Accounting
SEC plans to renew international convergence of accounting, auditing standards
The Securities and Exchange Commission is planning to encourage greater cooperation between U.S. and international standard-setters on accounting and auditing standards as a way to lower costs and complexity for multinational companies, while putting pressure on the International Financial Reporting Standards Foundation to improve its funding and place less emphasis on sustainability standards.
During a session Monday at the AICPA’s Conference on Current SEC and PCAOB Developments in Washington, D.C., SEC chairman Paul Atkins and chief accountant Kurt Hohl discussed their plans with Center for Audit Quality CEO Julie Bell Lindsay.
Hohl, who was formerly global deputy vice chair of EY’s global assurance professional practice before he was
“I told Rich it’s really important for him to work with the IASB on developing international accounting standards, and then vice versa, for the IASB to work with the FASB to learn from one another,” said Hohl. “One of the things that I’m really focused on is to try to get as much cooperation and convergence as we can on standards because it reduces investor confusion. There’s maybe undue costs associated with it, and I think we can basically leverage the work of each body to get developing standards out faster. If the IASB takes up a topic first, and the FASB wants to basically take up a similar project afterward, they can basically learn from the feedback that the IASB has gotten and maybe get out standards on a quicker basis.”
Hohl noted that the big challenge here on the cost side is trying to figure out how to get preparers and other stakeholders participating in the standard-setting process. “Auditors and the big firms and investors are pretty vocal,” said Hohl. “Some of the trade associations for preparers are, but we see individual companies are coming in after the fact and saying, ‘Well, you know, we don’t like the standard. We want you to change it or maybe not follow it, and we have to figure out a mechanism for companies to participate on the front side of the project to inform the FASB so that we can get fairly high-quality standards at a reasonable cost.”
FASB and the IASB had long worked together on converging accounting standards such as revenue recognition in 2014, but ultimately
Subverting accounting
SEC chair Atkins said he wants accountants and auditors to “get back to basics” of focusing on integrity, objectivity and professional skepticism. He criticized the growing focus on issues and services that promote the “financial self-interest of the firms and accountants.”
He criticized some of the stances he has seen from accounting firms in their comment letters to the SEC.
“I do have to say, I want to emphasize this right up front that especially over the last five or so years, I was really shocked at the focus of some of the firms on things that I think would have completely subverted the importance of financial materiality and financial accounting,” said Atkins. “That’s some of the disclosure rules that were pushed forward at the SEC to the chairs of some of the largest firms in the profession that would have subverted [Regulations] S-X, S-K and ultimately U.S. GAAP. Those things are looking to the profession to uphold, and if you can’t even do that in the face of pressure from the government or your investors and even so-called ‘investors,’ frankly politicized investors. I think that’s a real problem. Some of these comment letters that were submitted to the SEC are still on firms’ websites, so I guess you still stand by that. Looking forward, we have a very heavy regulatory agenda coming up next year. But basically, I will look with rather skepticism and discount some of the comments that come from the profession in this area. I think there has to be a real refocus, again, on the basics of financial accounting and auditing.”
PCAOB overhaul
Atkins was asked by Bell Lindsay about the Public Company Accounting Oversight Board after a provision to merge it with the SEC was
Atkins referred to the
“Independence is very important to me,” said Atkins. “With some firms acquiring law firms, and then we are seeing other potential challenges with private equity coming into the profession and rollups of accounting firms and that sort of thing, maybe that’s good for efficiency, but I think we have to be very mindful of independence issues and to keep focus on improving audit quality,” said Atkins. “And I think especially the PCAOB has a real need to not impose unclear standards or make things needlessly complicated, as I think a couple of the proposals in the past would have done. We are, of course, looking at the board and, in July, I accepted Erica Williams’ offer to resign, and we are in the process of looking at the board and the membership and it is a high priority. Christina Ho announced her resignation and she’ll step down. She’s been there since 2021, I believe, and I thought she did a very good job. She basically pushed for meaningful change at the board. She certainly is tenacious. She stands up for her principles, so I really appreciate her service there.”
