Podcast - SOX Compliance and Revenue Recognition

podcast

Podcast - SOX Compliance and Revenue Recognition

In this podcast, Chris Wright, Protiviti Managing Director and a leader with the firm’s Financial Reporting Remediation & Compliance practice, talks about the effects of the new revenue recognition standard on SOX compliance activities.


Protiviti Podcast Transcript Transcript

Kevin Donahue, Protiviti
Kevin 
Hello, this is Kevin Donahue with Protiviti, welcoming you to a new installment of Powerful Insights. Today, we’re continuing our discussions around Protiviti’s 2017 Sarbanes-Oxley Compliance Survey. I’m happy to be speaking today with Chris Wright, a managing director with Protiviti and a leader with the firm’s Finance Reporting Remediation & Compliance practice. We’re going to be talking today, specifically, about some of the results from the survey that are tied to the new revenue recognition standard that goes into effect next year. Chris is focusing extensively on the new revenue recognition standard, as well as the new lease-accounting standard that will go into effect soon. Chris, thanks for joining me today.
Christopher P. Wright, Protiviti
Chris
Kevin, it’s great to be here.
Kevin Donahue, Protiviti
Kevin 
First, for those in our audience who may not be familiar with the new revenue recognition accounting standard, what is it exactly, and why is it such a big deal for companies?
Christopher P. Wright, Protiviti
Chris

ASC 606, Revenue from Contracts with Customers, is a new accounting standard, which after a release and a deferral or two is now effective for calendar-year public companies as of Jan. 1, 2018. Private companies may have an extra year, and non-calendar-year companies will get all the extra time that the calendar allows based on the month of their year-end. Both public and private companies can choose to early adopt. What is potentially different for companies, and why we suggest that a diagnostic be done, is because in the case of revenue recognition, not all the changes will be similar, depending on the industry.

It’s a five-step approach. Those five steps are not dissimilar to the current four steps that public companies follow now under the Securities and Exchange Commission’s Staff Accounting Bulletin 104, but what’s different is that industry guidance, which has existed and grown over the years, is replaced by this new standard, and so all of that extra guidance is gone. As a result, the new standard creates a need to look at everything from a fresh perspective — to not be able to rely on prior industry guidance, which was heavy in areas like government contracting in technology companies, etc., and then be able to come up with a new and consistently applied approach for the company based on your facts and circumstances and on your industry. It has the potential to be significant. We’ve seen some early adopters this year where it was significant, some where it wasn’t, but it is a situation where companies needed to understand what might change, that they were in a position to make those changes in time for Jan. 1, 2018.

Kevin Donahue, Protiviti
Kevin 
Chris, thanks for that rundown. That was really informative. Where does the Sarbanes-Oxley compliance process come into play in all of this?
Christopher P. Wright, Protiviti
Chris

Well Kevin, in two ways: One, which should be obvious, is that because this is a new accounting standard — and potentially significant, depending on the company’s diagnostic efforts and what is uncovered by that process — and it applies the first of the year, it will need to be applied in quarterly filings next year that are used for preparedness now, so that if there is a change in the accounting policy and then there are changes in processes, those changes and processes might need to lead to changes in controls, which would affect the timing and extent of control testing.

Companies for whom this might be a substantial issue would be well advised, if it’s going to be very substantial issue, to consider a pre-implementation audit for Sarbanes-Oxley review toward the end of this year and certainly a post-implementation audit for a Sarbanes-Oxley control test in concert with the first quarter of next year. The Sarbanes-Oxley implications, in that regard, also would potentially affect the scoping of the work.

If companies tend to look at revenue recognition as they go from business unit to business unit, in this instance, they might want to look at it paying organizationally across the organization to make sure that the new standard is being applied consistently in all business units that may require different staffing as well. That first implication, which would be something you’d expect when you change an accounting standard in a quarter, is what we’re seeing people working on. 

The second implication, which has been surfacing lately, is that the auditing firms, because of encouragement by the PCAOB to be engaged in dialogue with their clients and because everyone’s concerned about this becoming a successful implementation absent late filings, misses and restatements, is that they are focusing on the Sarbanes-Oxley implications of auditing, not necessarily only the new revenue recognition standard but also the process by which the company approaches a new accounting standard.

The probable reason for that, beyond PCAOB interest and SEC interest, is that right behind these standards changes will be a change in lease accounting the very next year, the first day of the first quarter of the next year, which would be more substantial for more companies and more industry agnostic. That implication was not necessarily on everybody’s radar, something the companies need to focus on; they can be graded, if you will, on their controls over an accounting change of any kind as part of going through this process, as well as on how revenue recognition comes out the first quarter.

Kevin Donahue, Protiviti
Kevin 
Thanks, Chris. Before I toss you my next question, I want to remind our audience that our full report on the results of Protiviti’s 2017 SOX Compliance Survey is available at Protiviti.com/SOXsurvey. Our report is titled Fine-Tuning SOX Costs, Hours and Controls. Chris, in one of our key survey findings, we see that one in four organizations experienced the extensive or substantial increases in testing of controls over application of revenue recognition policies. I think this probably ties to what you just were explaining, but is it a safe bet to say that these numbers — the one in four companies — will increase next year when we do this survey?
Christopher P. Wright, Protiviti
Chris

Kevin, I think it is probably safe to assume that to be the case. The current emphasis on more testing on controls over revenue recognition now is largely a derivative of PCAOB interest in the topic in the past year or two. It’s not as if revenue recognition is now just becoming an area of complexity or interest, and so to the extent that revenue recognition was complex for a company before, it’s likely to continue to be complex to the extent that it delivers more than one product or service or bundle that is likely to drive complexity.

What will change, or what will up the ante, if you will, on the control testing in the future will be that for all organizations for whom there is a change, whether substantial or not, there will be a need to test the consistency of that change. Even if it’s only a focus on the need for consistency, companies for whom the change was either substantial or insubstantial will likely see an increase in that activity.

Kevin Donahue, Protiviti
Kevin 
Chris, I have a suspicion that we’ll be talking to you this time next year about lease accounting, and perhaps about revenue recognition as well.
Christopher P. Wright, Protiviti
Chris
I think so.
Kevin Donahue, Protiviti
Kevin 
I want to thank you, Chris, very much for joining me today to discuss some of the impacts of Sarbanes-Oxley compliance on revenue recognition. Again, I want to remind our audience, for more information and to download our full report on results of this year’s survey, visit Protiviti.com/SOXsurvey.

 

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Christopher P. Wright, Protiviti
Christopher P. Wright
Managing Director
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