As we step into 2024, several recurring issues remain top priorities for auditors, regulators, and financial leaders. While these topics may seem familiar, their implications evolve with changes in standards, interpretations, and risks.
Here’s why these are still hot topics, what to watch for, and how to ensure your audit readiness.
1. Revenue Recognition: ASC 606 Compliance Is Still Under the Microscope
Why It’s a Hot Topic: ASC 606 fundamentally changed how revenue is recognized, focusing on performance obligations, variable consideration, and disclosures. While many companies implemented the standard years ago, regulators and auditors continue to find inconsistencies in application—particularly in complex, multi-year contracts or those with variable consideration.
What to Look For:
- Variable Consideration: Are estimates for rebates, discounts, and returns supported by historical data and clearly documented?
- Contract Modifications: Have modifications been properly evaluated for impact on performance obligations?
- Disclosures: Are revenue recognition policies transparent and aligned with industry norms?
Why It Matters to Your Audit Partner: Revenue is one of the most critical and high-risk areas in financial reporting. Auditors face scrutiny from regulators, including the PCAOB, to ensure they’ve appropriately assessed revenue risks and controls.
2. Cybersecurity: Risk Mitigation Is Business as Usual
Why It’s a Hot Topic: Cyber threats continue to evolve, and the SEC’s heightened focus on cybersecurity disclosures means companies must be prepared to report material incidents promptly. Auditors must evaluate how cybersecurity risks affect internal controls over financial reporting (ICFR) and broader operational risks.
What to Look For:
- Access Management: Are systems and data restricted to authorized personnel only?
- Incident Response Plans: Are plans documented, tested, and effective?
- Control Failures: Could a cybersecurity breach impact financial reporting systems, such as payroll or invoicing?
Why It Matters to Your Audit Partner: This includes evaluating whether controls over access management, system updates, and data recovery are effective and consistently applied. A cybersecurity breach that exposes sensitive financial data or disrupts critical systems, such as payroll or revenue recognition, can result in significant errors or omissions in financial reporting.
Weak cybersecurity controls can signal broader control weaknesses, such as inadequate oversight of IT systems or ineffective coordination between finance and IT departments. For example, if access controls are poorly managed, unauthorized users could make changes to financial data, potentially leading to misstated financial results or compliance failures. Similarly, the absence of a robust incident response plan may indicate a lack of preparedness for addressing operational disruptions, further increasing risk to financial reporting.
Auditors view these risks not only as standalone threats but also as indicators of systemic issues that may require deeper scrutiny. This heightened focus aligns with regulatory expectations, particularly with the SEC’s emphasis on cybersecurity disclosures and the PCAOB’s continued interest in how IT general controls support overall internal controls over financial reporting (ICFR).
3. Mergers & Acquisitions: Familiar Challenges Persist
Why It’s a Hot Topic: M&A activity often involves significant judgment, from valuing acquired intangibles to allocating purchase price. Errors in these areas can lead to material misstatements, which regulators continue to target during inspections.
What to Look For:
- Valuation of Intangible Assets: Are values for customer relationships, trademarks, or patents based on defensible assumptions?
- Provisional Estimates: Have provisional amounts been finalized within the required timeframe?
- Integration Issues: Have acquired entities’ systems and processes been properly incorporated into financial reporting?
Why It Matters to Your Audit Partner: Auditors are tasked with validating the accuracy of purchase price allocations and ensuring disclosures are complete. Missteps in these areas can expose both companies and their auditors to significant risk.
4. Lease Accounting: ASC 842 Challenges Linger
Why It’s a Hot Topic: ASC 842 introduced complex new requirements for lease recognition and measurement. Companies continue to struggle with embedded leases, modifications, and ensuring ongoing compliance with the standard.
What to Look For:
- Embedded Leases: Have all contracts been reviewed for lease components that may not have been initially identified?
- Modifications and Remeasurements: Are changes to lease terms appropriately evaluated and recorded?
- Lease Disclosures: Do footnotes provide sufficient detail about lease terms and related party arrangements?
Why It Matters to Your Audit Partner: Leases can significantly impact a company’s financial statements. Auditors need to ensure that companies are correctly applying the standard and that all leases are properly accounted for.
5. Non-GAAP Measures: The Spotlight Isn’t Dimming
Why It’s a Hot Topic: Non-GAAP measures provide valuable insight into performance, but the SEC is increasingly concerned about their prominence and whether they may mislead investors. Misalignment with GAAP measures or inconsistent calculations can raise red flags.
