Year-end toolkit: Materiality assessments の全文書き起こし

this time of year and, you know, back and reread SAB 99 for the thousandth time. 00:04:27.759 --> 00:04:28.079 Right. 00:04:28.240 --> 00:04:32.800 Um, but you know, so it provides the guidance and then framework for evaluating materiality. 00:04:32.959 --> 00:04:36.959 So core objective is to prevent financial statements from being materially misstated, right? 00:04:37.040 --> 00:04:38.160 It's a simple concept. 00:04:38.240 --> 00:04:41.920 Um, sometimes very clear to apply it, sometimes it can be a little bit more challenging. 00:04:42.000 --> 00:04:46.240 And this is important for um, you know, the registrants and for the auditors. 00:04:46.399 --> 00:04:51.120 Um so basically it says, you know, when an error is identified, we need to determine if it's material. 00:04:51.199 --> 00:04:52.879 And it begins with a core question. 00:04:53.040 --> 00:05:00.480 And it's based in, you know, basically FASBI concept statements and the SEC, you know, the Supreme Court's um determination. 00:05:00.720 --> 00:05:10.800 And basically, if it's, you know, things are material, if it's probable that a judgment or reasonable person relying on the report would be changed or influenced by the inclusion or correction of the item. 00:05:11.040 --> 00:05:16.160 So the the good thing is we now have decades of consistent interpretation of what that means. 00:05:16.639 --> 00:05:26.160 The court decision, commission rules, enforcement actions, SEC comment letters, all reinforcing how SAP 99 is intended to be applied. 00:05:26.319 --> 00:05:29.600 So I'd say experienced practitioners know the framework very well. 00:05:29.759 --> 00:05:37.040 The SECs remain very consistent from administration to administration in its expectations, and we expect that to continue. 00:05:37.279 --> 00:05:42.879 So reinterpreting or reapplying, you know, what those words mean probably isn't very useful. 00:05:43.120 --> 00:05:49.199 So let's start with the fact that it requires a quantitative and qualitative analysis. 00:05:49.360 --> 00:05:52.160 And it's the interplay between that two that's really important. 00:05:52.319 --> 00:05:55.279 The first thing is I would say the starting point is quantitative. 00:05:55.920 --> 00:05:56.240 All right. 00:05:56.399 --> 00:06:08.160 And there is a, you know, a presumptive, um, when we're talking about an income statement approach, uh presumptive 5% of free tax income in a kind of normal profit-oriented entity is probably a good place to start. 00:06:08.319 --> 00:06:12.240 It could be usually a very relevant metric, not in all cases, right? 00:06:12.319 --> 00:06:14.000 So, and we can get into some of those later. 00:06:14.079 --> 00:06:17.120 Sometimes revenue might be more important, sometimes other metrics. 00:06:17.279 --> 00:06:22.160 You have, you know, what the what the SAP won wanted to avoid was a very mechanical approach. 00:06:22.240 --> 00:06:29.439 And that makes sense because think about a break-even situation where a 5% of a very

small number for a big company doesn't make sense, right? 00:06:29.920 --> 00:06:33.759 Um, so like I said, sometimes it's pretty clear, sometimes a little bit more judgment. 00:06:34.000 --> 00:06:43.120 So we have if we have an error, if it's quantitatively material, let's say double digit pre-tax income and a normal, like basically that's it. 00:06:43.279 --> 00:06:43.680 You're done. 00:06:43.839 --> 00:06:44.079 Right. 00:06:44.240 --> 00:06:52.800 Um, that I say quantitative and qualitative, but if it's quantitatively, you know, you can't overcome a large quantitative error with a bunch of qualitative arguments. 00:06:52.879 --> 00:06:52.959 Right. 00:06:53.120 --> 00:06:55.600 Not that, not that we haven't seen that uh tried. 00:06:56.000 --> 00:07:04.480 It's the other, the the intent and the and the express or written words in SAB 99, actually the example used in 799 is an error below 5%. 00:07:05.040 --> 00:07:10.000 And it's when it's quantitatively not significant, but it might be qualitatively. 00:07:10.240 --> 00:07:12.240 So it works one way, not the other. 00:07:12.319 --> 00:07:13.839 It's it's not a two-way street. 00:07:14.000 --> 00:07:18.480 So that's one of the things maybe uh misunderstood sometimes about the standard. 00:07:18.720 --> 00:07:22.240 So um, what are those qualitative issues that are important? 00:07:22.480 --> 00:07:27.680 Um, there are actually listed issues in SAB 99, and but it's not an exhaustive list. 00:07:27.759 --> 00:07:32.639 But some of the things you would look at trends, earnings trends, you'd look at um compliance. 00:07:32.720 --> 00:07:33.839 That's gonna be a big one this year. 00:07:33.920 --> 00:07:35.680 We have a lot of um debt covenants. 00:07:35.839 --> 00:07:36.079 Right. 00:07:36.240 --> 00:07:41.600 Um, and so you might have something that's could could trigger uh compliance with a debt covenant. 