Insights on PCAOB's Investor Advisory Group Presentation
Explore the discussions and insights shared during the PCAOB's Investor Advisory Group Working Group on Going Concern, including a review of the history, current survey findings, recommendations, and the 10-year anniversary of Sarbanes-Oxley Act. Key topics such as regulatory oversight of auditors, evaluation of internal controls, and financial reporting improvements are highlighted, along with a look at the top bankruptcies and enforcement initiatives over the years.
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Presentation Transcript
Presentation of the PCAOBs Investor Advisory Group Working Group on Going Concern March 28, 2012 1
Going Concern Agenda 1. Overview Anniversary of Sarbanes-Oxley Act 2. History 3. Current Survey 4. Recommendations Working Group Members Pete Nachtwey, Chief Financial Officer, Legg Mason Damon Silvers, Director of Policy and Special Counsel Anne Simpson, Senior Portfolio Manager, Investment and Director of Corporate Governance, CalPERS Lynn E. Turner,Director, LitiNomics and former SEC Chief Accountant 2
Going Concern 10 Year Anniversary Sarbanes Oxley The Market Before and After 3
Going Concern Ten Year Anniversary of Sarbanes-Oxley What did we gain? Public Company Accounting Oversight Board Regulatory oversight of Auditors Section 404 Evaluation of Internal Controls CEO/CFO Certification of Internal Controls Improved Financial Reporting 4
Going Concern History Initiatives Over the Years Going Concern Definition Top 10 Bankruptcies, Top 10 Issuers TARP Going Concern Opinions Financial Accounting Standards Board Current Requirements Enforcement 5
Going Concern History How we got to where we are Cohen Commission New Standard proposed CFA weighs in New SAS 59, Effective 1989 SOP 94-6 Exposure draft watered down O Malley Panel August 2000 FASB recommendations SEC urges FASB to act - FASB Project Proposal October, 2008 Project Revised to disclosures only in 2012 6
Going Concern Top Ten U.S. Bankruptcies 2001-2011 Signing Auditor (Pre and Post Opinions) Opinion Signature Date After Bankruptcy Filing Top Ten Bankruptcies Issuers by Market Cap Sector Bankruptcy Filing Date Going Concern ICFR Effective Going Concern Auditor Since ICFR Effective Lehman Brothers Holding ($639B) Financial 9/15/2008 Y N N/A N/A N/A E&Y 1990 WorldCom, Inc. ($103.9B) N/A - though designated Max risk 1999-2001 Arthur Anderson/ KPMG 1989 / engaged May 2002 N Telecom 7/21/2002 N N/A 2004 N/A General Motors ($91.05B) Y N Industrials 6/1/2009 N 2009 4/7/2010 2009 N D&T 1918 N N CIT Group ($80.45B) Financial 11/1/2009 2004 N 12/10/2009 2010 N PWC 2001 Arthur Anderson Enron ($65.50B) Energy 12/2/2001 N/A N N/A N/A N/A 1946 Financial/ Insurance Financial Derivatives Broker Y Conseco Inc.($61.4B) 12/17/2002 N/A N 2003 Y 2003 PWC 1985 MF Global Holdings ($41.05B) 10/31/2011 Y N N/A N/A N/A PWC 2007 Y N 04/30/2010 Y N Chrysler ($39.30B) Auto Residential Mortgage Lending 4/30/2009 D&T* 1947* Thornburg Mortgage($36.5B) Y 5/1/2009 Y 2008 N/A N/A N/A Y KPMG 2006 7 Pacific Gas and Electric ($36.15B) Y 2001,2002, 2003 Utility 4/6/2001 N/A 2000 - 2003 3/1/2002 Y D&T 1999
Going Concern Top Ten U.S.Issuers Receiving TARP Funds Opinion Signature Date After TARP DisbursementICFR Effective Signing Auditor (Pre and Post Opinions) Top Ten Issuers Receiving TARP Funds Total Disbursed ($M)2 First Date of TARP Disbursement Going Concern Auditor Since ICFR Effective Going Concern AIG4 69,835 9/16/2008 N N 3/2/2009 Y N PwC 1980 General Motors5 50,745 12/29/2008 N N 3/4/2009 N Y D&T 1918 Bank of America 45,000 10/28/2008 Y N 2/25/2009 Y N PwC 1984 Citigroup 45,000 10/28/2008 Y N 2/27/2009 Y N KPMG 1969 JPMorgan Chase 25,000 10/28/2008 Y N 2/27/2009 Y N PwC 1965 Wells Fargo 25,000 10/28/2008 Y N 2/23/2009 Y N KPMG 1931 Goldman Sachs 10,000 10/28/2008 Y N 1/22/2009 Y N PwC 1926 Morgan Stanley PNC Financial Services 10,000 10/28/2008 Y N 1/28/2009 Y N D&T 1997 7,579 12/31/2008 Y N 3/2/2009 Y N PwC 2006 U.S. Bancorp 6,599 11/14/2008 Y N 2/23/2009 Y N E&Y 2003 8
Going Concern Going Concerns Per Year Percentage of Going Concerns % of Auditor Opinions with Going Concern Uncertainty 100% 90% 80% 70% 60% 50% 40% 30% 21.0% 19.9% 19.4% 18.6% 17.4% 16.4% 16.4% 16.1% 15.9% 20% 15.2% 14.4% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Going Concerns 2795 2998 2817 2552 2554 2709 2864 3300 3328 2994 2875 Total Auditor Opinions 16997 18819 17191 17766 16794 16784 16462 16610 15848 15395 15503 % of All Opinions NOTE The majority of Going Concerns were issued for non-accelerated filers, i.e. 2010 -with only 46 for large accelerated filers, or < 3%, Audit Analytics, "Going Concern Overview , July 2011 16.44% 15.93% 16.39% 14.36% 15.21% 16.14% 17.40% 19.87% 21.00% 19.45% 18.54% 9
