FINANCIAL REPORTING DOSSIER

SEC: Enhanced Access to Financial Disclosure Data
On 19th August, 2021, the US Securities and Exchange Commission (SEC) announced open data enhancements that provide public access to financial statements and other disclosures made by publicly-traded companies on its Electronic Data Gathering Analysis and Retrieval (EDGAR) System. The SEC is releasing for the first time Application Programming Interfaces (APIs) that aggregate financial statement data, making corporate disclosures quicker and easier for developers and third-party services to use. APIs will allow developers to create web or mobile apps that directly serve retail investors. The free APIs provide access to the EDGAR submission history by the filer as well as XBRL data from financial statements, including annual and quarterly reports. [https://www.sec.gov/news/ press-release/2021-159]

UK FRC: Guidance on Addressing Exceptions in the Use of Audit Data Analytics
On 27th August, 2021, the UK Financial Reporting Council (FRC) issued a Guidance, Addressing Exceptions in the Use of Audit Data Analytics (ADA) for auditors to address potential exceptions when using data analytics in an audit. The Guidance lays down general principles for dealing with outliers when using ADA to respond to identified audit risks and includes an illustrative example based on a real-world scenario. Also included in the Guidance are best practices and potential pitfalls to avoid when refining expectations developed for ADA. [https://www.frc.org.uk/getattachment/01327ab3-1d5f-4068-ab9b-ece0efc3c3af/Addressing-Exceptions-In-The-Use-of-Data-Analytics-20210824.pdf]

IAASB: Supplemental Guidance on Auditor Reporting and Mapping Documents – Audits of LCE
On 3rd September, 2021, the International Auditing and Assurance Standards Board (IAASB) published two documents, namely: (1) Proposed Supplemental Guidance on Auditor Reporting, and (2) Mapping Documents related to its open consultation on the Audits of Less Complex Entities (LCE). The supplement provides further guidance on modifications and other changes to the auditor’s report when using the proposed ISA for LCE, while the Mapping Document is aimed at assisting users in navigating between existing, equivalent ISA and the requirements in the newly-proposed ISA for LCE. [https://www.iaasb.org/news-events/2021-09/audits-less-complex-entities-consultation-supplemental-guidance-auditor-reporting-mapping-documents]

FASB: Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
On 15th September, 2021, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of Proposed Accounting Standards Update – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions proposing amendments to Topic 820, Fair Value Measurement of USGAAP. The proposed amendments clarify that a contractual restriction on the sale of equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. [https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176177297732&acceptedDisclaimer=true]

FASB: Changes to Interim Disclosure Requirements
And on 1st November, 2021, the FASB issued a proposed Accounting Standards Update Disclosure Framework – Changes to Interim Disclosure Requirements (Topic 270). The Exposure Draft clarifies that interim reporting can take the following three forms: (a) Financial statements prepared with the same level of detail as the previous annual statements subject to all the presentation and disclosure requirements in GAAP; (b) Financial statements prepared with the same level of detail as the previous annual statements subject to all the presentation requirements in GAAP and limited notes subject to the disclosure requirements in Topic 270; and (c) Condensed financial statements and limited notes subject to the disclosure requirements in Topic 270. [https://www.fasb.org/cs/Satellite?c=Document_C &cid=1176178812005&pagename=FASB%2FDocument_C%2FDocumentPage]

International Financial Reporting Material

1. CPA Canada, ICAS and IFAC: Ethical Leadership in an Era of Complexity and Digital Change, Paper 1 – Complexity and the Professional Accountant: Practical Guidance for Ethical Decision Making. [19th August, 2021.]
2. UK FRC: Thematic Review – Viability and Going Concern. [22nd September, 2021.]
3. IAASB: First-time Implementation Guide for ISQM1 (Revised). [28th September, 2021.]
4. PCAOB: Staff Guidance – Insights for Auditors: Evaluating Relevance and Reliability of Audit Evidence Obtained from External Sources. [7th October, 2021.]
5. UK FRC: Structured Reporting: An Early Implementation Study – Applying Disclosure Guidance and Transparency (DTR) Rules 4.1.14 and the European Single Electronic Format (ESEF). [12th October, 2021.]
6. UK FRC: Thematic Review: IAS 37, Provisions, Contingent Liabilities and Contingent Assets. [14th October, 2021.]
7. UK FRC: Report – What Makes a Good Audit? [16th November, 2021.]