The recent 43-day government shutdown slowed down the process of finding new PCAOB board members. “We are moving forward after that, obviously,” said Atkins. “That was too bad that impeded our progress, but we’re obviously back at work and look forward to the new year.”
He wants to see greater coordination between the U.S. and the rest of the world on accounting and auditing.
“The one thing that I hear when I go abroad, over and over, in Europe and elsewhere, is that people really look to us with our capital markets to set the pace,” said Atkins. “They are very envious, let’s just say, of our strong investment ethos here in the United States and the willingness of our investors to take risks. Too often, other countries don’t have the capital markets to rely on. They rely on banks for financing new companies and that sort of thing. But I think we have just half of the world’s capitalization represented right here in the United States. Let’s keep that going. And the accounting profession, auditing profession, is incredibly important for all of that. It got started, after all, here in the United States, with foreigners being concerned with where’s our money going that we’re investing in U.S. railroads, and building canals and that sort of thing. That’s what built such a strong and important auditing profession here.”
Coordinating with IAASB
SEC chief accountant Hohl wants to see the U.S. coordinating more with international standard-setters like the International Auditing and Assurance Standards Board and the Monitoring Board that oversees it. He noted that the IAASB approved
“Maybe there’s an opportunity for the PCAOB to shift the inspection program to focus more on the system of quality management, and I think what that will do, in my own personal view, is it will shift the accountability to the leadership of the firm and their systems and processes, and less on individual engagement teams and the partners.”
He wants to see the PCAOB leveraging IAASB standards, similar to how FASB could leverage IASB standards, once there’s a replacement for Williams at the board. In the meantime, he has been working closely with
“One of the things that I’d like to focus on when we get a new chair in place at the PCAOB is to focus on their standard-setting process,” said Hohl. “The FASB just went through their agenda consultation asking practitioners where they think they need to emphasize their time? I think the PCAOB could benefit from that as well. And then again, focused on alignment with the IAASB standards. All the major firms use the International Standards of Auditing as the baseline for their audit methodologies. The AICPA adopted the International Standards of Auditing in their development of their standards. If we can basically get some level of convergence, that will actually, in my view, be beneficial for investors, because it will essentially develop a single set of high-quality standards. It will essentially significantly reduce cost and complexity because if you’re working on a multinational group audit, and you’re doing statutory accounts under ISA standards, and you basically are working on a component for an SEC engagement, you have to basically use a different set of standards, and that adds confusion, cost and the risk for noncompliance. To the extent that we can basically converge the two standards and get them as close as possible, I think that will be beneficial for all stakeholders in the long run.”
Despite the desire for convergence with international standard-setters, he echoed
“The chairman gave a speech in Brussels in September, basically emphasizing the need for high-quality standards,” said Hohl. “Interestingly enough, Paul was on the SEC when the SEC adopted the rules that allowed foreign private issuers using IFRS to use those without reconciliation to U.S. GAAP, and he did so because of his comfort in the IASB’s ability to develop high-quality accounting standards, and his comfort in the functioning of the IFRS Foundation, and particularly the funding associated with that. As of late, as I think most people know, we added the International Sustainability Standards Board to the IFRS Foundation. If you look at funding, most of that money that gets funded to the IFRS Foundation goes to the ISSB, to develop sustainability standards, not accounting standards. I think there’s a concern there as to whether having the ISSB together with the IFRS Foundation, you know, causes them to lose focus on really what’s a priority for our capital markets, and that’s the development of high-quality accounting standards. So we need to take a look at governance there and funding.”
