High-quality everything drives investor trust

Munter emphasized the importance of the FASB’s completion of its comprehensive update to the Conceptual Framework. Although most focus is on the standards themselves, Munter believes the Framework is the foundation. Munter noted the Framework’s potential role in developing high-quality recognition and measurement standards that faithfully represent the economics of an entity’s commercial arrangements. 

Munter believes the Framework could assist the FASB in prioritizing potential projects and improvements to accounting standards, ultimately benefiting investors by providing relevant and reliable information. Further, the Framework could serve as a valuable resource for external stakeholders, including preparers, enabling more effective engagement and feedback during the standard-setting process.

Lastly, OCA Staff emphasized the importance of stakeholder engagement in the upcoming agenda consultation in shaping the FASB’s priorities. Staff highly encourages participation in the agenda consultation, either individually, as companies or firms, or as industry groups, highlighting that the feedback received is taken very seriously in setting the agenda and priorities. As evidence of the value of participating in the process, it was feedback on the 2021 agenda consultation that led the FASB to focus on disaggregation projects.

Read Munter’s August 2024 Statement, Addressing Investor Needs through Application of the Updated Conceptual Framework in FASB Standard Setting.

OCA remains available to work collaboratively with companies and their auditors through the consultation process. Gaurav Hiranandani, Senior Associate Chief Accountant, reminded participants that when dealing with a complex accounting question, registrants should (1) first base their analysis in authoritative guidance, specifically the accounting standards; (2) apply reasonable judgment based on their specific facts and circumstances; and (3) when looking to nonauthoritative guidance (e.g. accounting firm publications), remain responsible for ensuring the financial reporting outcome is consistent with the principles of the accounting standards and are relevant to their specific facts and circumstances, including the economic substance of the transaction.  

Hiranandani and Jonathan Perdue, Professional Accounting Fellow, shared recent inquiries focused on the sale and/or disposal of subsidiaries, distinguishing liabilities from equity (e.g. questions around indexation when evaluating warrants) and scoping questions (e.g. under the segment reporting standard). 

Segment reporting remains a hot topic, following amendments (ASU 2023-07) and subsequent SEC Staff guidance. Hiranandani reiterated that the disclosure requirements in ASC 280 apply to all entities that meet the definition of public entity, which would include investment companies that are required to file under Investment Company Act of 1940 or the Securities Act of 1934. In short, registered investment companies are required to comply with this standard, including the new requirements introduced by ASU 2023-07.

Read more about the implementation of ASU 2023-07 in our Hot Topic, SEC staff clarifies segment reporting disclosures.

A recurring theme in recent years, Munter and his team reminded participants about the critical role of the statement of cash flows in understanding an issuer’s financial health, requiring high care in preparation and review. Hiranandani and Anita Doutt, Senior Associate Chief Accountant, noted frequent issues that arise in cash flow statements, including improper classification, inadequate disclosure and assessing the materiality of error corrections. To help mitigate these issues, we encourage enhanced communication between auditors and audit committees. Read more in our Handbook, Statement of cash flows.

Munter and his Staff emphasized the importance of credibility and trustworthiness across the profession – critical in protecting both investors and the integrity of the capital markets. Munter and Doutt mentioned the importance of a strong internal control environment, driven by not only a positive ‘tone at the top’, but also ‘mood in the middle’ and ‘buzz at the bottom’ to support collaboration and professional skepticism. They cited academic research showing that behavior is driven by the people directly around you. In the context of audit firms, a strong culture of integrity at all levels helps less experienced accountants feel empowered to challenge management with the objective of building and maintaining public trust in the profession.

When discussing fraud, Staff emphasized that ‘tone at the top’ within companies is crucial for fostering a culture where whistleblowers feel encouraged to speak up about any wrongdoing they observe without fear of retaliation. Further, Staff reinforced the importance of thorough and thoughtful fraud risk assessment by both management and auditors.