So um making sure that you can't you communicate timely and in advance of some of these things occurring is is critical to making sure timely evaluations are done and the right steps are taken to assure the ongoing independence of of the auditor is is is really critical.
• 28:43
  SPEAKER_02: So making sure this is a this is something that where there's a periodic touch point relative to all of these issues is really, really critical.
• 28:49
  SPEAKER_03: Yeah, I know that that's definitely a best practice or a must practice, I'd say.
• 28:54
  SPEAKER_03: So so let's close out with a couple of areas I know have really garnered a lot of interest in in recent months for differing reasons.
• 29:00
  SPEAKER_03: And um and you know, this is something obviously that that you've spent a lot of time talking about and thinking about, and it's it's starting us with this known or suspected fraud or illegal acts.
• 29:12
  SPEAKER_03: Um, you know, the the PCOB did recently delay action on that uh non-compliance with laws and regulations standard that I think we we obviously all agreed would have been a significant uh lift um for for audit firms, but also significantly impact um you know companies, um public companies.
• 29:28
  SPEAKER_03: And so um it still though gets a a lot of interest from investors and other market participants.
• 29:33
  SPEAKER_03: And so obviously, you know, who knows, you know, at least where the standard will go.
• 29:38
  SPEAKER_03: I think there's a lot of views that that you know it it may not be something that is a focus of then maybe the next PCOB leadership if there is, if there are changes there.
• 29:47
  SPEAKER_03: Um as you reflect on all the conversations you've had on the topic, including your your role on the standards uh in emerging issues advisory group, uh CAG at the PCOB, what would you highlight for preparers?
• 30:01
  SPEAKER_02: Yep.
• 30:01
  SPEAKER_02: And since you've mentioned my role in the CAG, I now have to give my disclaimer that none of my views today uh reflect the views of the CAG or anyone at the PCOB.
• 30:09
  SPEAKER_02: But uh yeah, and you're right, Kyle.
• 30:10
  SPEAKER_02: I I don't know what will uh be the fate of the proposed no-clar standard that was about to be finalized.
• 30:16
  SPEAKER_02: Um but but I do want to highlight that the PCOB did issue, and I think it's good for management and auditors, did issue recently a publication last month in November, a spotlight on existing responsibilities for auditors.
• 30:29
  SPEAKER_02: And I think it's important for um management and auditors to step back and remind themselves of their own obligations uh and responsibilities relative to understanding and assessing fraud and illegal acts.
• 30:39
  SPEAKER_02: And there's a lot of time that companies obviously spend today and auditors spend today.
• 30:42
  SPEAKER_02: And I think that document actually does a nice job at helping lay out and remind people of all the things that happen in in you know today's world relative to the existing standards and obligations, because I I did participate in the march in the PCOB's roundtable, and it became very clear that I think there was a lot of misunderstanding about all the good things that happened today.
• 30:59
  SPEAKER_02: Trevor Burrus, Jr.
• 31:00
  SPEAKER_02: I've watched that and I agree, a lot of misunderstanding.
• 31:03
  SPEAKER_02: Trevor Burrus, Jr.
• 31:03
  SPEAKER_02: Yeah, and and there was also misunderstanding as to what some investors were looking for, and many investors at at least at the roundtable didn't even seem to be asking for some of what was proposed.
• 31:11
  SPEAKER_02: Right.
• 31:12
  SPEAKER_02: Um but anyway, I I I recently more recently participated in a roundtable of the AFC and CAQ fraud forum where I discussed the responsibilities and I pointed to COSO in principle eight, and I think it's good for people to reflect on that and make sure that, you know, is management doing um uh you know an appropriate fraud risk assessment and and and do they have the appropriate uh anti-fraud uh programs and controls in place?
• 31:33
  SPEAKER_02: And and I think um, you know, making sure that the whistleblower hotlines are um robust and and and have the right controls and protocols around them for completeness and evaluation.
• 31:42
  SPEAKER_02: And oh, by the way, not just what comes in through whistleblower, but things that are reported to the company outside of those programs um and hotlines, how are those assessed for completeness?
