a © 2001 arthur andersen. all rights reserved. the accountants role in the new economy robert a....

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© 2001 Arthur Andersen. All rights reserved.

The Accountant’s Role in the New Economy

Robert A. JohnsonFebruary 5, 2001

2© 2001 Arthur Andersen. All rights reserved.

Agenda

• Characteristics of the New Economy

• New Economy Impact on Management

• New Economy Impact on Accounting and Auditing

• New Economy Accounting Issues


The External Context Has Changed

Convergence

ConsolidationGlobalization

Privatization

Emerging markets/trade shifts

Deregulation

Currency

Crises

Technology innovation

Strategic alliances

Recession?Core competence focus

Knowledge

Intellectual capital

Intangible economy Supply chain

integration

Communications infrastructure

e-BusinessBrand

Corporate governance

Investor pressures

Change in social/cultural patterns Generation X


Implications for Companies and Accountants

New competitors

Complex transactions

Premium upon knowledge

Political/economic instability

New skill

needs

Cross border sales

Rising cost of labor

Accelerating product cycles

Core competencies focus

Volatility of value

New distribution channels

Pricing pressure

New business opportunities


The Risk Gap is Growing

Unacceptable R

isk Gap

Busines

s Ris

ks

Ability to Manage Risks


Business RiskManagers Worry They Can’t Keep Up

Does your company have a formal risk management process?

Yes30%

Yes, But Inadequate

31%

Don’t Know6%

No33%

Source: 1997 EIU Study


The New Economy Requires A New Management Paradigm

OLD NEW

Inspect and Detect Anticipate and Prevent

Reactive Proactive

People Focused Process Focused

Fragmented Integrated with SeniorManagement Oversight

From Time to Time Continuous


Exploding Risks

A sian C risis M ay C reateB arriers to T radeA sian C risis M ay C reateB arriers to T rade

U n ion Pacifi c Posts$152 M i l l ion L oss,Five T im es W orse T han E xpectations

U n ion Pacifi c Posts$152 M i l l ion L oss,Five T im es W orse T han E xpectations

A sarco W i l l P ay $6.4 M i l l ionFine I n P ol lution C aseA sarco W i l l P ay $6.4 M i l l ionFine I n P ol lution C ase

Sears Roebuck’s Earnings Drop 5.5%Amid Rising Credit-Card Loan LossesSears Roebuck’s Earnings Drop 5.5%Amid Rising Credit-Card Loan Losses

W h a t D o esP ru d en tia l R ea lly O w e?

W h a t D o esP ru d en tia l R ea lly O w e?


The Old Audit Paradigm

BusinessEnvironment,

Processesand

Decisions

BusinessData

Accountingand

ManagementInformation

FinancialStatements

andManagement

Reports

Reality Information About Reality


The New Audit Paradigm

FinancialStatements

andManagement

Reports

Accountingand

ManagementInformation

BusinessData

BusinessEnvironment,

Processesand

Decisions

Reality Information About Reality


New Audit Paradigm

Historical Desired Focus on Accounting

Records

Focus on Business Risks andFinancial ReportingConsequences

Substantiate AccountBalances

Rely on Company RiskControl Processes

Fix the Financial Statements Fix control processes Focus Primarily on Detecting

Errors

Balance Emphasis on Fraud,Business Failure, andDetecting Errors

Perform Annual Audit NearYear End

Audit ContinuouslyThroughout the Year

Communicate as Required byStandards

Expand Communication onRisks and ControlsEffectiveness


Understand the Business

Assess Client Risk Controls

DetermineResidual

Audit Risk

ManageResidual

Audit Risk

The Business Audit

• Better audit

• Helps clients manage better

• Risk focus

• Control reliance

Plank #1: A New Audit Paradigm: the Business Audit




DetermineResidual

Audit Risk

ManageResidual

Audit Risk

UNDERSTAND THE BUSINESS

In depth business analysis to address:

What are the key businessand financial reporting risks the company is facing?

How does business information flow through the company, and what are the related risks?

How do key risks impact the company’s financial reporting?

How effective is the company in identifying, sourcing, and measuring these risks?




DetermineResidual

Audit Risk

ManageResidual

Audit Risk

ASSESS CLIENTRISK CONTROLS

How does the company control key risks?

How does the company know its risk control processes are operating effectively?


Determine Residual Audit Risk



DetermineResidual

Audit Risk

ManageResidual

Audit Risk

DETERMINE RESIDUALAUDIT RISK

Are there any risks not reduced to an acceptable level?

If so, what elements of the business risk management process and risk control processes are not operating effectively?


Manage Residual Audit Risk



DetermineResidual

Audit Risk

ManageResidual

Audit RiskMANAGE

RESIDUAL RISK

What additional company actions or audit procedures will reduce the specific risk to an acceptable level for purposes of the financial statement audit?

What recommendations will we make to the company to improve its business risk management process and risk control processes?


New Economy Accounting Issues

• New Economy Drives Accounting Issues/Risk– Rapid rate of change– Lack of traditional audit trail– Mix of high volume of relatively uniform transactions and limited number of

unique complex transactions– Capital market volatility and nontraditional value measures



• Proactive SEC Drives Accounting Issues/Risk– October 1999 “New Economy” letter– SAB 101– SAB 99– Blue Ribbon Commission– APB 20 Interpretation



• Business models are changing rapidly– Software ASP Hosting

• Complex arrangements– Multiple elements– Strategic partnerships

• Each party may provide products/services to the other

• May involve equity instruments

– Cash may pass back and forth

• Cash may not be indicator of fair value



• Back to back transactions– May not be contractually linked– May not occur at the same time

• Swaps or exchanges are common– Product for products– Product for technology– Product for services



• Various Accounting Literature May Apply– SOP 97-2 (software)– EITF 00-3 (hosting)– EITF 99-17 (barter transactions)– EITF 99-19 (gross vs. net)– SAB 101 (SEC revenue recognition)– EITF 00-8 (equity received for services)– EITF 00-21 (multiple element arrangements)– SOP 81-1 (contract accounting)– FASB 68 (funded development)– EITF 96-18 (equity issued for services)– APB No. 29 (nonmonetary transaction)– EITF 86-29 (magnitude of “boot”)



• Key Risks– Software accounting or some other model?– Identifying back-to-back transactions

• Documents may not link them

• May not occur at the same time

– How to value various elements

• VSOE/fair value not established

• Residual method/undelivered elements



• Valuation of equity instruments– Private company issues– Future accounting/impairment

• Valuation of other nonmonetary assets

• Impairment of nonmonetary assets received

• Is the earnings process complete?

• What is the business purpose of the transaction/transactions?


The Accountant’s Role in the New Economy

There is an increased need for accountants in the New Economy,

but with new skills:– Better understanding of business processes– Deeper technology skills– Technical research capability– A solid analytical framework

a © 2001 arthur andersen. all rights reserved. the accountants role in the new economy robert a....

Documents

residual audit risk

residual risk

business audit slide

arthur andersen

business risk managers

business audit better

new audit paradigm slide

specific risk