AICPA holds conference on SEC & PCAOB developments

| 12/20/2017


Current financial reporting, governance, and risk management topics

From the Federal Financial Institution Regulators

FDIC Issues “Quarterly Banking Profile”

The Federal Deposit Insurance Corp. (FDIC) issued, on Nov. 21, 2017, its “Quarterly Banking Profile,” covering the third quarter of 2017. According to the report, FDIC-insured banks and savings institutions earned $47.9 billion in the third quarter, up 5.2 percent from the industry’s earnings a year before. The rise in net earnings was a result primarily of a 7.4 percent increase in net interest.

The report provides these additional third-quarter statistics:
  • Return on assets reached 1.12 percent, up from 1.10 percent a year before.
  • Total loans and leases increased by 3.5 percent over third-quarter 2016 figures. Although loan growth remains steady, the rate of growth slowed for the fourth consecutive quarter.
  • Banks set aside $13.8 billion in loan loss provisions, up $2.4 billion from a year prior, representing the largest quarterly loss provisions for the industry since fourth-quarter 2012.
  • Community banks earned $6 billion in net income during the third quarter, up 9.4 percent from the same time last year.
The number of FDIC-insured commercial banks and savings institutions declined from 5,787 to 5,737 during the third quarter. The number of institutions on the problem bank list dropped to 104, the fewest since 2008, and the Deposit Insurance Fund balance rose to $90.5 billion during the third quarter.

NCUA Releases Third-Quarter 2017 Performance Data

On Dec. 13, 2017, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2017. These are highlights:
  • The number of federally insured credit unions continued to drop – from 5,696 at the end of the second quarter to 5,642 at the end of the third quarter, a decrease of 202 from a year earlier.
  • Net income at an annual rate was $10.5 billion, up $0.76 billion (7.8 percent) from a year ago.
  • Total assets were $1.36 trillion, 6.8 percent greater than a year ago.
  • Compared to one year earlier, the return on average assets has increased slightly from 78 to 79 basis points through the third quarter of 2017.
  • Outstanding loan balances increased 10.6 percent year over year, to $937 billion.
  • The delinquency rate was 0.79 percent, up slightly from one year earlier. The net charge-off ratio was 56 basis points, up from 53 basis points one year earlier.
  • Deposits (shares) grew $65 billion (6.4 percent) year over year, to $1.08 trillion.

New Comptroller Takes Office at the OCC

On Nov. 16, 2017, the Senate voted 54 to 43 to confirm Joseph Otting as comptroller at the Office of the Comptroller of the Currency (OCC), and he was sworn in as the 31st comptroller on Nov. 27. Previously he served in various roles in the banking industry, including as president and CEO of California-based OneWest.

Yellen Resigns From Federal Reserve Board Upon Swearing in of New Chair

Federal Reserve Chair Janet Yellen announced on Nov. 20, 2017, that she will resign from the Board of Governors of the Federal Reserve System (Fed) upon the swearing in of Jerome Powell as chair. President Donald Trump nominated Powell in early November, and Powell was confirmed by the Senate Banking Committee on Dec. 5, which clears the way for full Senate approval in the coming weeks.

Trump to Nominate McWilliams to Lead FDIC

The White House announced on Nov. 30, 2017, that Trump will nominate Jelena McWilliams to serve as FDIC chair. McWilliams is currently executive vice president and chief legal counsel at the Cincinnati-based regional bank Fifth Third, which she joined earlier in 2017. Her previous roles include chief counsel and deputy staff director at the Senate Banking Committee.

If confirmed by the Senate, McWilliams will replace Chairman Martin Gruenberg, who has led the agency in acting or confirmed capacities since 2011.

Agencies Defer Certain Basel III Capital Provisions

On Nov. 21, 2017, the Fed, FDIC, and OCC finalized an extension of the phase-in of certain Basel III capital rules for banks not using the Basel advanced approaches. The rule, which is effective Jan. 1, 2018, pauses the full transition to the Basel III treatment of mortgage servicing assets, certain deferred tax assets, investments in the capital of unconsolidated financial institutions, and minority interests. Because advanced approaches are used principally by banking organizations with more than $250 billion in assets or foreign bank subsidiaries with more than $10 billion in assets, the relief applies broadly to community, midsize, and even several regional banks.

