Questions for the audit committee to consider
- Has management evaluated the effects of the new disclosure requirements? If so, has management presented its analysis to the audit committee?
- Have the audit committee and management discussed the scope of changes of the proposed standards?
- Is the company actively participating in the standard-setting process and providing comments to the FASB?
Audit committees should stay current on the financial reporting developments that could affect 2010
year-end reporting and beyond.
As companies begin a new year and finalize the year-end financial reporting season, audit committees need to understand the effects of new financial reporting requirements.
Financial regulatory reform
While central elements of the Dodd-Frank Act (the Act) are focused on the regulation of the financial services sector, the Act also includes provisions that affect every public company. Several provisions in the Act deal with executive compensation, including say on pay, compensation committee and advisor independence and compensation clawback policies.
With the exception of say on pay, many of these provisions will not be effective for the upcoming 2011 proxy season. Still, audit committees and other board members should think about these provisions now, as many will become effective in the near future.
In August 2010, the US Securities and Exchange Commission (SEC) adopted changes to its proxy rules to facilitate director nominations by shareholders (proxy access). These changes would require companies, in certain circumstances, to include in proxy materials shareholder proposals that would amend a company's governing documents regarding shareholder director nominations and nominees for director submitted by eligible shareholders.
The adoption of the new proxy access rules has been delayed due to the legal petition filed by the US Chamber of Commerce and the Business Roundtable. However, it is important for directors to be proactive about engaging with management on how best to connect with large shareholders on this issue.
FASB convergence agenda
The Financial Accounting Standards Board (FASB) is continuing to focus on several broad-based convergence projects with the International Accounting Standards Board (IASB). Final standards on accounting for financial instruments, revenue recognition and leases, among others, are expected in 2011.
The effective dates for any new standards have yet to be determined as the scope and breadth of these proposals are unprecedented and each project could have significant effects on companies. It is not too early for audit committees to understand the potential implications.
In October 2010, the SEC staff issued its first progress report on its work plan related to the possible move to International Financial Reporting Standards (IFRS).
The SEC has indicated that following completion of its work plan and the convergence projects of the FASB and IASB, it should be in a position in 2011 to determine whether to incorporate IFRS into the US financial reporting system. Audit committees should continue to monitor the SEC's work in this area.
Audit committee communications
The Public Company Accounting Oversight Board (PCAOB) proposed additional requirements for communications between auditors and audit committees, including communication of critical accounting policies, practices and estimates and an overview of the audit strategy.
The PCAOB held a roundtable in September 2010 and extended the comment period to October 2010. The PCAOB expects to adopt the final standard in 2011.