00:07:41.759 --> 00:07:50.879 Uh always you look at impacts on executive compensation, and I'll come back to that a little bit more because that got a little bit more interesting with the check the box rules that came into play. 00:07:51.120 --> 00:07:57.519 Um, and you also, and and we'll also, I think, cover when we get a little bit further, maybe intentionality, right? 00:07:57.680 --> 00:08:05.199 Which is a really significant qualitative factor that could take, again, uh a quantitatively small number and make it material. 00:08:05.439 --> 00:08:06.879 So you got to consider all those things. 00:08:06.959 --> 00:08:11.360 It's the earnings management types, issues, it's what are the expectations on the street. 00:08:11.519 --> 00:08:24.160 And again, I would remind everyone the the illustrative example in SAB 99 is something that's below the quantitative threshold that have been set, but had material uh you know, qualitative issues that made it made it material. 00:08:24.399 --> 00:08:30.879 Um, the other thing that's important is our errors need to be evaluated individually and in the aggregate. 00:08:31.040 --> 00:08:35.120 So you could have an individual error and then you might have some other things that kind of offset it. 00:08:35.200 --> 00:08:39.440 You you can't use the offsetting to ignore a significant and material error. 00:08:39.600 --> 00:08:47.840 And in the same way, you have maybe you know a number of smaller things on their own that might not be material, but when you when you aggregate them, it becomes a material issue. 00:08:48.000 --> 00:08:52.240 So um you you know there are do's and don'ts in how you how you do the calculations. 00:08:52.480 --> 00:08:52.639 Right. 00:08:52.720 --> 00:08:54.480 A lot of different considerations you have to think through. 00:08:54.559 --> 00:09:01.519 And I think a good point you made, it's obviously facts and circumstances of the entity and you know their operating practices and that type of thing. 00:09:01.759 --> 00:09:08.480 So, okay, so now if an entity's made the materiality determination, what are the next steps and and best practices? 00:09:08.720 --> 00:09:08.960 Yeah. 00:09:09.120 --> 00:09:14.960 So the next thing that needs to be determined is well, okay, you you've you've now had an error, you've determined it's material or not. 00:09:15.200 --> 00:09:16.240 How are you going to deal with it? 00:09:16.480 --> 00:09:16.639 Right. 00:09:16.799 --> 00:09:23.600 Um, so there's there's a couple of I won't say options because usually the the facts will drive you to one of the conclusions. 00:09:23.679 --> 00:09:31.120 Um, but the ways of treating it, first of all, if you have an error that's deemed to be not material, you can record that error. 00:09:31.200 --> 00:09:35.840 Like again, we'll use a PL example, um, an out-of-period PL item. 00:09:36.000 --> 00:09:43.759 If it's not material to the current period or the prior period, and it's not expected to be material, you could record it effectively out of period. 00:09:43.840 --> 00:09:50.399 And generally we would recommend with disclosure as good practice because you you never know what comes down the road further, right? 00:09:50.480 --> 00:09:52.879 You have to always have an allowance for undetected errors. 00:09:53.039 --> 00:09:58.399 So out of period with disclosure is if it's not material to any particular period. 00:09:58.559 --> 00:10:07.919 Um, we have other errors that maybe were not very large in any one year, but they build up and all of a sudden they've accumulated, it's become too big to fix in the current period. 00:10:08.080 --> 00:10:08.320 Sure. 00:10:08.559 --> 00:10:12.320 But it was not material, no individual period was materially misstated. 00:10:12.480 --> 00:10:26.799 There, you could do what we call a revision and um revise the prior financial statements, but it doesn't require a pulling reliance of the opinion or pulling reliance on those previous financial statements because no previous financial statements were materially misstated. 00:10:27.200 --> 00:10:31.600 You just needed to

affect the change this way because you would have created a problem in the current period. 00:10:32.240 --> 00:10:44.799 Now, if it's material to any prior or current period, then you're you not option you need to restate, which involves the um, you know, pulling reliance on prior financial statements and getting the corrected financial statements on file. 00:10:44.960 --> 00:10:47.759 Um so those are really your options along with that. 00:10:48.080 --> 00:10:55.919 And um what has arisen subsequent to SAB 99, but it's been around with Sarbenes Oxley, is the need to do your internal controls evaluation. 00:10:56.159 --> 00:10:59.200 And that has to be married to this analysis. 00:10:59.440 --> 00:11:04.720 And, you know, if you have a restatement, the presumption is you have a material control weakness. 