Banking Industry Has Provided Timely Data on Credit Losses During Current Crisis
The banking industry has risen to the occasion to answer investor questions quickly about potential credit losses on loans during the current economic crisis, a major change from the financial crisis that took place 13 years ago, according to FASB. The current expected credit loss (CECL) standard worked as intended in generating timely and more detailed information so that investors could quickly understand banks’ assumptions, some analysts on the Financial Accounting Standards Advisory Council (FASAC) told the FASB on December 15. “Obviously March came with a bang, and the detail was—in some cases—lacking, but by the time we got to June when you look at the competitive environment out there companies did rise to the occasion, providing some of the key metrics that they use to assess what the reserving level should be in CECL life of loan during the pandemic, specifically employment rate, GDP rate,” Elizabeth Graseck, managing director of research at Morgan Stanley said. The information, Graseck continued, is important because it helps investors in their assessment of estimates. “I would say that the industry did step up in providing more detail a function of investor request to help investors understand what is behind the assumptions that go into that reserve accounting, which is obviously so critical.”
Progress Expected on Two Standards-Setting Projects in 2021
The PCAOB has had a light standards-setting agenda this year, but that may change next year. In 2020, the PCAOB voted just on one rulemaking item. But that was only to align its auditor independence rules to match up with the SEC’s recent revisions to its own auditor independence rules. In 2021, however, the board is likely to make tangible progress on two standards-setting projects. After working for several years on a rule that would strengthen the lead auditor’s supervision of other audit firms that participate in an audit, the board may finally be ready to complete the project in 2021. “We are currently developing a recommendation hopefully for consideration by the board in 2021,” PCAOB Acting Chief Auditor Barbara Vanich said during the AICPA Conference on SEC and PCAOB Developments on December 9. The other project the PCAOB is likely advance has to do with an audit firm’s system of quality control (QC). Currently, the PCAOB uses the AICPA’s quality control standards, issued in 1997 when the board did not exist. The audit environment has changed dramatically since then, especially with advances in technology. “At the moment, we are working hard on preparing draft proposed rulemaking that would update our standards in the area,” PCAOB member Megan Zietsman said at the same AICPA conference on December 7. “We look forward to also receiving comments on our proposing release when we will issue it next year.”
Brown Urges Increased Transparency in Audit Firm Quality Control Problem Remediation Process
During a recent conference, PCAOB member Jay Brown called on the board to increase transparency and accountability in handling an audit firm’s efforts to fix quality control problems. “The board has identified the remediation process as an appropriate area for transformation, including the need for greater transparency,” Brown said during the AICPA Conference on Current SEC and PCAOB Developments on December 7. “Increased transparency can result in access of highly useful information to all PCAOB stakeholders and accountability to the public with respect to the remediation process.” Board inspectors examine the audit work of accounting firms to promote integrity of and confidence in financial reporting of public companies. Based on the inspection, the board publishes findings. There are two parts. The first part has descriptions of any deficiencies of audit work itself, and it is made public. The second part is quality control problems. When inspectors find issues, firms are given a year to remediate them. But the PCAOB does not describe the problems in the inspection reports. Firms are given a year to remediate. Only when auditors fail to fix quality control problems within 12 months, then part 2 of the inspection report is made public. “Including additional descriptive information about a firm’s system of quality control in the firm’s individual inspection reports and providing an annual summary report of the inspection and remediation findings concerning firms’ systems of quality control would generate significant benefits,” Brown said.