GODFREYHODGSON

HOLMESTARCA

CHAPTER 14EMERGING ISSUES IN

ACCOUNTING AND AUDITING

XBRL

• XBRL = Extensible business reporting language• Allows financial information to be presented

in an interactive way that in turn allows individual items of data to be extracted by software to produce reports custom designed by individual users– SEC (2008)– 500 of largest US companies • 2009 financial reports

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XBRL

• XBRL will loosen the control managers currently have on data aggregation decisions and place their performance under greater scrutiny

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The effects of corporate collapses and Sarbanes-Oxley Act (2002)

• High profile collapses in early 2000s changed the image of accounting and auditing and its regulatory environment

• Criticism of auditor independence and corporate governance

• SOX– peer reviews replaced by PCAOB inspections– restrictions on provision of non-audit services by

audit firms to their audit clients4

Issues surrounding the application of fair value accounting during the global financial crisis• Some believe the practice of fair valuing

assets was contributing factor – it requires the write-down in the value of some

assets when markets are turbulent• marking financial assets to market

• Considerable dispute about this– SEC investigation (2008)• recommendations offered for improving fair value

accounting

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Is the criticism leveled at ‘fair value measurement’ fair?

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Reactions by standard setters

• IASB (October, 2008) changed rules so that losses from changes in market values of financial assets could be reclassified under certain circumstances avoiding charging mark-to-market losses to the income statement

• FASB (2009) introduced a ruling to allow banks to use their own judgement in determining the fair value of assets, rather than using markets

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Auditors and the global financial crisis• The GFC could lead to regulatory action

affecting auditors– relatively little attention paid to the auditor’s role

in the crisis– the accounting profession and regulators have

proactively issued guidance – auditors of banks later suffering financial

difficulties can expect to come under scrutiny

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IASB and FASB convergence project• 2002 and 2006 convergence agreements• SEC issued (2008) a roadmap for the use of IFRS by

US companies by 2014– markets becoming increasingly global– new investment opportunities to US investors– would make firms from different countries easier to

compare – progress toward 7 milestones to be assessed in 2011

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Issues in IFRS-US GAAP convergence• It is not certain that the US will adopt IFRS• Some argue that competition between

standard setters is desirable

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International auditing standards• Auditing standards are also being

internationalised– have been redrafted– growing international acceptance

• A move to IFRS would require US auditing standards to change from assessing ‘conformity with rules’ to assessing ‘true and fair’

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International auditing standards• Both the auditing and accounting standards

boards must deal with issues relating to their independence and governance before both sets of standards are truly global

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Sustainability accounting, reporting and assurance• Companies are issuing sustainability reports• Sustainability accounting is a subset of social

accounting• Sustainability can be regarded as meeting the

needs of the present without compromising the ability of future generations to meet their own needs– environmental protection– justice between peoples and generations

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Recent developments in sustainability reporting• Global reporting initiative (2006)• Accounting for carbon emissions • Sustainability reports are increasingly being either

audited or reviewed by independent auditors– companies with the most to gain from increasing the

credibility of their reports are more likely to seek assurance

– little authoritative guidance

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Trends in sustainability reporting• Some companies are now seeking assurance

for their sustainability reports

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Other non-financial accounting and reporting issues

• Water accounting applies accrual accounting concepts to water resources

• Greenhouse gas emission accounting• Both attempt to provide data on scarce

resources other than those traditionally captured by financial accounting systems

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Summary

• One of the major influences on accounting and auditing practice and research is the growing internationalisation of accounting and auditing standards

• There have been recent developments in sustainability reporting and assurance

• Water accounting and greenhouse gas emission accounting are new developments

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Key terms and concepts

• XBRL• Sarbanes-Oxley Act 2002• Fair value accounting and the GFC• Auditors and the GFC• Convergence project• Sustainability accounting and assurance• Water accounting• Greenhouse gas emission accounting

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