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Posted: April 14, 2014

Financial reporting: What happened, what’s ahead

Dodd-Frank rulemaking, slow progress toward convergence

Jim Brendel

Because there are now two frameworks in existence, companies should clearly indicate which one they have utilized in reporting management’s assessment in their Form 10-K.

Conflict minerals reporting – As part of the Dodd-Frank Act, Congress mandated that public companies make disclosures about the use of “conflict minerals.”  The term conflict minerals is used to describe certain minerals (tin, tungsten, tantalum and gold) that are mined in the Democratic Republic of the Congo (DRC). The law does not prohibit companies from using these minerals, or impose a penalty for doing so. However, Congress believed that public disclosure would discourage U.S. companies from their use, which may indirectly fund the armed groups in the DRC. Companies that use these minerals in their manufacturing processes and supply chain will be required to file a report on Form SD by May 31, 2014 for the 2013 calendar year. 

The U.S. Chamber of Commerce and a manufacturing industry association have filed litigation seeking to modify or repeal the conflict minerals rule on the grounds that it is overly burdensome, unworkable and ineffective.  A federal judge rejected the challenge, but an appeal is pending. In the absence of a successful appeal, companies will need to be ready to file Form SD by May 31, 2014.

Disclosure of payments by resource extraction issuers -  Another rule from the Dodd-Frank Act, this requirement that public companies disclose government payments made to further the commercial development of oil, natural gas or minerals was also challenged by industry groups.  A federal judge found that the SEC’s rule was invalid. However the law itself is unchanged, so the SEC will need to rewrite and revise the rule. Until then, oil and gas and mining companies do not need to make these disclosures.

The SEC’s “Robocop” – In a speech nominating Mary Jo White as the new chairman of the SEC, President Obama said, “You don’t want to mess with Mary Jo.”  That statement has proven to be true, as the SEC announced new initiatives intended to crack down on financial reporting fraud through the use of advanced analytical tools and technology.  The SEC’s newly formed Financial Reporting and Auditing Task Force rolled out its Accounting Quality Model (AQM).  The AQM, which has come to be known as “Robocop,” combs through company filings seeking risk factors that the SEC believes to be associated with earnings management. High-risk filers will be selected for further investigation of potential fraud by SEC enforcement teams.

Potential changes to the auditor’s report - The Public Company Accounting Oversight Board (PCAOB) proposed substantial changes to the standard auditor’s report, in response to feedback from investor groups seeking more information. The biggest change would be the addition of a “critical audit matters” section of the report, in which the auditor would describe the most difficult, subjective or complex judgments made in the course of the audit.

If adopted, this would be the largest change to the audit report since the 1940s. The PCAOB will be holding public meetings in 2014 to gather input on this proposal, which some fear could expose auditors and companies to additional litigation. If adopted as proposed, the new report could be effective as early as 2016. In preparation, companies should consider engaging in a discussion with their auditors about which items might be considered critical audit matters for their company.

Proposal to require disclosure of the audit engagement partner – In an effort to bring greater transparency to public company audits, the PCAOB is examining a proposal to require disclosure in the audit report of the name of the engagement partner and any other accounting firms used in the audit.  In addition to providing more information to investors and other users of the financial statements, some believe that naming the partner would serve to make them more accountable.

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James Brendel, CPA, CFE, is the national director of audit quality for Hein & Associates LLP, a full-service public accounting and advisory firm with offices in Denver, Houston, Dallas and Southern California. He specializes in SEC reporting and assists companies with public offerings and complex accounting issues. Brendel can be reached at or 303.298.9600.

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