2. Enforcement Actions and Inspection Reports by Global Regulators

The Public Company Accounting Oversight Board (PCAOB)

A. Enforcement actions
Alison G. Yablonowitz, CPA and Shawn C. Rogers, CPA (Partners of Ernst and Young LLP, New Jersey)
The Case: The audit client Synchronoss sold a 70% ownership interest in the BPO segment of one of its businesses for $146 million and accounted for it as part of net income from discontinued operations in the Consolidated Income Statement. The sale was to Counterparty E. Six days after the BPO Sale, Synchronoss entered into a license agreement with Counterparty E, which allowed Counterparty E to use one of Synchronoss’s software in connection with operating the BPO business. Counterparty E paid Synchronoss a $10 million fee in connection with the license agreement. Synchronoss accounted for the license agreement separately from the BPO sale and recorded $9.2 million of the $10 million license fee as revenue in Q4 2016 ($9.2 million was the company’s fair value estimate of the license agreement). It treated the remaining $0.8 million as additional consideration paid by Counterparty E to purchase the BPO business and recorded it as an element of the gain on the sale of the discontinued operations.

PCAOB Rules / Standards Requirement: Auditors who have identified significant unusual transactions are required to comply with specific provisions in the PCAOB’s auditing standard governing the auditor’s consideration of fraud – performing adequate procedures and obtaining sufficient evidence concerning certain significant unusual transactions.

The Order: The PCAOB suspended Alison G. Yablonowitz, CPA, from being associated with a registered public accounting firm for one year, imposed a $25,000 civil money penalty and required her to complete 20 additional hours of CPE within one year. The PCAOB censured Shawn C. Rogers, CPA, imposed a $10,000 civil money penalty and required him to complete 20 additional hours of CPE within one year. [Release No. 105-2021-010 dated 22nd September, 2021.]

B. Deficiencies identified in audits

1. KPMG LLP, Canada
Audit Area: Long-Lived Assets – The audit client had multiple cash-generating units. For one CGU, the issuer concluded that there were no indicators of potential impairment. For another CGU, the issuer identified indicators of potential impairment, performed an impairment analysis and recorded an impairment charge. For testing controls, the audit firm selected the client’s evaluation of long-lived assets for possible impairment. It included the client’s reviews of potential indicators of impairment and assumptions underlying the forecasts used in the impairment analysis such as forecasted operating costs, capital expenditures and discount rates.

Audit deficiency identified: The audit firm did not evaluate specific review procedures that the control owners performed concerning potential indicators of impairment related to the first CGU and to assess the reasonableness of the forecasted operating costs, capital expenditures and discount rates used in the impairment analysis for the second CGU. [Release No. 104-2021-137 dated 6th July, 2021.]

2. Haynie & Company, Salt Lake City, Utah
Audit Area: Revenue and Related Accounts – The Audit Firm was selected for testing in the revenue process for certain IT general controls, automated controls and IT-dependent manual controls.

Audit deficiency identified: The audit firm did not test the accuracy and completeness of the information used in testing controls over access rights and removals. For testing, it selected an automated control designed to calculate and record revenue. It did not obtain an understanding of or test the configuration of the control. The firm did not identify and test: controls over the accuracy and completeness of the information used in the performance of control to verify standard terms in customer agreements; super-user access to revenue systems in which various automated IT-dependent manual controls resided; the accuracy and completeness of specific inputs used to recognise revenue; and the determination of the units of accounting and allocation of total contract consideration to each performance obligation for contracts with multiple performance obligations. [Release No. 104-2021-134 dated 6th July, 2021.]

3. Yichien Yeh, CPA, New York
Audit Area: Related Party Transaction – The audit client entered into an agreement with a related party in which it was to receive quarterly fees. Since the agreement’s inception, the client recorded the fee as receivables and deferred revenue. The client disclosed that its sole officer and director was also the beneficial owner of and controlled the related party.