00:11:04.879 --> 00:11:14.720 You very well could have a material control weakness without having a restatement because the difference between the two is you have the actual or would and the control is under the could factor. 00:11:14.879 --> 00:11:15.120 Right. 00:11:15.279 --> 00:11:19.679 Um, so that that's something that also catches uh some folks by surprise sometimes. 00:11:19.840 --> 00:11:23.120 So it's really important to have that as part of the analysis. 00:11:23.279 --> 00:11:29.200 Um, and then I would say the other thing and is the the clawback rules relate to executive comp. 00:11:29.679 --> 00:11:43.759 If if the error and the restatement had an impact on you know executive comp, you have to, you know, work with registrants need to work with their SCC council, make sure they're checking the box if that's applicable and dealing with the impact to executive compensation. 00:11:43.919 --> 00:11:46.799 That brought, I think, a whole new focus to this area. 00:11:46.879 --> 00:11:49.200 And I would say some sensitivities as well. 00:11:49.360 --> 00:11:52.960 Um, that's probably one of the things that's made this a little bit more challenging. 00:11:53.200 --> 00:11:53.360 Yeah. 00:11:53.519 --> 00:11:58.159 And I and I think that was a great point on the internal controls, Mike, is is that could factor. 00:11:58.240 --> 00:12:02.320 So it's not only what was the actual error, but what could it have been? 00:12:02.480 --> 00:12:06.320 Uh, what would it have been, you know, given the current control structure. 00:12:06.399 --> 00:12:11.679 And I think an important thing is looking not only at your process level controls, but also entity level controls as well. 00:12:11.759 --> 00:12:14.320 I know is an important factor when you're thinking about that. 00:12:14.559 --> 00:12:14.720 Yeah. 00:12:14.799 --> 00:12:16.240 And you asked about best practices. 00:12:16.320 --> 00:12:20.960 Is that certainly one of them is including the controls evaluation with the error evaluation? 00:12:21.120 --> 00:12:25.759 The other thing is um, you know, companies ought to be prepared, have some good planning around this topic. 00:12:25.919 --> 00:12:38.320 I mean, for first of all, the best the best practices have a really good tone at the top, um, have a really good internal controls, pay attention to it, have accountability, and avoid errors in the first place, right? 00:12:38.480 --> 00:12:39.600 I mean, that's the best practice. 00:12:39.759 --> 00:12:41.039 But we all know things happen. 00:12:41.200 --> 00:13:05.840 So um then you get to having a good process, having a good understanding with your auditor, um, what is being viewed as material, so that you're on the same page with management and the audit committee, um, understanding what are your key metrics and what kinds of things would impact that so that you have um and you can look at the way you're presenting yourself in the marketplace, the way the analysts are following you, um, what's important in your industry. 00:13:06.000 --> 00:13:16.080 So getting a basic agreement on what are the key factors, you you pretty much can have your SAB 99 memo written as far as, and then if you have an error, you you you plop it in. 00:13:16.240 --> 00:13:19.200 Um, and and and you you've already agreed what's material. 00:13:19.440 --> 00:13:23.840 Often happens in its human nature is an error comes up, and then people argue why it's not material. 00:13:24.000 --> 00:13:24.240 Right. 00:13:24.399 --> 00:13:24.480 Right. 00:13:24.639 --> 00:13:32.720 And sometimes inconsistent with the way they present themselves, the way their filings look, um, what have been key metrics that they've disclosed before. 00:13:32.879 --> 00:13:39.519 So I always recommend, like before that, the heat of the issue, you know, kind of have agreement, drive run, have a really good process. 00:13:39.600 --> 00:13:46.559 And then when and if you do have errors, it's really important to have a good process around it, have really good, robust documentation. 00:13:46.879 --> 00:14:04.399 Don't have a bunch of unsupported assertions, run that through a process where the audit committee is on board, your SEC counsel, because what happens in these cases is often the SEC will review the filing, they'll see this disclosure, and they're they'll ask for SAP 99 documentation. 00:14:04.480 --> 00:14:11.600 And if you can demonstrate contemporaneous documentation, well thought out, robust, you know, good judgment and objectivity, right? 00:14:11.759 --> 00:14:14.559 That oftentimes can, you know, can that's very important. 00:14:14.720 --> 00:14:17.039 When you don't have that, it's uh very problematic. 00:14:17.360 --> 00:14:19.679 Yeah, and I think maybe just picking up on two things. 00:14:19.840 --> 00:14:25.679 I think one is your importance of thinking about what are analysts talking about, what's that external view, right? 00:14:25.759 --> 00:14:31.919 Because as you highlighted in the beginning, it is from a perspective of a reasonable investor, what is material to the investor. 00:14:32.080 --> 00:14:41.279 And so, you know, you can get into a discussion around