He also wants to see changes with the governance and funding structure of the IAASB and the International Ethics Standards Board for Accountants. “Similarly, we have a fairly cumbersome structure that exists for auditing standards,” said Hohl. “The IAASB, which is the International Auditing and Assurance Standards Board, and IESBA, which sets ethics standards, are governed by a complex structure, where you have the international regulators in the Monitoring Group, and you have the Public Interest Oversight Board, basically is there to lend independence and objectivity because the firms in the accounting profession pay over 90% of the cost to operate those two standards anymore. So there’s a concern that the profession is going to have its own self-interest in hand and basically not develop high-quality auditing standards. The challenge is that the Public Interest Oversight Board is in financial difficulty there. It’s a very cumbersome governance structure. So what we were going to do there is look to see how we can intervene there, because if we’re going to ask the PCAOB to adopt the ISAs as a baseline for auditing standards in the United States, we want to make sure that there’s super high-quality international standards that are developed, that are independent and objectively written. So there’s going to be a lot of close work with international stakeholders here. There’s a lot of international stakeholders involved in these two governance bodies. Hopefully we can basically move forward and solve a lot of these issues so that we can continue to allow use of IFRS standards in the U.S. We can basically have high-quality auditing standards developed globally for use in the United States, so that’s a significant undertaking, in a word, like herding cats.”
Working relationship
The U.S. and international standard-setters already do work together closely.
“Within OCA, we’ve long believed that strong engagement between the FASB and the IASB is essential for high-quality financial reporting, benefiting both U.S. GAAP as well as IFRS as issued by the IASB,” said Ella Karafiat, a professional accounting fellow at the SEC, during a later panel discussion at the conference. “The underlying goal, from our perspective, hasn’t changed. It’s to reduce unnecessary differences, because investors ultimately bear the cost of reconciling those differences. Engagement also helps ensure that both sets of standards are rooted in sound principles to produce decision-useful information.”
She noted that FASB and the IASB have a strong track record of engagement to the extent the boards have similar projects on their agendas. “We’ve observed open dialogue and knowledge sharing,” she said. “For example, we saw this on projects related to software and other intangible assets, as well as the state of the cash flows and those exchanges don’t always lead to identical outcomes, but they do help narrow the gap, so to speak.”
Similarly, the PCAOB and the IAASB have long worked together as well.
“I would say today when you look at the relationship between the PCAOB and the IAASB, it primarily consists of periodic meetings between the standard-setters to explore common issues,” said Nigel James, senior associate chief accountant at the SEC. “It also involves the PCAOB’s consideration of ISAs, the International Standards of Auditing, when they are developing their concept releases. And there are also the occasional publications that outline a comparison between certain IAASB standards and PCAOB standards. For example, in October 2024 the PCAOB published a text comparison between QC 1000 and ISQM 1. As you heard from Kurt [Hohl] this morning in an earlier session, OCA supports further alignment of the auditing and assurance standard-setting activities between the PCAOB and the IAASB. So what that might look like is, for instance, the PCAOB leaning on the International Auditing and Assurance Standard Board when setting and considering their agenda and or when updating their rules and standards. Alignment of auditing standards to the extent possible, we believe would greatly reduce risk because it would promote more consistency among auditors across the globe. Some differences are inevitable, but this approach would narrow the unnecessary gaps between PCAOB auditing standards and those set by the IAASB, which would then ultimately support investor confidence and continued high-quality auditing standards.”
The Financial Accounting Standards Board met this week to discuss its projects on accounting for transfers of cryptocurrency assets and enhancing the disclosures around certain digital assets, such as stablecoins.
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During Wednesday’s meeting, FASB’s board made certain tentative decisions, according to a
At a future meeting, the board plans to consider clarifying the derecognition guidance for crypto transfer arrangements to assess whether the control of a crypto asset has been transferred.
FASB also began deliberations on the
The board decided to provide illustrative examples in Topic 230, Statement of Cash Flows, to clarify whether certain digital assets such as stablecoins can meet the definition of cash equivalents. It also decided to include the following concepts in the illustrative examples:
- Interpretive explanations that link to the current cash equivalents definition;
- The amount and composition of reserve assets; and,
- The nature of qualifying on-demand, contractual cash redemption rights directly with the issuer.
FASB plans to clarify that an entity should consider compliance with relevant laws and regulations when it’s creating a policy concerning which assets that satisfy the Master Glossary definition of the term “cash equivalents“ will be treated as cash equivalents.