In the final rule, the agencies acknowledge the effects on capital of implementing the Financial Accounting Standards Board’s current expected credit loss (CECL) model: “The agencies recognize that CECL will affect accounting provisions and, consequently, retained earnings and regulatory capital, and that the amount of the effect will differ among banking organizations.” While the agencies did not take action now to address the impact of CECL, they added that they “are considering separately whether or not it will be appropriate to make adjustments to the capital rules in response to CECL and its potential impact on regulatory capital.”

This extension comes as the agencies go through a larger rulemaking project that would simplify the treatment of assets subject to common equity tier 1 capital threshold deductions and limitations on minority interest and replace the definition of high-volatility commercial real estate exposures with a more straightforward measure. The related simplification proposal was issued on Sept. 27, 2017, with comments due Dec. 26, 2017.

From the Consumer Financial Protection Bureau (CFPB)

CFPB Formally Rescinds Arbitration Rule

Following congressional action to overturn the CFPB’s controversial arbitration rule using the Congressional Review Act, the CFPB issued on Nov. 22, 2017, a final rule formally removing the arbitration rule text from the Code of Federal Regulations. The action is effective as of Nov. 22, 2017.

CFPB Director Cordray Steps Down

As announced in an email to CFPB staff in mid-November, Richard Cordray resigned as director of the CFPB, effective Nov. 24, 2017. Cordray’s five-year term was set to expire in July 2018.

Prior to his resignation, Cordray named CFPB Chief of Staff Leandra English as deputy director of the agency. The deputy director position has gone unfilled on a permanent basis for more than two years, but the Dodd-Frank Wall Street Reform and Consumer Protection Act designates the deputy director to serve as acting director of the CFPB in the “absence or unavailability” of a director.

However, Trump designated Mick Mulvaney, director of the Office of Management and Budget, to serve as acting CFPB director upon Cordray’s resignation. A legal opinion released by the Justice Department’s Office of Legal Counsel on Nov. 25, 2017, concluded that naming an acting director under the Federal Vacancies Reform Act remains an “available option” to the president. The CFPB’s general counsel also concluded that Trump has the authority to appoint an acting director and “advise[d] all Bureau personnel to act consistently with the understanding that Director Mulvaney is the Acting Director of the CFPB.”

In his first day as acting director on Nov. 27, Mulvaney imposed a 30-day freeze on new regulations, guidance, hiring, and civil money penalties at the CFPB.

From the Senate Banking Committee

Senate Banking Committee Passes Bipartisan Regulatory Reform Bill

On Dec. 5, 2017, the Senate Banking Committee passed S. 2155 (the Economic Growth, Regulatory Relief and Consumer Protection Act). A group of nine Republican senators and nine Democratic senators champion the bipartisan regulatory reform bill. Provisions in the bill include a qualified mortgage designation for mortgages held in portfolio, a substantial increase in the systemically important financial institution (SIFI) designation threshold, and relief from stress tests and exam requirements for certain institutions.

Senate leadership has indicated a January 2018 vote on this bill is likely. If this bill passes in the Senate, there remains uncertainty as to how the House of Representatives will proceed. House leaders could insist on their own regulatory reform bill (H.R. 10 – the Financial CHOICE Act) or could directly vote on the Senate’s bill. The two bills are significantly different, and the House bill currently lacks Democratic support.

From the Financial Accounting Standards Board (FASB)

FASB Codifies Rescission of SEC Guidance on Revenue Recognition

In November 2017, the FASB released Accounting Standards Update (ASU) 2017-14, “Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue From Contracts With Customers (Topic 606),” to codify Staff Accounting Bulletin (SAB) 116, which the Securities and Exchange Commission (SEC) issued on Aug. 18, 2017. SAB 116 eliminates previous SEC guidance on revenue recognition, to conform to the FASB’s guidance in ASC Topic 606. In particular, it eliminates SAB Topic 13, “Revenue Recognition,” which includes interpretations and four specific criteria for the FASB’s previous revenue model under ASC Topic 605. Once the guidance in ASC Topic 606 is adopted, reference to previous guidance in SAB Topic 13 no longer will be appropriate.

