With revenue recognition changes just around the corner, the Securities and Exchange Commission is talking up the importance of the corporate governing body most responsible for implementing them successfully: the audit committee. During a speech in March, the SEC’s chief accountant, Wesley R. Bricker, stressed the importance of audit committees to issuers’ financial credibility as well as their cultures.
“The livelihood of every American depends in a meaningful way on how well accountants do their jobs,” Bricker said to an audience at the University of Tennessee’s C. Warren Neel Corporate Governance Center. It’s a big statement, but one that’s difficult to dispute. “Economic decisions are no better than the information on which they are based—if the numbers are wrong, the decisions are wrong, and our economic future is placed at risk. Investors depend on accurate financial reporting.”
The Financial Accounting Standards Board (FASB) decided three years ago that investors needed better reporting about revenue—arguably the most important metric through which investors assess a company’s performance. The FASB joined with the International Accounting Standards Board (IASB) in creating the new revenue recognition guidelines that, among other advantages, are more consistent and comparable across industries than the discarded GAAP standards. “The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue from contracts with customers,” according to the FASB.
In short, the new revenue recognition rules will provide better information. But they also provide a massive challenge to audit committees, which will be held responsible for the quality of company reporting. “The importance of the audit committees’ work cannot be overstated,” Bricker said.
He stressed that audit committees should be working with management to set the right tone for the new reporting task. Specifically, audit committees should get on the same page with management about “what mechanisms are in place to assess the adequacy of [the] control environment, including across any relevant divisions and geographies.”
In light of a new EY Revenue Recognition Survey, that sounds like good advice. The survey reveals a troubling disconnect among C-suite executives on the extent to which they are prepared to implement the new revenue recognition standard by its 2018 effective date. According to the study, 85% of CIOs believe the IT team is “providing the support and skills needed” to comply with the changed standards, while only 60% of CFOs agree. These findings highlight the need for finance, IT and other functions within a company to work together in the compliance effort.
Ultimately, the buck stops with the audit committee, but Bricker noted that individual committees can and should approach the task differently.
“One size doesn’t fit all when it comes to audit committees,” he said. “Within broad parameters, each audit committee develops its charter and agenda. The committee’s job is one of oversight and monitoring, and in carrying out this job, it acts in reliance on senior management, the external auditor, and any advisors that the committee might engage.”
With American livelihoods depending on it, we can only hope that most audit committees handle their difficult job well.