On the 2017 audit committee agenda

Financial reporting, compliance, and the risk and internal control environment will continue to be put to the test in 2017 by slow growth and economic uncertainty, technology advances and business model disruption, cyber risk, greater regulatory scrutiny, and investor demands for transparency, as well as dramatic political swings. In our annual message to audit committees, we've highlighted several items audit committees should keep in mind as they carry out their 2017 agendas:
• Give non-GAAP financial measures a prominent place on the audit committee agenda. Expressing concern about the presentation of non-GAAP financial measures, SEC staff in May 2016 published additional guidance to help companies evaluate the acceptability of non-GAAP financial information and their compliance with applicable rules and regulations. Recent SEC staff Comment Letters have focused on the use of non-GAAP financial measures, and the SEC's Enforcement Division has sent inquiries to companies regarding potential securities law violations. In this environment, it is critical that non-GAAP financial measures have a prominent place on the audit committee agenda: Have a robust dialogue with management about the process and controls by which management develops and selects the non-GAAP financial measures it provides, their correlation to the performance of the business and results, and whether they are being used to improve transparency and not to distort results.
• Monitor implementation plans and activities for major accounting changes — particularly the new revenue recognition and lease accounting standards. The scope and complexity of these implementation efforts and the impact on the business, systems, controls, and resource requirements should be a key area of focus. The new revenue standard (effective January 1, 2018, for calendar year-end public companies) provides a single revenue recognition model across industries, companies, and geographical boundaries. While the impact will vary across industries, many companies — particularly those with large, complex contracts — will experience a significant accounting change. The new standard will require companies to apply new judgments and estimates, so audit committees will want to inquire about the judgment and estimates process and how judgments and estimates are reached. Under the new lease standard (effective January 1, 2019, for calendar-year- end public companies) lessees will recognize most leases, including operating leases, on the balance sheet. This represents a wholesale change to lease accounting, and many companies will face significant implementation challenges during the transition. Implementation of these new standards is not just an accounting exercise; audit committees will want to receive periodic updates on the status of implementation activities across the company.
• Redouble the focus on ethics, compliance, and culture. Whether moving quickly to innovate and capitalize on opportunities in new markets, leveraging new technologies and data, and/or engaging with more vendors and third parties across increasingly complex supply chains, most companies face heightened compliance risks. Coupled with the complex global regulatory environment, these risks and vulnerabilities require vigilance. Help ensure that regulatory compliance and monitoring programs are up-to-date, cover all vendors in the global supply chain, and clearly communicate the company's expectations for high ethical standards. Take a fresh look at the effectiveness of the company's whistle-blower program. Does the audit committee see all complaints? If not, what is the process to filter complaints that are reported to the committee?
• Monitor regulatory initiatives to enhance audit transparency. There continues to be significant discussion about the need for increased transparency — both by the external auditor and the audit committee — around the audit process. In the U.S., the PCAOB is expected to issue a final standard on the auditor's reporting model. The new standard is likely to require in the auditor's report a description of “critical audit matters” intended to provide audit-specific information about especially challenging, subjective, or complex aspects of the audit. An expanded auditor's report would be directly associated with the company's financial statements, so the implications are real. The SEC's 2015 concept release on possible revisions to the audit committee reporting requirements remains under consideration. Stay apprised of these PCAOB and SEC projects and take the lead on audit quality by weighing key indicators, such as the knowledge and experience of the engagement team, the audit firm's internal quality reviews, and PCAOB inspection findings. Consider expanding the audit committee's report to provide more insight into how the committee carries out its oversight responsibilities.
For the full text of the firm's annual message to audit committees see “On the 2017 Audit Committee Agenda” at kpmg.com/blc.