FASB Studying Two Parallel Paths to Potentially Revise Statement of Cash Flows

FASB Chair Richard Jones said the board plans to decide “at some point in time” whether to revise the statement of cash flows—a key report filed with the SEC that reveals whether a company has enough money to meet its budgetary obligations in a reporting period. A study of the statement of cash flows is currently on the board’s research agenda, which it uses to examine a topic and determine whether to add it to its technical rulemaking agenda. “It was something we heard as part of our agenda outreach and we heard two general things—one was we heard from some that [were] looking for additional disaggregated information on the statement of cash flows,” Jones told the SEC and Financial Reporting Institute Conference, hosted by the Leventhal School of Accounting at the University of Southern California, which was livestreamed. “The other thing we heard was that the statement of cash flows was not necessarily the most helpful statement when it came to a company whose business was cash, so think about financial institutions and the groupings of cash flows for a financial institution,” he said. “So we’re looking at those on the research agenda—those two parallel paths.” FASB has consistently heard from some investors in the past that they appreciate the information they typically get from commercial companies that use the indirect method, while other investors have wanted the board to get rid of the indirect method and adopt the direct method,


Revised Audit Requirements Proposed for Non-Compliance with Laws and Regulations

The PCAOB voted 3–2 to issue a proposal that aims to strengthen its standard to require auditors to proactively identify, evaluate, and communicate instances of a company’s non-compliance with laws and regulations (NOCLAR). The board’s proposal comes as investor advocates have long stated that the old 1988 AICPA standard—renamed as PCAOB Auditing Standard (AS) 2405, Illegal Acts by Clients—has not truly protected investors. The AICPA’s standard was adopted on an interim basis when the PCAOB was established by the Sarbanes-Oxley Act of 2002. Before the PCAOB was established, the auditing profession essentially regulated itself. “Unfortunately, the current standard on illegal acts fails to meet [investors’ expectations] that all means all, including material respects impacted by noncompliance,” PCAOB Chair Erica Williams said. “In fact, it says an audit in accordance with PCAOB auditing standards does not include audit procedures specifically designed to detect all illegal acts that could have a material effect on the financial statements.”

Investor Advisory Group to Discuss Critical Audit Matters

The PCAOB’s Investor Advisory Group (IAG) met in Washington, D.C., in June to discuss critical audit matters (CAM) and the auditor’s responsibility related to corporate fraud. After more than seven years of work, in 2017 the PCAOB adopted a standard that expanded auditor reporting, including CAMs, in response to investor advocates’ criticism that the pass-fail auditor report did not provide enough useful information. But investors today increasingly believe that CAMs are not as useful, and auditors may not be faithfully complying with the standards. When the board adopted the CAM rule, its decision largely reflected a compromise between what investors preferred and what auditors wanted. Some investor advocates said they wanted something along the lines of an auditor’s discussion and analysis (AD&A), analogous to management’s discussion and analysis (MD&A). By contrast, public companies and accounting firms had resisted some of the proposed changes because they feared that auditors would be required to publicly reveal matters that the company had not disclosed. In their view, such disclosures are the responsibility not of auditors but management. The PCAOB decided not to require an AD&A, instead coming up with CAMs, defining it as issues that have been communicated to the audit committee, that are related to accounts or disclosures that are material to the financial statements, and that involve especially challenging, subjective or complex judgments from the auditor.