Unaudited Earnings Announcements –
A new study by Indiana University’s Kelley School of Business has found that over two-thirds of U.S. public companies now announce annual earnings prior to audit completion. The study suggests that this practice has the potential to increase pressure in auditor/client negotiations over post-announcement audit adjustments, according to Joseph Schroeder, an assistant professor of accounting at Indiana University, one of the researchers.
Schroeder told MarketWatch, “Auditors are significantly less likely to push for adjustments for aggressive financial reporting when earnings have already been publically released. In this situation, auditors frequently exhibit biased decision processing, and lower judgment quality after adopting the client’s financial reporting goal of avoiding any adjustments.”
When companies release an earnings announcement prior to the completion of the audit, it is marked as “unaudited” and accompanied by a disclaimer.
As example, Market Watch reported that Wells Fargo’s disclaimer said, “Financial results reported in this document are preliminary. Final financial results and other disclosures will be reported in our Annual Report on Form 10-K for the year ended December 31, 2018, and may differ materially from the results and disclosures in this document due to, among other things, the completion of final review procedures, the occurrence of subsequent events, or the discovery of additional information.”
Full disclosure, so where’s the problem?
The researchers say “Auditors will likely internalize their clients’ desire to avoid subsequent revisions to publicly released earnings (i.e., to avoid negative market reactions), or they may anticipate tougher negotiation positions from managers regarding potential audit adjustments (e.g., related to subjective accounting estimates),” reports MarketWatch.
Although the study focused primarily on the possible effects of auditors being pressured by their client companies, it could be argued that the origin of the pressure begins with investors, so hungry for timely financial information, they’ll accept it before its time.
The Indiana University study, “An Investigation of Auditors’ Judgments when Companies Release Earnings before Audit Completion,” has been accepted for publication in the Journal of Accounting Research.
Consistently Inconsistent Won’t Cut It
The SEC has significantly focused on companies that report non-GAAP numbers. When SEC Chair Jay Clayton and SEC Chief Accountant Wes Bricker attended the recent AICPA Conference, their message to CPAs was “deliver consistency.”
“There has to be a similar consistency in the reporting of non-GAAP numbers and key performance indicators (KPIs) as we expect in GAAP numbers. A point of investor frustration that we can be cognizant of is when non-GAAP numbers and KPIs move around in terms of how they are calculated,” said Clayton.
Non-GAAP presentations can be beneficial to investors when it provides information that gives them a better understanding of the company. It becomes a problem when non-GAAP is used to present the company in a more favorable light, instead of more accurately.
Last year the SEC updated its Compliance and Disclosure Interpretations to help companies comply.
Clayton acknowledged that perspectives evolve or mistakes can happen that require changes in presentations. In those situations communication is important. “Company policies would do well to deal with situations where there’s been a change in a presentation policy and how that would be communicated to investors, or a situation where a company identifies a mistake in a prior presentation, and how they’ll correct that moving forward,” added Bricker.
Disclosure No Substitute for Remediation
The SEC announced settled charges against four public companies for failing to maintain internal control over financial reporting (ICFR) for seven to 10 consecutive annual reporting periods. Two of the charged companies also failed to complete the required evaluation of the effectiveness of ICFR for two consecutive annual reporting periods.
According to the SEC’s orders, year after year the four companies disclosed material weaknesses in ICFR involving certain high-risk areas of their financial statement presentation. Each of the four companies took months, or years, to remediate their material weaknesses after being contacted by the SEC staff. One of the four companies is still in the process of remediating its material weaknesses.
Melissa Hodgman, an Associate Director in the SEC’s Enforcement Division, added, “Companies cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation. We are committed to holding corporations accountable for failing to timely remediate material weaknesses.”
Bill Would Extend SOX Exemption for Certain EGCs
A bipartisan group of U.S. Senators has introduced the Fostering Innovation Act of 2019, which would provide regulatory relief for many innovative companies that are in scientific and medical research fields.
Emerging growth companies (EGCs) currently are exempt from certain regulatory requirements for five years after their initial public offering. One of those exemptions is from Sarbanes-Oxley Section 404(b) – the auditor attestation requirement. SOX 404(b) requires a public reporting company, other than a non-accelerated filer or emerging growth company (EGR), to obtain an auditor attestation regarding management’s assessment of the effectiveness of the company’s internal control over financial reporting.
The Fostering Innovation Act is designed to help those EGCs that will lose their exemptions from SOX 404 (b) five years after their IPOs, but still do not report much revenue. The auditor attestation requirement is time-consuming and expensive, and this bill would temporarily extend the exemption for an additional five years for a small subset of EGCs with annual average revenue of less than $50 million and less than $700 million in public float.
The Benefits of the New Lease Accounting Rules?