What to Look For:
- Prominence of Non-GAAP Measures: Are these measures more prominent than GAAP metrics in filings or communications?
- Consistency: Are non-GAAP measures calculated consistently across reporting periods?
- Reconciliations: Are detailed and clear reconciliations provided to the most comparable GAAP measures?
Why It Matters to Your Audit Partner: Auditors are responsible for evaluating whether non-GAAP measures are misleading or improperly presented, as these are often areas of focus during inspections.
6. Regulatory Shifts: Preparing for New SEC Leadership
Why It’s a Hot Topic: With the upcoming departure of SEC Chair Gary Gensler and the nomination of Paul Atkins, regulatory priorities could shift significantly. Known for his historically pro-business stance and skepticism toward heavy-handed enforcement, Atkins’ leadership may bring a lighter regulatory approach. This potential easing of enforcement or rulemaking could affect cryptocurrency oversight, financial reporting standards, and emerging issues such as ESG disclosures.
Additional Areas of Potential Shift:
- Climate and Sustainability Reporting: Atkins has previously expressed concerns about imposing costly reporting mandates. Companies may see a slowdown in the SEC’s push for climate-related disclosure requirements.
- PCAOB Inspections: The SEC’s oversight of the PCAOB could shift toward fewer inspections or a reduced emphasis on certain areas, potentially impacting audit firm accountability.
- SPAC Regulations: Recent years have seen heightened scrutiny on special purpose acquisition companies (SPACs), but Atkins may deprioritize enforcement actions targeting SPAC disclosures and investor protections.
- Enforcement Approach: Under Atkins, the SEC may adopt a more lenient stance on corporate penalties, focusing instead on individual accountability for executives.
What to Look For:
- Changes in proposed rulemaking timelines and priorities, particularly around ESG and climate-related disclosures.
- A potential reduction in enforcement actions or penalties against public companies.
- Updated guidance from the PCAOB as its priorities shift under new SEC oversight.
Why It Matters to Your Audit Partner: Regulatory shifts create uncertainty, and auditors must stay agile to align with new expectations. These changes could also impact how auditors assess compliance with evolving reporting standards, adding complexity to the audit process.
Action Items to Prepare for 2024’s Hot Topics
- Ensure Comprehensive ASC 606 Compliance: Regularly review contracts to identify performance obligations, maintain detailed documentation for variable considerations, standardize processes for contract modifications, update revenue recognition policies for transparency, and provide ongoing training to accounting and finance teams.
- Strengthen Cybersecurity Measures: Implement robust access controls, develop and test incident response plans, assess the impact of potential breaches on financial reporting systems, enhance coordination between IT and finance departments, and stay informed on regulatory requirements to ensure compliance.
- Optimize M&A Accounting Practices: Engage valuation experts early in the due diligence phase, monitor and finalize provisional estimates within required timeframes, develop detailed integration plans for acquired entities, ensure comprehensive disclosures of valuation methods, and conduct post-merger reviews to improve future acquisitions.
- Enhance Lease Accounting Compliance: Conduct thorough reviews of lease portfolios to identify embedded leases, establish procedures for evaluating lease modifications, ensure detailed lease disclosures, provide ongoing training on ASC 842 requirements, and utilize technology solutions to manage lease data effectively.
- Ensure Integrity of Non-GAAP Measures: Review and standardize non-GAAP policies, provide clear reconciliations to GAAP measures, monitor regulatory guidance, evaluate the prominence of non-GAAP measures in communications, and train investor relations teams on appropriate use and disclosure.
- Adapt to Evolving Regulatory Landscape: Stay informed on changes in SEC leadership and emerging priorities, assess the impact on reporting practices, engage with legal and compliance teams, update internal policies accordingly, and communicate changes to relevant stakeholders within the organization.
Final Thoughts
These topics may not be new, but their nuances and implications evolve every year. Proactively addressing them not only ensures audit readiness but also demonstrates a commitment to transparency and accountability.
As we move into 2024, staying ahead of these hot topics is essential to navigating an increasingly complex financial and regulatory environment. Proactive preparation and clear communication with your audit partner aren’t just best practices—they’re critical to avoiding last-minute surprises that could derail your audit timeline. The time to act is now. By addressing these issues early, you can ensure a smoother audit process and reinforce the integrity of your financial reporting when it matters most.