• 31:51
  SPEAKER_02: And then obviously making sure there's the right communications with auditors around those matters.
• 31:55
  SPEAKER_02: So, you know, I think a lot to think about in terms of what companies do today and what auditors' existing roles are, when you know roles and responsibilities are relative to uh the identification detection and addressing matters that are uh uh identified relative to noncompliance with laws and regulations.
• 32:12
  SPEAKER_03: So so you you talked a little bit about this of just as you think about kind of the misconception that that maybe you know some of the panelists at that you know previous session that you had uh at the SEC talking about this topic specifically.
• 32:26
  SPEAKER_03: Um and so so we do know that that there does continue to be concerns from some investors and and the regulators, right?
• 32:33
  SPEAKER_03: We've we've definitely heard that um from the regulators, and we've been hearing that um uh heavy emphasis on that on that over the last few years that auditors really don't do the work to respond to suspected fraud or legal acts in an appropriate or or timely manner.
• 32:49
  SPEAKER_03: Are there any other challenges um in this regard to highlight?
• 32:54
  SPEAKER_02: Well, particularly for identified matters, I I I was sort of surprised that there's confusion around that.
• 32:59
  SPEAKER_02: Obviously, it's important for firms like we, as we do, to have robust policies and procedures that are followed.
• 33:04
  SPEAKER_02: And there needs to be a full understanding of the facts and um you know of alleged fraud or illegal acts.
• 33:09
  SPEAKER_02: And you know, that may involve uh involving forensics specialists, it may involve investigations, third parties may be involved in that, depending on the nature of the matter, and certainly communications with the audit committee.
• 33:20
  SPEAKER_02: And there could be obviously implications to the financial statements, um broader legal and regulatory issues, uh, could upset the timing of filings.
• 33:28
  SPEAKER_02: So, you know, I I do expect auditors to be doing the right thing here, following these policies and procedures, regardless of you know when when and how they learn of the potential matters in the audit cycle.
• 33:38
  SPEAKER_02: And obviously, the sooner they're dealt with in the audit cycle, the better.
• 33:42
  SPEAKER_02: But um it's really important for management to raise the matters that they're dealing with on a timely basis so that they can be appropriately dealt with without holding up filings where where it can be avoided.
• 33:51
  SPEAKER_02: In some cases, just given the timing of when things might arise, it's sometimes not even possible.
• 33:55
  SPEAKER_02: And uh the company needs to go through their processes, the audit committee needs to go through their processes, investigations need to be completed, and then um, and then obviously the facts need to be dealt with.
• 34:04
  SPEAKER_02: But um the earlier that can be done, the the better.
• 34:07
  SPEAKER_02: But I, you know, we see this all happen and play out time and time again when these types of things arise.
• 34:12
  SPEAKER_02: And obviously there's not a lot of transparency unless um ultimately there is disclosure that's appropriate or necessary, uh, or in some cases restatements or other actions the companies take, which you do see from time to time.
• 34:24
  SPEAKER_02: But for all the ones you see, there are others where you know the the the work has to be done, even though ultimately something's not substantiated or it doesn't have a financial reporting.
• 34:31
  SPEAKER_03: I love that point.
• 34:32
  SPEAKER_03: I love that point.
• 34:33
  SPEAKER_03: So so one more topic, Brian, and I I know I've kept you for a while now, and it's been an exhausting week for us.
• 34:39
  SPEAKER_03: Um we've both been traveling, ASCPA conference definitely can can wear you down.
• 34:43
  SPEAKER_03: Um but I want to touch on AI and and when it was talked about a little bit at the conference, but I think uh getting your perspective, I think, would would be very useful here, at least for our preparers.
• 34:55
  SPEAKER_03: I mean, any thoughts or reminders for preparers that are considering using AI?
• 34:59
  SPEAKER_03: And we'll I won't talk about the different AI and the generative AI, but as they're thinking about their financial reporting processes and the use of AI.
• 35:07
  SPEAKER_02: Yeah, well, this is a topic I could sit here with you for the rest of the day and talk about.