Going Concern Going Concern Percentages by Filer Status Non-Accelerated Filers Large Accelerated Fiscal Total Acc. Filers Filers Year Small Reporting Company (subset) Other (subset) All Total Auditor Opinions Total Auditor Opinions Total Auditor Opinions Total Auditor Opinions Total Auditor Opinions Total Auditor Opinions Going Going Going Going Going Going Percentage Percentage Percentage Percentage Percentage Percentage Concerns Concerns Concerns Concerns Concerns Concerns 3 43 2590 2008 31 2636 10 Partial 1657 0.18% 1739 2.47% 11347 22.83% 4019 49.96% 153 20.26% 14743 17.88% 7 67 2920 2291 65 2994 2009 1725 0.41% 1935 3.46% 11735 24.88% 4312 53.13% 181 35.91% 15395 19.45% 23 144 3161 1915 499 3328 2008 1951 1.18% 2175 6.62% 11722 26.97% 3675 52.11% 790 63.16% 15848 21.00% 7 85 3208 346 1820 3300 2007 2038 0.34% 2237 3.80% 12335 26.01% 1055 32.80% 2950 61.69% 16610 19.87% 4 77 2783 19 1735 2864 2006 1983 0.20% 2287 3.37% 12192 22.83% 23 82.61% 3071 56.50% 16462 17.40% 2 61 2646 12 934 2709 2005 1326 0.15% 2760 2.21% 12698 20.84% 14 85.71% 1946 48.00% 16784 16.14% 1 56 2497 8 456 2554 2004 6 16.67% 3673 1.52% 13115 19.04% 10 80.00% 1226 37.19% 16794 15.21% 0 40 2512 7 1280 2552 2003 1 0.00% 3492 1.15% 14273 17.60% 9 77.78% 2760 46.38% 17766 14.36% 0 49 2768 2 1393 2817 2002 1 0.00% 2473 1.98% 14717 18.81% 6 33.33% 3297 42.25% 17191 16.39% 10
Going Concern Current Accounting Standards International Accounting Standards IAS 1 Management shall make an assessment of an entity s ability to continue as a going concern. Prepare financial statements on a going concern basis unless intend to liquidate or cease trading or no realistic alternative but to do so. Significant doubt on ability to continue as a going concern. Financial Accounting Standards Board - Currently no guidance in GAAP about going concern and/or the point in time at which an entity ceases to be a going concern 11
Going Concern FASB Current requirements FASB Statement No 107 Requires disclosures about Concentration of Credit Risk SOP-94-6-1 Requires disclosures if the Concentration makes the enterprise vulnerable to the risk of a near-term severe impact Since hurdle was so high did not see disclosures Risk and Uncertainties existing Nature of Operations Use of estimates in the preparation of financial statement Certain significant estimates Current vulnerability due to certain concentrations 12
Going Concern Auditing Standards and Guidance PCAOB Auditing Standards GAAS AU 341 International Auditing and Assurance Standards ISA 570 European Commission Impact Assessment Amending Directive 2006/43/EC on statutory audits of annual accounts and consolidated accounts Institute of Chartered Accountants in England & Wales Guidance for Directors of UK Companies 2009 American Institute of Certified Public Accountants SAS 59 Redrafting 13
Going Concern Enforcement Investors surprised by demise of companies during financial crisis without warnings or red flags Lack of going concern opinions Lack of disclosure of enforcement actions so far Standards are only worthwhile when they are followed and enforced 14
Going Concern Going Concern Survey Respondents included investors, some of whom were also members of: Council of Institutional Investors (CII) Chartered Financial Analyst (CFA) International Corporate Governance Network (ICGN) Asian Corporate Governance Network (ACGA) Global Peer Group ESG Exchange Global Investors Governance Network (GIGN) 40 respondents to survey 15
Going Concern Is the Concept Going Concern Important? 5.00% 2.50%0.00% Yes, very important Somewhat Very little No, not important at all Not sure 27.50% 65.00% 16
Going Concern Should There Be a Change in the Term Going Concern? 37.5% 40% 35% 30.0% 27.5% 30% 25% 17.5% 20% 15.0% 15% 10% 5% 0% Definition Triggers Responsibility No need to change Not sure 17
Going Concern When Should a Company Be Identified As a Going Concern? There is "substantial doubt" (80+%) More likely than not (51% chance) Reasonably possible (<51%) Not sure 10.0% 22.5% 17.5% 50.0% 18
Going Concern Should the Assessment be Based on a Time Period Assessment? Limited to the next 12 months 2.5%5.0% 5.0% Limited to next 12 months but also considered foreseeable events The foreseeable future (1-3 years) 27.5% 60.0% Other Not sure 19