“I agree with the staff suggestion to look at examples,” said FASB vice chair Hillary Salo. “From my perspective, I think that is going to help level the playing field. People have been making reasonable judgments. I agree with that. And I think that this is really going to help show those goalposts or guardrails of what types of stablecoins would be in the scope of cash equivalents, and which ones would not be in the scope of cash equivalents. I certainly appreciate that approach, and I think it has the least potential impact of unintended consequences, because I do agree with my fellow board members that we shouldn’t be changing the definition of cash equivalents, and it’s a high bar to get into the cash equivalent definition.”
“I’m definitely supportive of not changing the definition of cash equivalents,” said FASB chair Richard Jones. “I believe that’s settled GAAP in a way, and we’re not really seeing a call to change it for broader issues. I am supportive of the example-based approach. The challenge with examples, though, is everybody’s going to want their exact pattern, but that’s not what we’re doing.”
The examples will explain the rationale for how digital assets such as stablecoins do or do not qualify as cash equivalents and give a roadmap for other types of digital assets with varying fact patterns to be able to apply.
“We really don’t want to be as a board facing a situation where something was a cash equivalent and then no longer is at a later date,” said Jones. “That’s not good for anyone, so keeping it as a high bar with certain rigid criteria, I think, is fine.”
Stablecoins are supposed to be pegged to fiat currencies such as U.S. dollars and thus provide more stability to investors. “In my view, while a stablecoin may meet the accounting definition established for cash equivalents, not every one of those stablecoins in the cash equivalent classification represents the same level of risk,” said FASB member Joyce Joseph.
She noted that the capital markets recognize the distinctions and have established a Stablecoin Stability Assessment Framework to evaluate a stablecoin’s ability to maintain its peg to a fiat currency. Such assessments look at the legal and regulatory framework associated with the stablecoin, and provide investors with information that could enable them to do forward-looking assessments about the stability of the stablecoin.
“However, for an investor to consider and utilize such information for a company analysis the financial statement disclosures would need to include information about the stablecoin itself,” Joseph added. “In outreach, the staff learned that investors supported classifying certain stablecoins as cash equivalents when transparent information is available about the entities at which the reserve assets are held. Therefore, in my view, taking all of this into consideration a relevant and informative company disclosure would include providing investors with the name of the stablecoin and the amount of the stablecoin that is classified as a cash equivalent, so investors can independently assess the liquidity risks more meaningfully and more comprehensively by utilizing broader information that is available in the capital markets and its emerging information.”
Such information could include the issuer, reserves, governance and management, she noted, so investors would get a more holistic look at the risks that holding the stablecoin would entail for a given company.
The board decided to require all entities to disclose the significant classes and related amounts of cash equivalents on an annual basis for each period that a statement of financial position is presented.
Entities should apply the amendments related to the classification of certain digital assets as cash equivalents on a modified prospective basis as of the beginning of the annual reporting period in the year of adoption.
FASB decided that entities should apply the amendments related to the disclosure of the significant classes and amounts of cash equivalents on a prospective basis as of the date of the most recent statement of financial position presented in the period of adoption.
The board will allow early adoption in both interim and annual reporting periods in which financial statements have not been issued or made available for issuance.
FASB also decided to permit entities to adopt the amendments to be illustrated in the examples related to the classification of certain digital assets as cash equivalents without the need to perform a preferability assessment as described in Topic 250, Accounting Changes and Error Corrections.
The board directed the staff to draft a proposed accounting standards update to be voted on by written ballot. The proposed update will have a 90-day comment period.
Senators introduced several pieces of tax-related legislation this week, including measures aimed at improving customer service at the Internal Revenue Service, cracking down on tax evasion and curbing the carried interest tax break, in addition to efforts in the House to repeal the Corporate Transparency Act.
