Regulatory Roundup: Auditor Selection, Segment Reporting, and Other Areas of SEC Concern

The following highlight some accounting issues that are currently receiving regulatory scrutiny.

• Auditor Selection. Unlike European Union proposals that would require large firms to change auditors every ten years, mandatory rotation is not (yet) on the table for US companies. However, regulators have urged corporate boards to consider independence and quality issues, and not focus solely on lower costs, when looking to hire new auditors. Larger audit firms are generally associated with higher quality products, but their inexorable forays into more and varied consulting services offerings could raise questions about independence.
• Segment Reporting. In an earlier blog post, we discussed challenges involved in assigning balance sheet items, including goodwill, to various reporting units of a Company. Segment reporting appears to be on the regulators’ radar screens, as well. The issue was the third most common item, after tax and goodwill accounting, discussed on SEC comment letters in the first three quarter of 2013.
• Other “Red Flags”. According to this WSJ article, items likely to be frowned upon by the SEC’s Financial Reporting and Audit Task Force include multiple revisions (especially over a short period of time), significant differences between reported and tax earnings, off-balance sheet transactions, use of non-GAAP metrics, and deficient internal controls.

Much like boards that are hiring new auditors, corporate managers often have to consider independence and quality issues in choosing third party service providers, including valuation specialists. Mercer Capital has a long history of working with management teams across the country to produce independent valuation analyses necessary to meet financial reporting requirements, and avoid common pitfalls. Call us – we would like to help.

Related Links

• Audit Reforms Stall After Accountancy Firms’ Aggressive Lobbying
• Auditor Switches May Get Closer
• Big Four Firms to Be Questioned on Push into Consulting