Going Concern Whose Responsibility to Report to Investors on Going Concern? 90% 77.5% 80% 67.5% 70% 60% 52.5% 50% 40% 30% 17.5% 20% 10% 2.5% 0% Management Auditors Audit Committee PCAOB - SEC Not sure 20
Going Concern What Disclosures Should be Provided to Investors? 92.5% 85.0% 90% 100% 80% 67.5% 70% 57.5% 57.5% 55.0% 55.0% 60% 52.5% 47.5% 50% 40% 30% 20% 10% 0% Reasonably detailed discussion of the company's ability to generate sufficient cash Expected courses of action that bear on fin flexibility New borrowings Raising of new capital Liquidating of assets Reducing costs Reducing dividends Reducing levels of services or products Filing for bankruptcy 21
Going Concern How Should This Information be Disclosed? 80% 67.5% 70% 60.0% 60% 50.0% 50% 40% 30% 20% 10% 2.5% 0% An unaudited MD&A Footnotes of financials Included in auditor's report Other 22
Going Concern Recommendations Disclosures - FASB Strengthen Going Concern Definition Require Management Disclosure When aware of conditions and events that is reasonably foreseeable that an entity may not meet its obligations: 1. If reasonably estimable pertinent conditions and events giving rise to the assessment, including when event is anticipated to occur. 2. Possible effects of conditions and events. 3. Possible discontinuance of operations. 4. Management s evaluation of the significance of conditions and events that bear on financial stability and any mitigating factors. 5. Whether plans to mitigate events can be effectively implemented and the likelihood. 6. Recoverability or classification of recorded asset amounts or the amounts of classification of liabilities. 23
Going Concern Current Issues with Auditing Standards - AU 341 Lack of specific objectives auditor should achieve Auditor is not required to design their audit specifically to look for evidence with respect to Going Concern No requirement for auditor to communicate with audit committee Auditor not required to consider public domain information that is contrary to evidence management has presented. 24
Going Concern Current Issues with Auditing Standards Cont d. No requirement for auditor to gain understanding and evidence of management s key assumptions in their plans for mitigating the risks associated with the business that may result in it being more likely than not it will fail. Auditor not required to conclude as to whether management s key assumptions provide a reasonable basis for management s conclusion. 25
Going Concern Recommendations Audit Standards - PCAOB Refine Auditing Standards Include basic objectives the PCAOB expects auditors to achieve Auditors should be required to design the audit to obtain evidence with respect to Going Concern Auditors should be required to consider evidence available to them in the public Auditors should be required to understand the plan and its key assumptions, check for consistency of assumptions and data, recognize key omissions, understand factors specific to the industry, and see past historical trends of the company 26
Going Concern Recommendations PCAOB Refine Auditing Standards Auditors should be required to communicate to the audit committee how they reached their conclusion on going concern. Disclosures Communicate to the audit committee whether or not they have concerns as to whether it is reasonable to expect the company may not continue as a Going Concern and basis for conclusion. Roles Board should include a statement of basic objectives it expects the auditors to achieve and the process the audit committee uses in its oversight when there is a going concern issue. 27
Going Concern Recommendations SEC Disclosure of not just risks, but also how risks are mitigated in plain English Key Performance Indicators Some but not all companies provide information in public domain Factors critical to success and understanding of the company, its operations and cash flows Varies greatly by industry, e.g. Backlogs, sales per square foot and customer, plant utilization, tonnage shipped, etc. 28
Going Concern Summary Recommendations Standard Setters - Strengthen Definition - Define Triggers Move auditing standard from Substantial Doubt to More Likely than Not Require disclosure when Reasonable Possibility exists that the company is no longer a going concern Independent auditor ultimately must make assessment Extend the period of evaluation to 12 months plus foreseeable events beyond 12 months Key Performance Indicators Management to disclose in SEC filings Audit Committee s Role Enhanced Communication between auditor and audit committee Summary of discussion to shareowners Regulators Disclosures Mitigating Risks 29