Audit deficiency identified: The audit firm did not obtain an understanding of the business purpose of the transaction and failed to take the transaction into account in its identification of significant unusual transactions. It did not evaluate the financial capability of the related party concerning the outstanding receivable balance and assess whether the client’s accounting for and disclosure of the transaction was appropriate. During the audit, the audit firm was aware of information concerning possible illegal acts committed by the client and an officer. Despite this, it did not obtain an understanding of the nature of the acts, the circumstances in which they occurred and sufficient other information to evaluate the effect on the financial statements. [Release No. 104-2021-148 dated 28th July, 2021.]

4. BF Borgers, CPA, Colorado
Audit Area: Accounts Receivable – The audit firm received electronic responses to its accounts receivable confirmation requests.

Audit deficiency identified: The audit firm did not consider performing procedures to address the risks associated with electronic responses, such as verifying the source and contents of the confirmation responses. [Release No. 104-2021-155 dated 16th August, 2021.]

The Securities Exchange Commission (SEC)
1. Kraft Heinz Company
The Case: Kraft Heinz Company, according to the SEC order, from the last quarter of 2015 to the end of 2018, engaged in various types of accounting misconduct, including recognising unearned discounts from suppliers and maintaining false and misleading supplier contracts, which improperly reduced its cost of goods sold and allegedly achieved ‘cost savings’. Kraft, in turn, touted these purported savings to the market, which financial analysts widely covered. The accounting improprieties resulted in Kraft reporting inflated adjusted EBITDA, a key earnings performance metric for investors. In June, 2019, after the SEC investigation commenced, Kraft restated its financials, correcting a total of $208 million in improperly recognised cost savings arising out of nearly 300 transactions.

The Violations: The expense management misconduct inter alia included the following types of transactions: (a) Prebate Transactions – The company’s procurement division employees agreed to future-year commitments, like contract extensions and future-year volume purchases, in exchange for savings discounts and credits by suppliers (prebates), but mischaracterised the savings in contract documentation which stated that they were for past or same-year purchases (rebates); (b) Clawback Transactions – The procurement division employees agreed to take upfront payments subject to repayment through future price increases or volume commitments, but documented the transactions in ways which obscured the repayment obligation; and (c) Price Phasing Transactions – Suppliers agreed to reduce their prices during a specific period in exchange for an offsetting price increase in a future period, but the entire nature of the arrangement was not communicated by the procurement division employees to controller group employees.

Throughout the relevant period, the company did not design or maintain effective controls for the procurement division, including those implemented by the finance and controller groups, in connection with the accounting for supplier contracts and related arrangements.

The Penalty: Kraft consented to cease and desist from future violations without admitting or denying the SEC’s findings and paying a civil penalty of $62 million. The company’s former COO consented to cease and desist from future violations, pay disgorgement of $14,000 and a civil penalty of $300,000. [Press Release No. 2021-174 dated 3rd September, 2021.]

3. Integrated Reporting

(a) Key Recent Updates

CDSB: Application Guidance for Water-related Disclosures
On 23rd August, 2021, the Climate Disclosure Standards Board (CDSB) released an Application Guidance for Water-related Disclosures. The Guidance helps businesses apply the recommendations of the Task Force on Climate-related Financial Disclosures (TFCD) beyond climate to water. The Water Guidance is designed around the first six reporting requirements of the CDSB Framework: Governance; Management’s environmental policies, strategies, and targets; Risks and opportunities; Sources of environmental impact; Performance and comparative analysis; and Outlook. [https://www.cdsb.net/sites/default/files/ cdsb_waterguidance_double170819.pdf.]

IFAC: Practical Framework for Deploying Global Standards at Local Level
On 9th September, 2021, the International Federation of Accountants (IFAC) published a Framework for implementing global sustainability standards at the local level, focusing on the Building Blocks approach (published in May, 2021). The Framework examines how existing mechanisms already in place for adopting IFRS standards used in financial reporting may be appropriate or adapted for sustainability-related reporting. Alternatively, it states a new mechanism may be required. [https://www.ifac.org/knowledge-gateway/contributing-global-economy/publications/how-global-standards-become-local.]

