Financial reporting, compliance, and the risk and internal control environment will continue to be put to the test in 2017 by slow growth and economic uncertainty, technology advances and business model disruption, cyber risk, greater regulatory scrutiny, and investor demands for transparency, as well as dramatic political swings. In our annual message to audit committees, we've highlighted several items audit committees should keep in mind as they carry out their 2017 agendas:
* Give non-GAAP financial measures a prominent place on the audit committee agenda.
Expressing concern about the presentation of non-GAAP financial measures, SEC staff in May 2016 published additional guidance to help companies evaluate the acceptability of non-GAAP financial information and their compliance with applicable rules and regulations. Recent SEC staff Comment Letters have focused on the use of non-GAAP financial measures, and the SEC's Enforcement Division has sent inquiries to companies regarding potential securities law violations. In this environment, it is critical that non-GAAP financial measures have a prominent place on the audit committee agenda: Have a robust dialogue with management about the process and controls by which management develops and selects the non-GAAP financial measures it provides, their correlation to the performance of the business and results, and whether they are being used to improve transparency and not to distort results.
* Monitor implementation plans and activities for major accounting changes--particularly the new revenue recognition and lease accounting standards. The scope and complexity of these implementation efforts and the impact on the business, systems, controls, and resource requirements should be a key area of focus. The new revenue standard (effective January 1, 2018, for calendar year-end public companies) provides a single revenue recognition model across industries, companies, and geographical boundaries. While the impact will vary across industries, many companies--particularly those with large, complex contracts --will experience a significant accounting change. The new standard will require companies to apply new judgments and estimates, so audit committees will want to inquire about the judgment and estimates process and how judgments and estimates are reached. Under the new lease standard (effective January 1, 2019, for calendar-year- end public companies) lessees will recognize most leases, including...