there's different types of investors, but I think that external perspective is helpful in building into those determinations around what a company would think is material. 00:14:41.440 --> 00:14:46.320 And then I think to your point on the SEC, if they do see corrections, they are asking those questions. 00:14:46.480 --> 00:14:48.320 I think it's about the SAB99. 00:14:48.480 --> 00:14:53.120 And we've also seen, too, that the SEC has questions too around the internal controls. 00:14:53.200 --> 00:15:00.399 And so making sure you have that full control evaluation with the error evaluation is an important point that you highlighted as well. 00:15:00.799 --> 00:15:01.200 Absolutely. 00:15:01.360 --> 00:15:01.519 Yeah. 00:15:01.759 --> 00:15:02.399 Okay, well, great. 00:15:02.480 --> 00:15:04.320 Well, I think all of that makes a lot of sense. 00:15:04.480 --> 00:15:09.440 So when we think back uh or think of over 2025, there's been a lot going on this year. 00:15:09.519 --> 00:15:12.639 You know, we already touched on briefly the change in administration. 00:15:12.879 --> 00:15:17.840 We've seen a lot of actions and interventions coming from the government perspective. 00:15:18.000 --> 00:15:23.200 You know, we've seen tariffs, uh the restriction on government grants and funding. 00:15:23.600 --> 00:15:29.120 There's obviously changes in the agenda and potential changes in regulations and different investigations. 00:15:29.200 --> 00:15:32.960 And so I think when we think about all this, some of this is a little bit of noise. 00:15:33.039 --> 00:15:43.840 And a lot of this has things that really impact companies, you know, profitability, their cash flow, uncertainties, and impact the materiality analysis. 00:15:44.000 --> 00:15:52.879 So, you know, when we're thinking about all this stuff that's going on, what should our listeners be thinking about when they're thinking about how to factor this into their materiality assessment? 00:15:53.120 --> 00:15:54.159 Yeah, it's a great question. 00:15:54.240 --> 00:15:59.360 And I like the way you phrase that with kind of separating the noise from what actually impacts the materiality assessment. 00:15:59.519 --> 00:16:04.320 And one thing it brings to mind is first of all, it's not a static one, one, one and done exercise. 00:16:04.480 --> 00:16:12.080 Um, and and we do see, I mean, you're right, all these things, a lot of this does create some, you know, uncertainty. 00:16:12.320 --> 00:16:14.320 And uh it's it's been actually difficult. 00:16:14.480 --> 00:16:20.159 We know it's been difficult for some restaurants to be actually doing their cash forecasts like they normally do in our profitability forecasts. 00:16:20.240 --> 00:16:22.720 Um, and some of these things have affected profitability. 00:16:22.879 --> 00:16:25.759 No doubt tariffs have affected different industries in a certain way. 00:16:26.000 --> 00:16:28.559 So we are seeing some reduced profitability. 00:16:28.720 --> 00:16:36.240 We're also seeing, because of the uncertainties, um, some strategic decisions being made around discontinued operations. 00:16:36.480 --> 00:16:39.039 We've seen maybe new strategic directions. 00:16:39.200 --> 00:16:40.960 So that might result in impairments. 00:16:41.120 --> 00:16:44.320 Now, these are the types of things that do affect the materiality, right? 00:16:44.559 --> 00:16:53.200 So one thing is to be continually updating your materiality and again, making sure you're on the same page with your auditor as you have forecasts that become actual. 00:16:53.279 --> 00:16:54.799 And what does that do to the number? 00:16:54.960 --> 00:17:01.600 It affects the for the auditor, it affects their audit plan for the for the management, it affects what's material or our controls at the right level. 00:17:01.759 --> 00:17:07.359 So certainly like reduce things that reduce profitability are gonna make and affect every dollar more material. 00:17:07.599 --> 00:17:09.759 So I think that is something to be consider. 00:17:10.319 --> 00:17:14.079 Um, we talked about the fact that 5% of pre-tax doesn't make sense all the time. 00:17:14.160 --> 00:17:17.599 And an example would be, you know, you have a large impairment. 00:17:17.839 --> 00:17:20.720 It's gonna dramatically change your pre-tax income. 00:17:20.960 --> 00:17:27.759 You you don't you can't ignore that, but if you just because if you just did the calculation, you'd get a much smaller materiality, right? 00:17:28.000 --> 00:17:28.960 That doesn't make sense. 00:17:29.039 --> 00:17:31.039 Um, or it might throw you into a loss, right? 00:17:31.200 --> 00:17:31.599 Who knows? 00:17:31.680 --> 00:17:36.400 But so you kind of have to look to a look with and without and what is what is material? 00:17:36.480 --> 00:17:40.400 That really probably shouldn't change that much because of of a significant impairment. 