FASB Combines Topics on Income and Comprehensive Income

The FASB’s ongoing Codification Improvements project includes simplifying the Accounting Standards Codification (ASC). To that end, Topic 225, “Income Statement,” and Topic 220, “Comprehensive Income,” have been identified as two topics that cover related guidance and would be simplified by being combined.

The board decided the guidance in Topic 225 will be moved to Topic 220. All guidance for the income statement and the statement of comprehensive income in a single topic, “Income Statement – Reporting Comprehensive Income.” No incremental changes will be made to the guidance.

From the Securities and Exchange Commission (SEC)

AICPA Presents Conference on SEC and PCAOB Developments

The annual American Institute of CPAs (AICPA) Conference on Current SEC and PCAOB Developments was held in Washington, D.C., on Dec. 4 through 6, 2017. The conference included remarks from the SEC chairman and the chief accountant as well as professionals from the SEC’s Office of the Chief Accountant (OCA) and the Division of Corporation Finance (Corp Fin). In addition, representatives from the PCAOB and the FASB also  addressed the conference.

See highlights from the conference in the Crowe e-communication, “Headline Speeches From the 2017 AICPA Conference on SEC and PCAOB Developments.”

SEC Eliminates Previous Guidance on Available for Sale (AFS) Equity Securities

On Nov. 29, 2017, the SEC staff issued Staff Accounting Bulletin (SAB) No. 117, to eliminate guidance in SAB Topic 5.M, “Other Than Temporary Impairment of Certain Investments in Equity Securities.” Because FASB ASC Topic 321, “Investments – Equity Securities,” (codified by ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”) eliminates the AFS classification for investments in equity securities, the SEC guidance in SAB Topic 5.M on that security type and classification is no longer applicable. Subsequent to an SEC registrant adopting ASC Topic 321, SAB Topic 5.M will no longer apply.

SEC Staff Updates Financial Reporting Manual

Staff in the SEC’s Division of Corporation Finance (Corp Fin) updated its Financial Reporting Manual (FRM) on Dec. 1, 2017. The revisions to the FRM address the timing of applying new accounting standards to pro forma financial information and the adoption of new accounting standards after an issuer loses its emerging growth company (EGC) status.

SEC Enforcement Division Issues Report on FY17

The SEC’s Enforcement Division issued, on Nov. 15, 2017, “Annual Report: A Look Back at Fiscal Year 2017,” which focuses on SEC enforcement priorities for the coming year and reviews actions taken during fiscal year 2017.

Within the report, Stephanie Avakian and Steven Peikin, division co-directors, provide their overall enforcement approach and identified the following five core principles that will guide their enforcement decision-making:
  • Focus on the Main Street investor.
  • Focus on individual accountability.
  • Keep pace with technological change.
  • Impose sanctions that most effectively further enforcement goals.
  • Constantly assess resource allocation.
The report also discusses the Enforcement Division’s creation of a Cyber Unit and a Retail Strategy Task Force.

From the Public Company Accounting Oversight Board (PCAOB)

SEC Appoints New PCAOB Chairman and Board

On Dec. 12, 2017, the SEC appointed a new board of four members and a chairman, William D. Duhnke III, to the PCAOB. Duhnke is currently the staff director and general counsel to the U.S. Senate Committee on Rules and Administration, and he previously served as staff director and general counsel to the U.S. Senate Committee on Banking, Housing, and Urban Affairs and the Committee on Appropriations.

The four new board members include:
  • J. Robert Brown, currently a professor of law at the University of Denver, where he is director of the corporate and commercial law program and is the Lawrence W. Treece professor of corporate governance
  • Kathleen M. Hamm, currently the global leader of securities and fintech (financial technology) solutions and senior strategic adviser on cyber solutions at Promontory Financial Group
  • James G. Kaiser, currently a partner and the global assurance methodology and transformation leader at PricewaterhouseCoopers
  • Duane M. DesParte, soon to retire as senior vice president and corporate controller of Exelon Corporation. He previously was an audit partner at Deloitte & Touche and, prior to that, at Arthur Andersen.