CDSB: Biodiversity Application Guidance
On 15th September, 2021, the CDSB released for consultation a Biodiversity Application Guidance aimed at assisting companies in the disclosure of material biodiversity-related information in the mainstream report. The Guidance is designed around the first six reporting requirements of the CDSB Framework (Supra). For each reporting requirement, the Biodiversity Guidance provides a checklist including suggestions for effective biodiversity-related disclosures, detailed reporting suggestions and a selection of external resources to assist companies in developing their mainstream biodiversity reporting. [https://www.cdsb. net/sites/default/files/biodiversity_application_guidance_draft_for_consultation_v2_1.pdf.]

GRI: First Sector Standard for Oil and Gas
On 5th October, 2021, the Global Reporting Initiative (GRI) released its first sector-specific sustainability reporting standard for Oil and Gas, namely, GRI 11: Oil and Gas Sector 2021. The standard applies to any organisation involved in oil and gas exploration, development, extraction, storage, transportation or refinement. It guides reporting across 22 most likely material topics, including climate adaptation, resilience and transition, site closure and rehabilitation, biodiversity, the rights of indigenous peoples, anti-corruption, water and waste. The standard comes into effect for reporting from 1st January, 2023. [https://www.global reporting.org/about-gri/news-center/oil-and-gas-transparency-standard-for-the-low-carbon-transition/.]

GRI: Revised Universal Standards
On 5th October, 2021, the GRI launched Revised Universal Standards. The revised standards, effective for reporting from 1st January, 2023, represent the most significant update since GRI transitioned from guiding to setting standards in 2016. The revised standards reflect due diligence expectations for organisations to manage their sustainability impacts outlined in the UN and OECD intergovernmental instruments. The Universal Standards comprise three standards: (a) GRI 1: Foundation (replaces GRI 101); (b) GRI 2: General Disclosures (replaces GRI 102); and (c) GRI 3: Material Topics (replaces GRI 103). [https://www.global reporting.org/about-gri/news-center/gri-raises-the-global-bar-for-due-diligence-and-human-rights-reporting/.]

IFRS Foundation: Developments related to Disclosures on Climate and Sustainability Issues
And on 3rd November, 2021, the IFRS Foundation announced: (a) the formation of a new International Sustainability Standards Board (ISSB); (b) Consolidation of Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June, 2022; and (c) the publication of prototype climate and general disclosure requirements developed by its Technical Readiness Working Group (TRWG). [https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/.]

(b) Extracts from Published Reports – Task Force on Climate-related Financial Disclosures
Background
In 2017, the Task Force on Climate-related Financial Disclosures (TCFD) released climate-related financial disclosure recommendations to help companies provide better information to support informed capital allocation. The disclosure recommendations are structured around four thematic areas representing core elements of how organisations operate: governance, strategy, risk management, and metrics and targets.

Extracts from Annual Report of Entain PLC (listed on LSE) [2020 revenue: GBP 3.6 billion]
Reporting on climate-related risks and opportunities aligned with the TCFD
Entain supports the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD). The recommendations fit well with our new Sustainability Charter to help us achieve long-term success. We took our first step towards implementing the TCFD recommendations in 2020 by reporting our first CDP climate change submission in 2020. We will take a step-wise approach to implementing the recommendations, with the following page being our first TCFD Statement.

Task Force for Climate-related Financial Disclosures (‘TCFD’) Statement

1 The table is not reproduced for the purposes of this feature. The relevant environmental KPIs reported by Entain PLC include: total energy consumption; total GHG emissions – direct and indirect; total GHG emissions intensity per employee; water withdrawal and waste generated

(c) Integrated Reporting Material
1. IFAC Statement: Corporate Reporting – Climate Change Information and the 2021 Reporting Cycle. [7th September, 2021.]
2. UK FRC: Thematic Review – Streamlined Energy and Carbon Reporting. [8th September, 2021.]
3. Value Reporting Foundation: Transition to Integrated Reporting: A Guide to Getting Started. [20th September, 2021.]
4. UK FRC: Frequently Asked Questions – International Sustainability Standard Setting. [23rd September, 2021.]
5. UK FRC: Thematic Review – Alternative Performance Measures (APMs). [7th October, 2021.]
6. UK FRC: FRS 102 Factsheet 8 – Climate Related Matters. [12th November, 2021.]