00:17:40.480 --> 00:17:42.160 Um, so but you have to think about those things. 00:17:42.240 --> 00:17:43.440 Discontinued operations. 00:17:43.519 --> 00:17:46.799 Now you've you've you have a different classification on the income statement. 00:17:46.880 --> 00:17:48.319 So you got to think about that. 00:17:48.480 --> 00:17:51.599 Um, some of the other things are are maybe just the noise, right? 00:17:51.680 --> 00:17:56.000 So so so I would say keep updated, look at alternative benchmarks. 00:17:56.079 --> 00:17:56.400 It's fine. 00:17:56.480 --> 00:18:02.559 Like there's no prescribed rule that you must use, you know, um sometimes that isn't the right benchmark. 00:18:02.640 --> 00:18:08.079 So we see many um in many audit engagements, alternative materialities being used, which are appropriate. 00:18:08.240 --> 00:18:10.640 Again, the key is is it reflect good judgment? 00:18:10.799 --> 00:18:13.599 Is it based in the facts and circumstances of that entity? 00:18:13.680 --> 00:18:16.319 And is it appropriately documented and communicated? 00:18:16.480 --> 00:18:19.680 Um, some of the non-gap

metrics also come into play. 00:18:19.759 --> 00:18:21.119 So, you know, you want to pay attention to that. 00:18:21.200 --> 00:18:23.599 And again, as you as you mentioned earlier, how are you presenting yourself? 00:18:23.680 --> 00:18:26.000 What are the key your key performance indicators? 00:18:26.240 --> 00:18:32.160 But I I I don't want to go too far with that because you know, sometimes people ask me, what are some of the losing arguments you've seen? 00:18:32.480 --> 00:18:39.119 When when people argue that gap doesn't matter or it's not important, that's that's not a good, that's not a good place to be, although some may think it. 00:18:39.279 --> 00:18:48.480 Um, so I think focusing on the gap is always important, the actual numbers, keeping in mind that that's what you're certifying in your financial statements, that's what the auditor is opining on. 00:18:48.720 --> 00:18:53.680 But keep up to date, look for changes and think about how that affects your materiality. 00:18:53.920 --> 00:19:08.400 And I think too, Mike, when I think back to some of my audit days as well, sometimes too, it's helpful to look at a couple different benchmarks too, when you have so much change going on and thinking about again, what is important to investors, what is important to the company and the management. 00:19:08.480 --> 00:19:18.640 But sometimes it's also helpful to look at maybe a couple different benchmarks and think about okay, when I look at these in totality, kind of what number makes sense to coalesce around. 00:19:18.720 --> 00:19:21.200 And so anyway, that's just another thought as well. 00:19:21.519 --> 00:19:21.839 Agreed. 00:19:21.920 --> 00:19:23.839 Yeah, we sometimes we call that triangulation. 00:19:23.920 --> 00:19:25.359 You know, you look at a few different things. 00:19:25.519 --> 00:19:29.279 And and as long as it's all current and relevant, and I think that's good. 00:19:29.440 --> 00:19:33.519 Uh, again, sometimes what people do is you know, is well, you can switch average. 00:19:33.839 --> 00:19:39.839 Yeah, you can't switch every year and you can't some people look at, well, I average three years, but you know, maybe the business has fundamentally changed. 00:19:39.920 --> 00:19:46.640 So as long as it's a current um view supported by, you know, with good judgment, um, I think alternative benchmarks are fine. 00:19:46.799 --> 00:19:47.119 Yep. 00:19:47.279 --> 00:19:47.599 Okay. 00:19:47.839 --> 00:19:50.000 Well, those are all great reminders, Mike. 00:19:50.160 --> 00:19:54.880 So over the years, we've seen a number of recurring patterns in financial reporting errors. 00:19:55.039 --> 00:19:59.759 So most recently, you know, the statement of cash flows comes up pretty frequently. 00:20:00.079 --> 00:20:08.880 Can you talk to us about what trends you're seeing in reporting errors today and if there's any things you you'd highlight from a regulatory perspective? 00:20:09.279 --> 00:20:11.039 Yeah, uh definitely cash flows comes up. 00:20:11.119 --> 00:20:12.160 And that's an interesting one, right? 00:20:12.240 --> 00:20:20.000 Because again, you you you you can only have one materiality metric, but you you you know, you apply it differently when you think about uh the income statement to the cash flow statement. 00:20:20.160 --> 00:20:22.160 Uh again, uh losing argument. 00:20:22.240 --> 00:20:23.680 It's just a classification error. 00:20:23.920 --> 00:20:26.160 Well, cash flow is just a classification statement, right? 00:20:26.319 --> 00:20:27.359 So that doesn't really work. 00:20:27.519 --> 00:20:32.480 Um you know, again, depending upon, I mean, many times cash flow from operations is very important, right? 00:20:32.640 --> 00:20:35.519 And so, you know, liquidity measure, free cash flow. 00:20:35.759 --> 00:20:40.799 Um, it it it depends company to company, but but cash flow from operations is is is significant. 