The Impact of Recent Legislation on Accountants and Auditors
Ever-changing regulations, both domestically and abroad, place a burden on accountants and auditors.
Audit firms feel the strain of balancing resources with quality control, trying to do more with less while still delivering audit quality.
The pressure isn’t limited to external auditors. In-house accounting departments need to stay current on rules and regulations, so they’re prepared when the auditors walk in.
And when you toss in tax compliance, it can get overwhelming.
Role of Accountancy Bodies
Most countries have accountancy bodies that regulate the rules for financial reports that accountants follow. These standard setters are responsible for setting the generally accepted accounting principles (GAAP) used to prepare financial statements.
The names of the larger regulatory bodies from around the world may sound familiar to you.
|Accounting rulemaking authorities|
|Country||Governing body name|
|Australia||Australian Accounting Standards Board|
|Canada||CICA’s Accounting Standards Board (AcSB)|
|United Kingdom||Accounting Standards Board|
|United States||Financial Accounting Standards Board (FASB, pronounced ‘Fahs bee”)|
|International||International Accounting Standards Board (IFRS, international standards)|
You may hear or read phrases like:
- These financials use U.S. GAAP
- Does your company follow Canadian GAAP or IFRS?
- The company uses U.K. GAAP to prepare their financial statements
It’s important to specify which accounting rules were used to create financial statements because they aren’t all the same. For example, U.S. rules allow for the LIFO (last in, first out) method for inventory valuation, but it’s not permitted under IFRS.
In addition to these basic sets of reporting standards, specialized groups can provide regulatory requirements to specific industries.
In the U.S., The Securities and Exchange Commission provides regulatory guidance and oversight for the securities and capital markets.
The Sarbanes-Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB), which oversees the audits of public companies to protect the public interest in the preparation of accurate and independent audit reports.
Congress passed SOX in the wake of company failures in the early 2000s, most notably Enron and Worldcom. The law holds the company’s senior management accountable for the accuracy of its financial statements and requires them to implement internal controls to prevent fraud and abuse.
The regulators at the PCAOB aim to keep company management and the audit function working toward quality audit services that produce balance sheets free of material misstatements and identify any companies with a going concern. And when a business has liquidity or financial viability issues, it should be specified in the auditor’s report.
Significant regulatory changes generally come after a systemic failure, and lawmakers and rule setters are forced to react.
In a global economy, international cooperation to create a level playing field for all companies and governments will be the focus now and in the near future.
With leaks of financial documents via the Panama Papers and Paradise Papers, jurisdictions are taking a closer look at off-shoring.
Off-shoring is the elaborate loop of collaboration that allows companies and wealthy individuals to move their profits to a no or low-tax locale. Off-shoring is legal if done correctly. However, the moral or ethical arguments for avoiding taxes are unsettled.
The COVID-19 pandemic left many countries strapped for cash. Some are taking another look at their tax laws, with many looking for ways to reduce base erosion and profit shifting (BEPS). Base erosion occurs when a country’s tax base is reduced or completely removed in favor of another country’s more favorable tax rules.
According to the Organisation for Economic Co-operation and Development (OECD), the global non-profit organization tackling BEPS, multinational enterprises exploiting gaps and mismatches between different countries’ tax systems costs $100 – 240 billion in lost tax revenue annually.
We’re likely going to see an increased focus on the digital economy. The 2018 South Dakota vs. Wayfair U.S. Supreme Court case allows states to charge tax on purchases made from out-of-state sellers, even if the seller has no physical presence in the taxing state.
This new threshold, called economic nexus, replaced the old rules that required a seller to have a physical presence in a state to be subject to the tax laws there.
Nearly every state in the U.S. has some version of economic nexus rules that allows them to collect sales tax on almost any online transaction. States are stepping up enforcement efforts for non-compliance, so auditors and accounting departments should understand the sales tax requirements in their jurisdictions.
Another area where accountants need to remain alert is in data protection regulations.
Along with protecting financial information uncovered by audit standards, independent auditors will need to examine internal controls over data security. With increased public pressure and stakeholder expectations, cybersecurity will receive increased focus from the accounting profession.
Recent cyber hacks of big companies like Colonial Pipeline and software company Kaseya have brought to light the need for robust information systems and controls to keep companies from paying hefty ransoms to get back online. These ransomware attacks have emerged as a significant national security issue in 2021.
Need for Education
When there’s a change in regulatory reporting methodology or changes in tax law, accountants need to be updated.
There will be an increasing need to educate CPAs and auditors in areas that will see growing regulations in the coming years.
Areas like digital technology, tax regulation, and integrated financial reporting will see an increased need for high-quality training.
Even the more common accounting and auditing areas aren’t exempt from training updates, including areas like:
- Auditing and accounting review standards
- Financial accounting standard setting
- Audit committee presentations
- Corporate governance best practices
- Internal audit procedures
- Financial reporting requirements
- Tax updates
The accounting information industry needs to be prepared for future changes. The U.S. has seen once-in-a-lifetime tax initiatives and monumental changes to its tax law in the last few years, starting with the 2017 tax reform to the numerous pandemic relief packages of 2020 and 2021. Accountants welcome a slow down in legislation but should always be ready for more.