Implementing Standards: How Do Preparers Cope?

About the Panelists

Prabhakar Kalavacherla, a partner in the audit quality and professional practice group at KPMG; Mark LaMonte, former managing director at Moody’s Investors Service; Sarah Ovuka,professional accounting fellow at Financial Executives International (FEI); Scott Taub, managing director at Financial Reporting Advisors LLC; and Amie Thuener, chief accountant at Google Inc., were the panelists. Norman Strauss, distinguished lecturer of accountancy at Baruch College, moderated the panel. The following is an edited and condensed summary of the panel discussion. The views expressed are the panelists’ own personal views and not necessarily those of their employers or those employers’ boards, management, or staff.

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Strauss opened the panel by asking Amie Thuener to talk about how issuers deal with new standards. Thuener discussed the recent major changes in accounting for leases, noting that, while the quantitative impact on the financial statements has been small, “there is a big change in the background, lots of systems changing, lots of controls and processes changing to comply with the new methods.” She added that large projects such as these involve multiple functions within a company, and that early communication to all these groups, as well as management, the audit committee, and stakeholders, is critical to successful implementation. Thuener also praised FASB’s efforts to keep issuers and industry groups apprised of its activities.

Prabhakar Kalavacherla added his perspective as a former member of the IASB, saying that few companies get involved with standards setting early. This, he said, is a main reason why companies find implementing standards so difficult. Of revenue recognition, Kalavacherla said that “engagement only happened after the standard become effective. In my mind, that’s too late.”

Scott Taub then offered examples from his experience consulting with companies on implementation. In one case, a company was concerned about a proposal in the revenue recognition standard’s exposure draft. He advised the company to write in with those concerns, but the company demurred, noting that its concerns were only relevant to three of FASB’s 25 questions. “I said, ‘Then you should write in and comment on the three and explain that you’re only commenting on those because you have real experience dealing with those issues,’” Taub told the panel. Ultimately, the company did so, and as a result FASB and IASB took a different approach with the final standard.

Taub then shared his experience hearing from some companies that they had not expected their reporting to change simply because they hadn’t heard any complaints about their accounting in those areas. When pressed, these companies all admitted they had not read the exposure draft. “You kind of missed your chance to weigh in,” Taub said. “A lot of times things that surprise companies were actually laid out in the proposal, so it is important to take the take the time to read it.”

Thuener added that, in her view, standards setters often do not get enough insight into the cost-benefit equation of large standards from the preparer perspective. “Frequently, “ she said, “I hear from FASB that ‘we didn’t know that it was this hard, that you didn’t have this data available.’”

Sarah Ovuka spoke about how the FEI educates companies and their staff on the content of new standards. Like Thuener, Ovuka said that the answer depends upon the size of the company. “If you have certain people that are dedicated to the specific topic, you can do an internal training and teach each other,” she explained, adding, “There are certainly volumes of helpful information that the firms publish as well.” Ovuka went on to say that working with other affected companies can be helpful as well. “Education is not just about the technical; you are addressing the operational at the same time,” she said.

Asked for a user perspective, Mark LaMonte said that “users of financial statements are often very late to the game in terms of understanding the impact of new accounting standards.” While FASB does make efforts at outreach, he continued, most of users’ information about new standards comes from companies’ SAB 74 disclosures, “which more often than not don’t say a lot. They might do a good job of describing what the new accounting standard is, but they generally do a rather poor job of quantifying what the impacts are until very late in the game, if at all.” Investor calls also play a role, LaMonte said, especially when investors ask questions about how the new models have affected the numbers.

Finally, Strauss asked the panelists about how preparers handle internal issues with implementation, such as systems development and legal and tax questions. “I think it’s critical to have a true cross-functional project,” Thuener said. “The last thing you want to do is get to the end, implement, and then that’s the first time your external auditors look at it. Having a partnership along the way—talking about the key accounting decisions you’re making, the process changes, the control changes, and engaging them—is really important.”

Leasing and Revenue Recognition

Taub began the discussion on the new leasing and revenue recognition standards by saying that he was surprised at FASB Chair Russell Golden’s earlier comment that the revenue standard was cheaper to implement than FASB had expected: “It was more expensive to implement than I thought, so apparently, we had wildly different expectations.” Nevertheless, he continued, the final implementation went “relatively smoothly. All of that work paid off. There were not a whole lot of companies that had to file late or were scrambling to get it done.” Taub added that answering questions on revenue recognition in general is easier than it was under the previous standard, as the principles behind the accounting are more clearly laid out.

In the case of leasing, Taub said that the difficulty companies had in coming up with systems to handle the necessary data surprised him. Strauss noted that “a lot of companies couldn’t even necessarily find the leases. If you’re a multinational and they’re not in one central place and you have divisions all over the place, they didn’t even know where the leases were. And then some had translation issues; they weren’t in English.”