00:20:40.960 --> 00:20:47.759 What we have found is sometimes there's a little less focus on the cash flow statement than there is on the income statement and balance sheet. 00:20:47.839 --> 00:20:55.279 And so we, you know, again, our recommendations are that you have good quality controls around that, that the auditor has good auditing procedures around that. 00:20:55.440 --> 00:21:06.160 Um, sometimes what happens is uh companies we see do really good analysis of the accounting and accounting considerations for a transaction, but sometimes I don't think about the cash flow treatment, right? 00:21:06.240 --> 00:21:10.000 And and it's these unusual, it's the unusual transactions that tend to cause the problem, right? 00:21:10.160 --> 00:21:13.599 The normal activity, you probably have the normal classification. 00:21:13.759 --> 00:21:15.279 So that's something that to keep in mind. 00:21:15.359 --> 00:21:21.759 Don't forget when you're doing uh an accounting analysis and a memo, don't forget disclosures and don't forget cash flow. 00:21:22.079 --> 00:21:28.000 Um uh we see on the on the income statement, you know, errors that pop up, but uh revenue grows to net. 00:21:28.319 --> 00:21:33.039 And again, people say, okay, well, it's not um, you know, that's not a net PL impact. 00:21:33.119 --> 00:21:35.920 It's you know, the net effect zero, but it could still be material, right? 00:21:36.240 --> 00:21:39.039 Particularly if you're a company where revenue or a trend is very important. 00:21:39.359 --> 00:21:45.839 Um, income taxes, just because sometimes how how challenging it can be and difficult, we see you know some errors in that area. 00:21:46.000 --> 00:21:52.640 And then I would say it tends to be um, you know, companies are generally pretty good about what they do every day, day in and day out. 00:21:52.799 --> 00:21:59.839 It's the unusual transactions that come up that, you know, but whether it's business combination or an impairment or a disability. 00:22:00.160 --> 00:22:06.799 Ops, something unusual that you're not doing dealing with

every day, that maybe uh drives some more of the errors that we've seen. 00:22:06.960 --> 00:22:19.119 Um, in terms of how that's looked at, again, we've seen some judgments made where to to kind of try to grab onto the qualitative to overcome some of these errors. 00:22:19.200 --> 00:22:24.640 And so we we talked about that before that that that's not probably a good avenue to go down. 00:22:24.799 --> 00:22:27.759 Um, classification errors, uh classification is important. 00:22:27.839 --> 00:22:32.079 So just think about that, including on the income statement, you know, above the line, below the line. 00:22:32.240 --> 00:22:33.759 That's something to be thinking about. 00:22:33.920 --> 00:22:41.519 And then sometimes over the, you know, different industries have an industry practice, and but obviously it still has to be in accordance with gap, right? 00:22:41.599 --> 00:22:48.160 So in those cases, sometimes, again, when there's things like that, pre-clearance with the SEC on your accounting model, that that can be very helpful. 00:22:48.240 --> 00:22:50.240 Um, so that's something that to think about. 00:22:50.400 --> 00:22:54.640 Um, and then always, as we as we said before, be thinking about the controls. 00:22:55.039 --> 00:23:05.920 Um, and um, where we've seen good uh good practice too is really good involvement with SEC council and audit committee, you know, involved in the process along with management and the auditor. 00:23:06.160 --> 00:23:06.400 Okay. 00:23:06.559 --> 00:23:08.160 Well, those are great reminders. 00:23:08.400 --> 00:23:16.240 Maybe we'll we'll move back to something that we touched on at the beginning of our conversation, which was intentionality and fraud and illegal acts. 00:23:16.400 --> 00:23:22.079 And those have been top of mind, obviously, at the SEC and PCAB, that's been a focus there for years. 00:23:22.240 --> 00:23:31.039 Um, but with the changing administration, is there anything that our listeners should be focused on or anything messaging-wise that you would like to highlight? 00:23:31.279 --> 00:23:33.359 Yes, I think there's gonna be a focus there. 00:23:33.519 --> 00:23:38.720 And Atkins was clear on that, you know, on the traditional fraud, financial statement fraud, holding those accountable. 00:23:38.960 --> 00:23:42.640 We don't want people who lie, cheat, or steal, nor do we. 00:23:42.799 --> 00:23:45.920 Um, and so that's that's gonna be really important. 00:23:46.000 --> 00:23:49.359 And again, like people here, maybe enforcement isn't gonna be like it was. 00:23:49.519 --> 00:23:53.519 I think they're trying to get away from the regulation by enforcement, like, think about crypto. 00:23:53.680 --> 00:23:59.440 Um but as far as enforcing where there's bad actors, or I mean, I don't think there's gonna be any step back in that. 00:23:59.599 --> 00:24:02.079 So I think that pressure is gonna be there. 