• 35:11
  SPEAKER_02: It's one that's um near and dear to my heart.
• 35:13
  SPEAKER_02: We've been very focused on it.
• 35:14
  SPEAKER_02: I have weekly, in fact, I had a weekly call this morning with my my team.
• 35:17
  SPEAKER_02: We do weekly calls on this from a policy perspective and really helping to try to advance.
• 35:21
  SPEAKER_02: That sounds amazing.
• 35:23
  SPEAKER_02: Yes, it's sounds exciting.
• 35:24
  SPEAKER_02: It's one of my favorite calls of the week, to tell you the truth.
• 35:26
  SPEAKER_02: Yeah.
• 35:26
  SPEAKER_02: Um and and really, I think there's a lot here.
• 35:29
  SPEAKER_02: I mean, prepare is at early stages here, so are we, as you think at least about generative AI.
• 35:34
  SPEAKER_02: And we talk about responsibly embedding gen AI and everything we do over time, obviously.
• 35:39
  SPEAKER_02: Um, there's a lot to think about in making sure that we've got the right human involvement, that we're providing data sources and there's reliability around that.
• 35:45
  SPEAKER_02: So we've got policies and protocols in place from our perspectives.
• 35:49
  SPEAKER_02: But um, you know, when I when I think about companies, I think it's really important for companies to have the right governance around this, the right policies around this, and to make sure they know where within the organization AI may be being used.
• 36:00
  SPEAKER_02: Uh, if you're using that to generate memos or to perform analyses, it's important to understand that you've begun to do that.
• 36:07
  SPEAKER_02: When we use it, we're ensuring that we're uh doing within the side of our firewalls and that the confidentiality of the data is maintained.
• 36:13
  SPEAKER_02: But that's another important consideration.
• 36:15
  SPEAKER_02: So there's a lot of unique risks here.
• 36:17
  SPEAKER_02: Um, we've spent a lot of time making inquiries of management, obtaining management rep letters, making sure we really understand where in the financial reporting process companies may be beginning to use AI.
• 36:26
  SPEAKER_02: It's around on Gen AI, it's around the margins.
• 36:29
  SPEAKER_02: There are some in situations where within controls, we're seeing the beginning of the introduction of Gen AI with the right human involvement.
• 36:36
  SPEAKER_02: So not to the point where we've certainly identified deficiencies in controls because it tends to be almost additive or incremental with the human involvement around it.
• 36:44
  SPEAKER_02: But um there's a lot of opportunity here.
• 36:46
  SPEAKER_02: I know there's a lot of interest in the future relative to what um, you know, the potential use cases and all the things that can be done going forward.
• 36:52
  SPEAKER_02: But I think rightfully, companies and and auditors are moving at a measured pace.
• 36:56
  SPEAKER_02: I think we'll look back at this time frame someday and think that things were actually, while it feels fast now, we're probably moving very slowly compared to what we're eventually able to do in this space.
• 37:05
  SPEAKER_02: But for now, we're watching it closely.
• 37:07
  SPEAKER_02: We're engaging with management and um governance policies and thorough understanding of what's going on with your organization, is the best advice I can give.
• 37:14
  SPEAKER_03: You know, Brian, as we teed this off, we were talking about this focus on, you know, this podcast on preparers.
• 37:20
  SPEAKER_03: And I think it's I I kind of wish that we could get that like really in front of the masses and have everyone hear that because I think it really would help companies as they go through not just their audit season, but also like the reviews cycle, you know, or you know, when they're actually filing their quarterly reports and the work the auditor does with review and the importance of assessing things throughout the year as well.
• 37:44
  SPEAKER_03: So I I really appreciate just everything that you've shared today.
• 37:48
  SPEAKER_03: So, Brian, thank you so much.
• 37:50
  SPEAKER_03: Thank you, Kyle.
• 37:51
  SPEAKER_03: It's great to be here.
• 37:52
  SPEAKER_03: Thank you.
• 37:53
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  SPEAKER_01: From Thought Leadership at PwC, I'm Heather Horn.
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