Kalavacherla added that he expected as much as one-third of internal control audit reports to receive comment from regulators on revenue recognition, so he was pleasantly surprised with how smoothly the implementation went. He also mentioned a forthcoming paper he coauthored that analyzes the filed Form 10-Ks to determine the mean and median change in revenue due to the standard; while the research is ongoing, he said, “I’m a little bit surprised to see the amount on net income has not shown much impact. Definitely on the top line, I expected a much bigger change.”

“For many years, there were discussions about how this would be Armageddon and the capital markets would shut down because companies were all of a sudden going to have to put leases on their balance sheet,” LaMonte remarked. “I certainly don’t see that happening. Investors had long put leases on their balance sheets through many different ways, either doing a discounting of the forward lease disclosures or taking rent expense and multiplying it by a number. So this is really nothing new; it’s just catching up the accounting to what sophisticated investors had long been doing.”

Implementation and Research Issues

Asked by Strauss about how companies and accounting firms deal with the complexity of standards, Ovuka said, “I do think that the guidance itself can be quite complex, but when you have different resources from each of the firms, though they are quite helpful, sometimes there are discrepancies in the advice that different firms give or companies receive from different firms, which adds even more complexity to adopting these standards.”

Strauss then asked Thuener about solving accounting problems. Thuener replied that her team begins by developing an understanding of the transaction itself, then looking for the corresponding model in the standards. “If there is no particular model,” Thuener said, “then you’re trying to figure out the intent of different models plus the economics of the transaction.” In addition, she said, they also may consult with other firms and with auditors. Reaching out to regulators like the SEC and FASB is reserved for matters that are “very judgmental or gray.”

Kalavacherla noted that a great deal of private companies’ implementation work is being subcontracted to outside consultants. “The danger with that,” he said, “is that there is never going to be any institutional knowledge in an organization if that work is sub-contracted.” This leaves the company’s accountants, practically speaking, as more like project managers, he said. In addition, the consultants rarely perform substantive research. “They don’t have a professional practice group; they’re just using the Internet and doing a little bit more work,” he said.

Ovuka brought up the issue of FASB’s efforts to improve implementation. For example, while the new revenue recognition standard simplifies the guidance, Ovuka opined that regulators are under the misconception that the volume of data available means that any needed information will be immediately available. Thuener agreed, saying, “There isn’t this sort of magic data pool where everybody can go and get whatever they want.” Taub added that if management doesn’t have a piece of data immediately available, it probably wouldn’t be important to investors either.

Taub went on to say that, in his opinion, “FASB has done a reasonably good job of that. Although the revenue recognition standard adds a ton of disclosures and there was a lot of fear that companies might not have the data, … most companies agreed that the numbers they were being required to disclose were actually relevant.” He also noted that, while the data was available, controls around it might not have been as robust as regulators would like.

Strauss then asked LaMonte whether users have any concern about the implementation process. LaMonte replied that FASB’s efforts to get investor and user input before issuing new standards has hopefully eased concerns about the usability of those standards. “Certainly,” he said, “FASB should be asking, ‘How is this going to be useful in your decision making?’ … FASB is getting better and better, but I don’t know they’re quite all the way there yet.”

SEC Compliance

Strauss then asked Taub and Kalavacherla to discuss compliance with SEC requirements. Taub began by again referring the audience to the quarterly updates put out by the Big Four before discussing; he then described how companies should react to SEC comment letters or enforcement attention. “Respond truthfully, don’t stall, don’t sandbag,” he said, adding, “Get your advisors involved early. Talk to your auditors, your lawyers, whoever the appropriate experts are.”

Taub also addressed the question of how to write good management discussion and analysis (MD&A): “Each quarter, start with a blank sheet of paper and do not look at last quarter’s MD&A. Nobody does that; I think most companies do a fresh rewrite of a portion of the MD&A and roll everything else forward. Maybe that’s adequate, but I don’t think it’s what the SEC or the markets hope for.”

With regard to prefiling conferences, Taub said the discussion tends to be much easier: “There’s less pressure on getting them to agree with you when you haven’t already posted those numbers.” Kalavacherla noted that prefiling is available for private companies that are planning to go public. He especially recommended this practice for Silicon Valley startups, saying, “It’s always a good idea to go because business models are not captured very well in a standard.”

Other Reporting Issues

Strauss then turned the topic to other, older standards, such as segment reporting and deferred taxes. “You still have to continue to take a fresh look at those areas,” Ovuka said, particularly when they are on FASB’s agenda and there may be upcoming changes.

Strauss also asked about documentation issues. “Documentation is so important,” Thuener said, “because if you get called by the SEC or if your auditor comes to you with a question, having a clear trail—how did you think about it, what’s the transaction, how does it fit within the literature—makes those conversations so much easier. And having them contemporaneous gives you an ability to say, ‘These are the facts I had on the day when I made the assessment.’” Taub agreed, adding, “By far the most effective response to an SEC comment is if you can say, ‘See attachment A, which is the memo we wrote when we booked the entry.’”