00:24:02.240 --> 00:24:07.519 I also think, and going back to your comments about the environment, some of the pressures are out there. 00:24:07.680 --> 00:24:13.440 I think we see from a fraud risk, we see heightened fraud risk because you have you have pressure on people. 00:24:13.599 --> 00:24:13.759 Yes. 00:24:14.000 --> 00:24:18.799 You have um, you know, so and you have incentives to make numbers. 00:24:19.119 --> 00:24:21.039 You've got a difficult environment. 00:24:21.200 --> 00:24:26.000 And so when you when you when you look at those factors coming together, I think we see uh enhanced fraud risk. 00:24:26.160 --> 00:24:34.000 I mean, a great example is you know, all these tariffs, lo and behold, we've started to see and read about some tariff evasion, you know, frauds, right? 00:24:34.160 --> 00:24:39.039 So you know, anytime there's new rules or you know, people you know tend to look for loopholes. 00:24:39.200 --> 00:24:44.880 So um I think the focus and and the pressures out there would would say that the fraud risk is going to be high. 00:24:44.960 --> 00:24:52.079 And just based on our level of activity of our forensics team, I would say uh that that is the case. 00:24:52.319 --> 00:25:05.359 So I think and an intentionality is one of those real hot buttons um thing very, you know, any intentionality is is likely to be deemed to be that results in in a financial statement impact, likely to be material. 00:25:05.519 --> 00:25:05.599 Right. 00:25:05.920 --> 00:25:07.279 I don't care what what the amount is. 00:25:07.519 --> 00:25:18.720 The whole purpose, if you're if it, if it, and and SAB 99 speaks to this, if it was done with intent to meet some kind of number or something, then by definition, that's going to be viewed as material. 00:25:19.039 --> 00:25:26.640 So um really important that companies have good fraud risk assessments, that they have controls in place to deal with that. 00:25:26.720 --> 00:25:30.400 And from an auditor standpoint, I know it's a focus for auditors. 00:25:30.480 --> 00:25:31.920 And the regulators expect that. 00:25:32.000 --> 00:25:43.200 You know, they want they they really harped on auditors' independence and integrity, their objectivity, professional skepticism, and uh a gatekeeper responsibilities, right? 00:25:43.279 --> 00:25:48.480 All those things speak to our responsibilities to be on the on the lookout uh for that. 00:25:48.799 --> 00:26:03.920 And I think, and for companies, uh uh obviously they need to have, as I said, the right controls and probably most importantly the right tone at the top, so that so that given these difficult circumstances that we're not taking shortcuts to meet, you know, to meet numbers. 00:26:04.079 --> 00:26:06.240 Um, so all that's really important. 00:26:06.319 --> 00:26:17.440 And the other thing it does, um, one of the things that creates a lot of strain in these situations, you know, you're you're in the financial reporting cycle and error is determined, it creates a bit of a crisis and you're worried about timing. 00:26:17.519 -->

00:26:19.519 You're worried about getting filed on time. 00:26:19.680 --> 00:26:26.000 Well, if there's intentionality involved, you now have investigative responsibilities. 00:26:26.160 --> 00:26:35.279 Um, you know, the auditor is gonna have responsibilities, companies gonna have responsibilities to make sure they do an appropriate scope of investigation, find out root causes to determine whether there's been intentionality. 00:26:35.440 --> 00:26:36.400 That takes time. 00:26:36.720 --> 00:26:38.160 It creates a lot of stress. 00:26:38.400 --> 00:26:38.720 Right. 00:26:38.960 --> 00:26:43.920 And so, again, um, when it's under fire, it's tough to come up with a process for the first time. 00:26:44.000 --> 00:26:53.119 So, again, my recommendation is that companies with their audit committees, with their auditors, have a game plan ready, know what responsibilities are, know what the implications are. 00:26:53.440 --> 00:26:56.400 Um, we're seeing a lot of whistleblower allegations. 00:26:56.559 --> 00:27:02.480 We're seeing short selling reports that point to uh potential accounting irregularities. 00:27:02.720 --> 00:27:15.119 And um, there's just a lot out there, and sometimes you have to sift through it, but but all those things need to be taken into account if there's if there's contradictory data or evidence um that needs to be sorted through. 00:27:15.279 --> 00:27:20.720 So this is an area that I think is um uh going to be ripe for you know a lot of effort. 00:27:20.960 --> 00:27:24.640 And um, we're seeing quite a bit of that activity in in the marketplace. 00:27:24.720 --> 00:27:26.319 So that's something that's really, really important. 00:27:26.640 --> 00:27:32.799 Well, I think that's those are great reminders and and an area that continues to receive focus and and should. 