PCAOB Publishes Guidance on Implementing Auditor’s Reporting Model (ARM) Changes

On Dec. 4, 2017, the PCAOB published staff guidance describing changes to the auditor’s report that are effective for phase one of implementation, which includes audits for fiscal years ending on or after Dec. 15, 2017. The guidance addresses these key changes to the auditor’s report:
  • Form of the auditor’s report – requires the opinion section to be first, immediately followed by the basis for the opinion; in addition, requires section titles  
  • Addressee – requires the report to be addressed to the shareholders and the board of directors
  • Auditor independence – requires a statement that the auditor is registered with the PCAOB and is independent
  • Auditor tenure – requires a statement containing the year the auditor began serving consecutively as the company’s auditor
  • Auditor reporting regarding Internal Control Over Financial Reporting (ICFR) – requires explanatory language when management’s report is not required to be audited and makes conforming amendments when management’s report is audited
  • Explanatory and emphasis paragraphs – addresses when an explanatory paragraph is required and the use of emphasis paragraphs
  • Information about certain audit participants – permits the auditor’s report to include  report information regarding the engagement partner and/or other accounting firms participating in the audit
The guidance also provides an overview of the requirements for critical audit matters (CAMs), which are not required to be reported until phase two of implementation, which includes audits of fiscal years ending on or after June 30, 2019 (for audits of large accelerated filers), or Dec. 15, 2020 (for audits of all other companies to which the requirements apply).

From the American Institute of Certified Public Accountants (AICPA)

AICPA Proposes Changes to the Auditor’s Report

On Nov. 29, 2017, the AICPA’s Auditing Standards Board (ASB) issued three exposure drafts; one of particular interest to private financial institutions is the proposed alignment of the form and content of the auditor’s reporting under AICPA standards with the International Auditing and Assurance Standards Board (IAASB) standards and, in many ways, with the PCAOB standards.

The exposure draft, “Proposed Statements on Auditing Standards [SAS] – Auditor Reporting” and “Proposed Amendments – Addressing Disclosures in the Audit of Financial Statements,” includes the following changes:
  • The opinion section must be presented first in the auditor’s report, followed by the basis for opinion, which must include an affirmative statement about the auditor’s independence and fulfillment of other ethical responsibilities.
  • Communication of key audit matters (KAMs) would not be required for audits of nonissuers unless the terms of the audit engagement include reporting KAMs.
  • The description of the responsibilities of management for the preparation and fair presentation of the financial statements is expanded, including a requirement to identify those responsible for the oversight of the financial reporting process if different from those responsible for the preparation.
  • The description of the responsibilities of the auditor and key features of an audit is expanded.
Comments are due May 15, 2018, and the proposal would be effective no earlier than for audits of financial statements for periods ending on or after June 15, 2019.

From the Center for Audit Quality (CAQ)

CAQ Provides New Tool for Audit Committees: PCAOB’s Auditor Report Model

On Dec. 6, 2017, the CAQ distributed a new tool, “The Auditor’s Report: Considerations for Audit Committees,” that public company audit committees can use to understand the changes in and implementation timing of the PCAOB’s new auditing standard, “The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.”
The first phase of implementation includes disclosure of auditor tenure among other changes, and the second phase includes the most significant change – that is, disclosure of CAMs. For both phases, the CAQ tool identifies the changes to the auditor’s report and provides questions for audit committees to consider as they discuss those changes with auditors and other stakeholders.

From the Institute of Internal Auditors (IIA)

Report Provides Recommendations for Reporting Misconduct

The Anti-Fraud Collaboration, which was formed in 2010 by the IIA, the CAQ, Financial Executives International, and the National Association of Corporate Directors, on Nov. 15, 2017, issued a report, “Encouraging the Reporting of Misconduct,” that provides recommendations from corporate directors, financial executives, and internal and external auditors for reporting suspected financial fraud.

The collaboration gathered information from roundtable discussions on suspected financial reporting fraud and the impact that fear of retaliation has on reporting. The report summarizes that information to identify factors that discourage reporting, recommendations to encourage reporting, and guidance for establishing and maintaining an environment free from retaliation.

Contact us

Sydney Garmong
Sydney Garmong
Office Managing Partner, Washington, D.C.