The lease accounting standard, which became effective for 2019 financial reports, requires public companies to report most leases on their balance sheet – a cumbersome process of chasing down lease agreements, reviewing contracts, and compiling and disclosing the data according to the new accounting standard.
It is a change that is estimated to add $3 trillion to company balance sheets, and force investors to change the way they measure financial criteria, such as ratios of debt to earnings or debt to equity, explains CNBC.
However, some companies are finding unexpected savings as they comply with the new lease accounting rules, according to Michael Keeler, chief executive of LeaseAccelerator, Inc., which sells software to help companies comply with the new standard.
Keeler told the Wall Street Journal, “now that companies have their lease information in one place, they might be able to manage these contracts more efficiently and find cost savings. The process of consolidating lease information can provide chief financial officers deeper insight into the financial volume and conditions of their leases. It could offer clues as to how to use existing real estate or equipment more efficiently, uncover forgotten accords that should be scrapped and help them negotiate better terms when leases expire.”
Not all would agree that the arduous exercise was worth it. One international company told the Journal that even if they do find opportunities to cut costs, realizing them will take time. “The majority of our leases are long term, so even if we thought the standard could generate savings, these are unlikely to be realized immediately.
Silver lining or not, don’t expect to see a lot of companies sending any thank you notes right now. They’re a little busy, scrambling to comply with the new Revenue Recognition accounting rules which hit at the same time.
Munger Says States Are Stupid to Drive Out Rich
Warren Buffett’s right-hand man, Charlie Munger told CNBC‘s Becky Quick, “There are a number of places that have shot themselves in the foot; Connecticut, California, New York City.” Commenting on whether some cities and states need to make their tax structures and regulations more attractive to wealthy individuals and businesses, Munger aded, “I think it’s really stupid for a state to drive the rich people out. They are old, they keep your hospitals busy, they don’t burden your schools, police departments or prisons. Who wouldn’t want rich people?”
California Driving Out Everyone
An online survey conducted by Edelman Intelligence, and reported by CNBC found a growing number of Californians are contemplating moving from the state, “not due to wildfires or earthquakes, but the sky-high cost of living.” Fifty-three percent of Californians surveyed say they are contemplating leaving. Among millennials, it jumps to 63 percent.
Top reasons cited for discontent include the high cost of housing and high taxes. California has the highest top marginal tax rate in the nation, and the new federal tax changes which placed a limit on state and local tax deductions ($10,000) magnified the problem.
Good Month for Jobs
The U.S. economy added 304,000 jobs in January. It was the largest monthly jobs increase in nearly a year and it extends a run of 100 consecutive months of job growth, according to the Department of Labor. Surprising economists, the strong job numbers overcame a partial government shutdown and despite an ongoing trade dispute with China. Following is a breakout of where the jobs are:
January jobs one-month net change:
Leisure and hospitality 74,000
Education and health services 55,000
Professional and business services 30,000
Transportation and warehousing 26,600
Retail trade 20,800
Financial activities 13,000
Mining and logging 7,000
Wholesale trade 4,700
Source: Bureau of Labor Statistics
Americans Optimistic About Personal Finances
Climbing to levels not seen in over 16 years, a new Gallup Poll has found Americans are optimistic about their personal finances – with 69% now saying “they expect to be financially better off at this time next year.” Fifty percent say they are in better shape financially than a year ago.
Simply Stated Briefs
Billionaires don’t want to be called billionaires anymore.
Take Starbucks former CEO, and possible presidential hopeful, Howard Schultz. Huffpost reporter Mavid Moye writes that, at a recent book event hosted by CNBC, Schultz was asked if he thought billionaires had too much power in America.
Schultz replied, the moniker “billionaire” now has become the catchphrase. “I would rephrase that and say that ‘people of means‘ have been able to leverage their wealth and their interest in ways that are unfair…”
There was a time in this country when becoming successful, even getting filthy rich, was something to be proud of. No more, those days are gone.
Time to edit your PC Dictionary. Please add: “Billionaires” shall henceforth be called “people of means.”
And just so we’re all up to date, be sure you already have made the following corrections:
- Don’t call it “garbage,” it’s now Unintended Refuse.
- No longer “Drunk,” just Chemically Inconvenienced.
- It’s not a “Beer Gut” it’s a Liquid Grain Storage Facility.
- And finally, being a “Total Butthead,” is now just a case of Rectal-Cranial Inversion.
That last one ought to come in handy with the upcoming presidential elections!
An Audited Legacy of Quality
It’s become a lot easier to choose the best audit firm. That’s because the Public Accounting Oversight Board (PCAOB) conducts periodic inspections of all audit firms and publishes its reports online. For all to see.
Yes, we get audited too.
Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar inspection reports.
We thought we were building a leading, international accounting firm by providing Big 4 expertise, delivered with personal service.
Turns out we were also building “An Audited Legacy of Quality.”