00:27:32.960 --> 00:27:35.599 And so I think we've had a great discussion here. 00:27:35.759 --> 00:27:41.039 And as we wrap up, you know, any final advice that you'd want to share for our listeners, Mike? 00:27:41.359 --> 00:27:47.440 Yes, a couple of key takeaways, some of it maybe a bit repetitive, but but uh but I'll I'll do that anyway. 00:27:47.599 --> 00:27:49.680 Um again, I'll start tone at the top. 00:27:50.160 --> 00:27:59.519 Um, you know, how important that is and to have the right discipline, the right internal controls, and really good communication between all the responsible parties. 00:27:59.680 --> 00:28:02.400 Um, that communication should be early and often. 00:28:02.559 --> 00:28:07.920 Again, from the audit team, the audit committee with SEC council involved when necessary. 00:28:08.160 --> 00:28:12.000 Um, it's important for all parties to maintain objectivity. 00:28:12.240 --> 00:28:13.119 This is difficult. 00:28:13.279 --> 00:28:20.559 Maybe a little bit easier for the auditor than the management team, but from an audit committee and corporate governance standpoint, that's going to be important. 00:28:20.880 --> 00:28:38.319 Um, the bias

is inherent, but you have to try to overcome it because the judgments and the documentation need to be supported with objective facts, need to be tied to the reality, and not uh it's not an op-ed where you're trying to argue one side because you don't like what the implication will be. 00:28:38.480 --> 00:28:43.039 Um, and again, don't try to get down the route of having qualitative factors outweigh. 00:28:43.279 --> 00:28:47.200 I mean, if you have something that's quantitatively material, you're you're you're kind of there. 00:28:47.359 --> 00:28:50.079 Um, updating, as we talked about, there's a lot of changes. 00:28:50.160 --> 00:28:50.799 It's very fluid. 00:28:50.960 --> 00:28:54.079 Update materiality based on actual results and changes in the business. 00:28:54.240 --> 00:28:58.799 Shift those benchmarks if they need to be shipped and keep keep on top of that. 00:28:59.119 --> 00:29:09.599 When and if there is an error, have a very thorough analysis, considering everything we talked about, quantitative, qualitative, intentionality, investor perspective, the controls, evaluation. 00:29:09.759 --> 00:29:11.359 The documentation does matter. 00:29:11.519 --> 00:29:15.599 You know, again, I say sometimes these things are really clear, but there are close calls. 00:29:15.759 --> 00:29:22.799 And I'll tell you, on the close calls, uh, you know, a well, well done documentation contemporaneous with everybody involved the right way can win the day. 00:29:22.880 --> 00:29:27.839 Whereas if you don't have that, maybe you had a case, but you you might have lost your opportunity. 00:29:28.000 --> 00:29:29.680 Um, expect the scrutiny. 00:29:29.839 --> 00:29:33.920 Um, you know, it's clear from uh from the registrant standpoint. 00:29:34.000 --> 00:29:42.400 Um, the SEC is is very likely to ask for and um have some questions about your materiality assessments from an auditor standpoint. 00:29:42.480 --> 00:29:48.000 Obviously, the PCOV focuses on this area, so that's that's something that those teams need to be prepared for. 00:29:48.160 --> 00:29:50.400 Um again, we can thank Sarbanes Oxley. 00:29:50.559 --> 00:29:52.319 The internal controls are critical. 00:29:52.480 --> 00:30:00.880 And um, you know, better to better the controls, a better attention to that, better quality financial reporting, and and you'll have less of these error outcomes to deal with. 00:30:01.119 --> 00:30:05.039 So I think those would those that would be my uh my my best advice in this area. 00:30:05.440 --> 00:30:07.119 Thanks so much for joining me today, Mike. 00:30:07.200 --> 00:30:12.160 This has been a great conversation and really helpful year-end reminders for our listeners. 00:30:13.039 --> 00:30:14.960 That's our show for today. 00:30:15.279 --> 00:30:18.079 Tune in next week for more fresh episodes. 00:30:18.319 --> 00:30:20.880 So that you never miss any of our audio content. 00:30:21.039 --> 00:30:25.519 Follow the PWC Accounting Podcast wherever you listen to your podcasts. 00:30:25.680 --> 00:30:34.559 And to stay up to date on all our latest accounting and reporting news, sign up for our newsletter at viewpoint.pwc.com. 00:30:35.279 --> 00:30:39.279 From Thought Leadership at PwC, I'm Heather Horn. 00:30:39.599 --> 00:30:41.119 Thanks for tuning in. 00:30:46.480 --> 00:30:50.559 This podcast is brought to you by PwC, all rights reserved. 00:30:50.799 --> 00:30:52.559 PwC refers to the U.S. 00:30:52.720 --> 00:30:58.799 member firm or one of its subsidiaries or affiliates, and they sometimes refer to the PWC network. 00:30:58.960 --> 00:31:01.359 Each member firm is a separate legal entity. 00:31:01.519 --> 00:31:07.839 Please see www.pwc.com slash structure for further details. 00:31:08.079 --> 00:31:17.920 This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors, including accountants and lawyers.