LaMonte gave his take on the quality of note disclosures. “There is an awful lot of repetition in disclosures from year to year,” LaMonte said, adding that the repetition “sometimes disguises those things that are really important to investors. … When there’s that type of information asymmetry, it doesn’t lead to efficient deployment of capital.”

Kalavacherla brought up one point specifically regarding segment reporting, noting that the new revenue standard came from investors telling standards setters that segment reporting was not giving them the level of detail they needed. “I’m very eager to see how FASB and also the IASB are going to shape that,” he said.

Working with Auditors

Kalavacherla began discussion of the next topic by saying that, when surprises crop up in audits, they are often down to poor planning by both preparers and auditors. “Upfront involvement of auditors in transactions that are not routine, like mergers and acquisitions or a new standard, will reduce the surprise level quite a bit,” he said.

Strauss then asked Thuener about the PCAOB’s new requirement for auditors to comment on critical audit matters (CAM). Thuener replied that it has been a topic of interest for Google and its auditors, reiterating a point from an earlier panel about consistency between the audit report and the financial statements. “We started conversations early with our auditors around what [CAMs] might look like,” she said, “so that we can make sure that we’ve disclosed those things adequately.”

Kalavacherla picked up on the consistency point, saying that companies can learn from international companies’ implementation of the similar “key audit matters” (KAM) requirement; for example, he said, “there is a healthy tension between what the auditors want to disclose and what companies don’t want to disclose.” He also said that “avoiding boilerplate is the number one issue; make sure that this is not a cut-and-paste from another firm.”

Ovuka said that early dry runs have helped quiet concerns from preparers. “We’ve had a lot of discussions around getting both sides on the same page and setting those expectations so that there aren’t surprises when it does go live,” she said.

LaMonte said that he expects to see “a significant amount of boilerplate” and that “it’s focused on something that investors don’t necessarily get that excited about. … Investors just want to know that the audit got done and a clean opinion was given. Whether or not it was challenging to get to the right answer in a particular area is not necessarily that important to them.” Taub also voiced concerns about boilerplate, saying that earlier comments from the SEC about knowing what CAMs to expect from each industry indicated a turn toward boilerplate already.

Finally, Strauss asked the panelists what they least liked to see during an audit. The panelists generally agreed that no one is ever happy about surprises, with Thuener saying that the worst case is when a problem comes up near the end of the audit. In such cases, she said, it is important to do a postmortem afterward to prevent a repeat occurrence. “Why did it come up late? Is it because the company didn’t give the right information on time? Is it because the auditors weren’t looking on time? Is it because it’s one of those controls that you can’t audit until the last minute anyway?” Thuener also reiterated the importance of involving the auditors at the earliest possible stages of the financial reporting process.

Disclosures

As the subject turned to the quality and volume of disclosures, LaMonte opined that technology is likely going to play a large role. “I think we’re looking at a fascinating period ahead in the next 10 to 15 years,” he said, opining that disclosure of financial information is headed toward real-time availability. “Investors love data,” he explained, continuing, “but it isn’t necessarily taken off of the paper [financial statement] that shows up quarterly or annually. It’s getting fed directly into their models through data aggregators, and getting looked at on dashboards.” He also noted that investors are using digital tools to sift through boilerplate disclosures for new information.

Kalavacherla alluded to the SEC’s recent settlement with an unnamed car company over its CEO’s use of Twitter. In his view, “there needs to be a vetting process” for such disclosures, as “it is inevitable that there will be an explosion of information disseminated this way. We need to quickly get to a position where we can put guardrails in place.” LaMonte agreed, saying that the effort will probably require collaboration between regulators, auditors, preparers, and users of financial statements.

Other Issues

Strauss then opened the panel for discussion on other issues. Thuener spoke briefly about the challenges presented by internal controls, saying that companies are examining their systems to see how well they are supporting the business and financial reporting, before turning to cybersecurity. With privacy such a large concern currently, “investors want to hear about [companies] putting processes in place so that when there’s a problem, the information gets escalated to the right people in upper management,” she said. Ovuka added that, with the expected technological advances discussed above, the next generation of CPAs will need to be knowledgeable about more than just accounting, while still maintaining that foundation of knowledge.

As a concluding thought, Taub noted that, while FASB issued 19 Accounting Standards Updates (ASU) in 2018, none were major changes; most were what he called “medium-sized issues,” nonprofit-related, or technical corrections. “I think we, as a profession, can handle changes of that size,” he said, even with the continuing challenge of revenue, leases, and CECL (current expected credit losses). “I think once we get these big standards behind us, we may see that keeping up is not as hard as we think it is.”