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Senators Bill Cassidy, R-Louisiana, and Mark Warner, D-Virginia, teamed up on introducing a bipartisan bill, the
The bill would establish a dashboard to inform taxpayers of backlogs and wait times; expand electronic access to information and refunds; expand callback technology and online accounts; and inform individuals facing economic hardship about collection alternatives.
“Taxpayers deserve a simple, stress-free experience when dealing with the IRS,” Cassidy said in a statement Wednesday. “This bill makes the process quicker and easier for taxpayers to get the information they need.”
He also mentioned the bill during a
“I’m happy to meet with the team … and do all I can to make it as good as you want it to be,” said Bisignano.
“My bill would equip the IRS with the legislative mandate to create an online dashboard so that taxpayers can monitor average call wait time and budget time accordingly,” said Cassidy. He noted that the bill would allow a callback for taxpayers that might need to wait longer than five minutes to speak to a representative, and establish a program to identify and support taxpayers struggling to make ends meet by providing information about alternative payment methods, such as installments, partial payments and offers in compromise.
“I know people are kind of desperate and don’t know where to turn for cash, so I think this could really ease anxiety,” he added. “This legislation is bipartisan and is likely to pass this Congress.”
Cassidy and Warner
“Taxpayers shouldn’t have to jump through hoops to get basic answers from the IRS — and in the last year, those challenges have only gotten worse,” Warner said in a statement. “I am glad to reintroduce this bipartisan legislation on Tax Day to ease some of this frustration by increasing clear communication and making IRS resources more readily available.”
Stop CHEATERS Act
Also on Tax Day, a group of Senate Democrats and an independent who usually caucuses with Democrats teamed up to introduce the Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act.
Senate Finance Committee ranking member Ron Wyden, D-Oregon, joined with Senators Angus King, I-Maine, Elizabeth Warren, D-Massachusetts, Tim Kaine, D-Virginia, and Sheldon Whitehouse, D-Rhode Island. The bill would provide additional funding for the IRS to strengthen and expand tax collection services and systems and crack down on tax cheating by the wealthy.
“Wealthy tax cheats and scofflaw corporations are stealing billions and billions from the American people by refusing to pay what they legally owe, and far too many of them are getting a free pass because Republicans gutted the enforcement capacity of the IRS,” Wyden said in a statement. “A rich tax cheat who shelters mountains of cash among a web of shell companies and passthroughs is likelier to be struck by lightning than face an IRS audit, and Republicans want to keep it that way. This bill is about making sure the IRS has the resources it needs to go after wealthy tax cheats while improving customer service for the vast majority of American taxpayers who follow the law every year.”
Earlier this week. Wyden also
The Stop CHEATERS Act would provide the IRS with additional funding for tax enforcement focused upon high-income tax evasion, technology operations support, systems modernization, and taxpayer services like free tax-payer assistance.
“As Congress seeks ways to fund much-needed policy priorities and address our growing national debt, there is one common sense solution that should have unanimous bipartisan support: let’s enforce the tax laws already on the books,” said King in a statement. “Our legislation will make sure the IRS has the resources it needs to confront the gap between taxes owed and taxes paid – while ensuring that our tax enforcement professionals are focused on the high-income earners who account for the most tax evasion. This is a serious problem with an easy solution; let’s pass this legislation and make sure every American pays what they owe in taxes.”
Carried interest
Wyden, King and Whitehouse also teamed up on another bill Thursday to close the carried interest tax break for hedge fund managers that
Carried interest is a form of compensation received by a fund manager in exchange for investment management services, according to a
Under the bill, the
“Our tax code is rigged to favor ultra-wealthy investors who know how to game the system to dodge paying a fair share, and there is no better example of how it works in practice than the carried interest loophole,” Wyden said in a statement. “For several decades now we’ve had a tax system that rewards the accumulation of wealth by the rich while punishing middle-class wage earners, and the effect of that system has been the strangulation of prosperity and opportunity for everybody but the ultra-wealthy. There are a lot of problems to fix to restore fairness and common sense to our tax code, and closing the carried interest loophole is a great place to start.”
