In a pair of recent speeches, SEC Chief Accountant Wesley R. Bricker emphasized the importance of reinforcing and advancing credible financial reporting through effective audit committees and effective internal control over financial reporting ("ICFR"). Mr. Bricker highlighted several ways to advance the role and effectiveness of audit committees, including the following:
- Audit committees should understand the businesses they serve and the impact of the operating environment – the economic, technological, and societal changes – on corporate strategies.
- Balancing audit committee workload is critical given the need for audit committees to stay current on emerging issues, whether financial, ICFR, or disclosure related through continuing education and other means.
- Audit committees should consider training and education programs to ensure that their membership has the proper background and stays current as to relevant developments in accounting and financial reporting, including the recently-issued accounting standards relating to revenue recognition, leasing, financial instruments and credit losses.
With respect to ICFR, Mr. Bricker noted that management's ability to fulfill its financial reporting responsibilities significantly depends on the design and effectiveness of ICFR. Companies should also be aware that certain areas of ICFR may be impacted by the transition to the new revenue standards and that they should take appropriate steps to ensure the effectiveness of ICFR, including the following:
- Refreshing other components of internal control over financial reporting, including professional competence.
- Considering whether the existing controls support the formation and enforcement of sound judgments (regarding the nature of revenue recognition, the economic substance of revenue arrangements, whether to report revenue on a gross or net basis, etc.) or whether changes are necessary.
- Making sure they have appropriate resources to evaluate revenue arrangements and properly apply the principles of the new standards.
- Considering whether their reporting systems are designed to accurately capture the effects of changes to customer contracts and other information required for compliance with the new standards.
- Keeping in mind that the effectiveness of any changes to internal controls is predicated on a comprehensive and timely assessment of risks that may arise as a result of applying the new standards. Appropriate identification and assessment of risks may require involvement of management and employees from both the accounting and financial reporting functions and other functional areas of a company.
Mr. Bricker's speeches are available at: https://www.sec.gov/news/speech/bricker-remarks-annual-life-sciences-accounting-and-reporting-congress-032117 and https://www.sec.gov/news/speech/bricker-university-tennessee-032417.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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