Could Codification Weaken Internal Controls?

Maybe. And here's what you can do to mitigate the effect on your accounting policies, disclosures, and error detection.

But even though such references are common in financial reports, there’s no requirement in GAAP or other financial-reporting guidance (e.g., Securities and Exchange Commission rules) to cite specific provisions of GAAP in financial-report notes or narratives (see “Companies Exasperate SEC Accounting Chief”). So in mitigating the impact of the codification on ICFR, you’ll need to decide whether you’re going to continue to cite specific provisions of GAAP in notes and narratives — and if you decide to do so, you’ll need to decide how you’re going to cite them, at which point the work of identifying the provisions to cite can begin. That’s where your updated accounting policy manual comes in, and that’s why it’s important to update the manual first.

In GE’s case, the notes that accompany its 2009 financial statements explicitly say: “In these financial statements, references to previously issued accounting standards have been replaced with the relevant ASC references.” Accordingly, GE’s 2009 annual report contains 40-plus references to codification topics by number and title, which is just one of many acceptable ways to cite the new standards (see the Notice to Constituents document on the ASC Website for suggested citation styles).

Accounting Principle Changes
A persistent myth about the codification is that it didn’t actually change the provisions that comprise GAAP. The truth is, however, that it did make certain minor changes to GAAP, and in some cases included items that weren’t part of the formerly authoritative pronouncements. For instance, the codification expanded the entity scope of certain GAAP provisions through the inclusion of revenue-recognition guidance from the American Institute of Certified Public Accountants’s Technical Inquiry Service. As a result, it became necessary for reporting entities that had not previously applied the guidance to begin doing so.

To ensure that changes in accounting principles resulting from the codification are reflected in your organization’s accounting policies, review the Notice to Constituents document on the ASC Website for those areas where GAAP (or its scope) have changed. Be prepared to update your organization’s accounting policies as needed, and be prepared to account for and disclose any change you make as a change in accounting principle per FASB ASC 250, Accounting Changes and Error Corrections.

Error Detection and Correction
A situation that could arise from aligning your organization’s accounting policies and practices with the codification is that you might realize you’ve been incorrectly accounting for a particular kind of transaction or event. Such a realization might come about because the codification communicates the requirements of GAAP in a more integrated, complete fashion. So it’s advisable to review your organization’s past accounting policies if they were very complex or if you were never quite certain that you were applying GAAP correctly. Be prepared to restate past financial statements if necessary per FASB ASC 250.

The overriding focus of mitigating the impact of the codification on ICFR should be on the financial-reporting competencies of you and your staff. The codification has made obsolete a significant portion of the knowledge, skills, and abilities that most financial professionals have developed over their career. Consequently, you should tend to several human-resources issues, including reviewing and updating job descriptions, formally retraining existing personnel to develop required competencies, seeking and evaluating required competencies when recruiting new personnel, and avoiding blind reliance on traditional certifications or credentials as guarantees of competencies.

There are many ways in which the FASB codification may have weakened your organization’s ICFR. By following the guidance in this article, you can restore and potentially even improve your ICFR in this time of great change.

Contributor Bruce Pounder is president of Leveraged Logic and chairs the Small Business Financial and Regulatory Affairs Committee of the Institute of Management Accountants (IMA). His latest book, Convergence Guidebook for Corporate Financial Reporting, is published by Wiley.




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