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White said: “In too many cases, the non-GAAP
information, which is meant to supplement the
GAAP information, has become the key message to
investors, crowding out and effectively supplanting
the GAAP presentation.” In this environment, it is
critical that non-GAAP financial measures have a
prominent place on the audit committee agenda:
Have a robust dialogue with management about
the process—and controls—by which management
develops and selects the non-GAAP financial
measures it provides, their correlation to the actual
state of the business and results, and whether the
non-GAAP financial measures are being used to
improve transparency and not to distort results.
Monitor implementation plans and
activities for major accounting changes
on the horizon—particularly the
new revenue recognition and lease
international accounting standards.
The scope and complexity of these implementation
efforts and the impact on the business, systems,
controls, and resource requirements should be a
key area of focus for audit committees. The new
revenue standard (effective January 1, 2018 for
calendar year-end companies) provides a single
revenue recognition model across industries,
companies, and geographical boundaries. While
the impact will vary across industries, many
companies—particularly those with large, complex
contracts—will experience a significant accounting
change when implementing the new standard. The
new standard will require companies to apply new
judgments and estimates, so audit committees will
want to inquire about the judgment and estimates
process and how judgments and estimates are
reached. Under the new lease standard (effective
January 1, 2019 for calendar-year-end companies)
lessees will recognize most leases, including
operating leases, on the balance sheet. This
represents a wholesale change to lease accounting,
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and many companies will face significant
implementation challenges during the transition.
Implementation of these two new standards is
not just an accounting exercise; audit committees
will want to receive periodic updates on the status
of implementation activities across the company
(including possible trouble spots), the adequacy
of resources devoted to the effort, and the plan to
communicate with stakeholders.
Monitor key regulatory initiatives
to enhance transparency of the
audit process.
There continues to be significant discussion
internationally about the need for increased transparency
by the external auditor around the audit process. Under
International Standards on Auditing (ISA 701)—while
retaining the current pass/fail model—auditors will soon
be required to describe in the audit reports of listed
entities the key areas they focused on in the audit and
what audit work they performed in those areas. In the
U.S., the PCAOB is expected to issue a final standard on
the auditor’s reporting model, which is likely to require
a description of “critical audit matters” in the auditor’s
report. Auditors may have the primary responsibility for
implementing the requirements, but they are relevant
to and affect other stakeholders as well, in particular
the audit committee. Audit committees should interact
comprehensively with the auditor from the audit
planning stage through to the finalization of the audit
report. In particular, consider whether disclosures in
the financial statements or elsewhere in the annual
report and/or in other investor communications need
refreshing, otherwise the auditor might be disclosing
more information about an item than the company.
Engaging in early and open communication with the
auditor is crucial in this regard.