Repealing Corporate Transparency Act
The House Financial Services Committee is also planning to markup a bill next Tuesday that would fully repeal the Corporate Transparency Act, which has already been significantly
If enacted, the repeal would eliminate beneficial ownership reporting requirements, removing a transparency measure designed to help law enforcement and national security officials identify who is behind U.S. companies.
“This repeal would turn the United States back into one of the easiest places in the world to set up anonymous shell companies, something Congress worked for years to fix,” said Erica Hanichak, deputy director of the FACT Coalition, in a statement. “These entities are routinely used to facilitate corruption, financial crime, and abuse. Rolling back the CTA doesn’t just weaken transparency, it signals to bad actors around the world that the U.S. is once again open for illicit business.”
The Internal Revenue Service rarely penalizes taxpayers who have high balances in foreign bank accounts and fail to file the proper forms, according to a new report.
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The
Taxpayers with specified foreign financial assets that meet a certain dollar threshold are also required to report the information to the IRS by filing Form 8938. Failure to file the form can result in penalties of up to $60,000. However, TIGTA’s previous reports have demonstrated that the IRS rarely enforces these penalties.
The IRS created an Offshore Private Banking Campaign initiative to address tax noncompliance related to taxpayers’ failure to file Form 8938 and information reporting associated with offshore banking accounts, but it’s had limited success.
Even though the initiative identified hundreds of individual taxpayers with significant foreign bank account deposits who failed to file Forms 8938, the campaign only resulted in relatively few taxpayer examinations and a small number of nonfiling penalties. The campaign identified 405 taxpayers with significant foreign account balances who appeared to be noncompliant with their FATCA reporting requirements.
The IRS used two ways to address the 405 noncompliant taxpayers: referral for examinations and the issuance of letters to them.
- 164 taxpayers (who had an average unreported foreign account balance of $1.3 billion) were referred for possible examination, but only 12 of the 164 were examined, with five having $39.7 million in additional tax and $80,000 in penalties assessed.
- 241 noncompliant taxpayers (who had an average unreported account balance of $377 million) received a combination of 225 educational letters (requiring no response from the taxpayers) and 16 soft letters (requiring taxpayers to respond). None of the 241 taxpayers were assessed the initial $10,000 FATCA nonfiling penalty.
“While taxpayers can hold offshore banking accounts for a number of legitimate reasons, some taxpayers have also used them to hide income and evade taxes,” said the report.
Significant assets and income are factors considered by the IRS when assessing whether taxpayers intentionally evaded their tax responsibilities, the report noted. Given the large size of the average unreported foreign account balances, these taxpayers probably have higher levels of sophistication and an awareness of their obligation to comply with the law.
TIGTA believes the IRS needs to establish specific performance measures to determine the effectiveness of the FATCA program. “If the IRS does not plan to enforce the FATCA provisions even where obvious noncompliance is identified, it should at least quantify the enforcement impact of its efforts,” said the report. “This will ensure that IRS decision makers have the information they need to determine if the FATCA program is worth the investment and improves taxpayer compliance.
TIGTA made three recommendations in the report, including revising Campaign 896 processes to include assessing FATCA failure to file penalties; assessing the viability of using Form 1099 data to identify Form 8938 nonfilers; and implementing additional performance measures to give decision makers comprehensive information about the effectiveness of the FATCA program. The IRS disagreed with two of TIGTA’s recommendations and partially agreed with the remaining recommendation. IRS officials didn’t agree to assess penalties in Campaign 896 or with implementing performance measures to assess the effectiveness of the FATCA program.
“From our perspective, TIGTA’s conclusions regarding IRS Campaign 896 are based, in part, on a misguided premise and overgeneralizations, including the treatment of ‘potential noncompliance’ as tantamount to ‘egregious noncompliance’ that warrants a monetary penalty without contemplating the variety of justifications that may exempt a taxpayer from having to file Form 8938,” wrote Mabeline Baldwin, acting commissioner of the IRS’s Large Business and International Division, in response to the report.
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