SEC Comment Trends and PCAOB Update Greg Coy Audit Partner Keith Zapp Audit Senior Manager As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

SEC comment trends

Copyright © 2011 Deloitte Development LLC. All rights reserved. 2 All issuers are reviewed at least once every three years Percentage of issuers reviewed: Targeted risk-based and corporate governance reviews Staff is listening to analyst/earnings calls, reviewing press releases and websites, and issuing comments ing comment letters and new closing letters SEC review process FY09FY10FY11 40%44%48%

Copyright © 2011 Deloitte Development LLC. All rights reserved. 3 SEC comment trends Insights into focus areas from SEC comment process New — Frequent comments on IPOs Industry appendices: –Financial services –Retail –Energy and resources –Life sciences –Technology –Telecommunications Available at deloitte.com/us/SpecialReports

Copyright © 2011 Deloitte Development LLC. All rights reserved. 4 Contingencies Income taxes Long-lived assets and impairment testing Investments and other-than-temporary impairments Fair value Management’s discussion and analysis (MD&A) Non-GAAP financial measures SEC comment trends (cont.)

Copyright © 2011 Deloitte Development LLC. All rights reserved. 5 The overarching theme of the staff’s comments on loss contingencies is risk –Settlement may be material –Accrual may not cover ultimate liability –Underlying assumptions may change Timing of the recognition of a loss contingency Disclosures about contingencies should be specific rather than generic SEC comment trends (cont.) Contingencies

Copyright © 2011 Deloitte Development LLC. All rights reserved. 6 The staff often requests: –More specifics on the nature of a matter –Increased quantification of: Amounts accrued Reasonably possible loss or range of loss –Increased clarity on: Judgments and assumptions underlying significant accruals Timely reporting of new developments –Enhanced disclosure of accounting policies for legal costs and recoveries Consistency of disclosures both within filings and with other filings and communications SEC comment trends (cont.) Contingencies (cont.)

Copyright © 2011 Deloitte Development LLC. All rights reserved. 7 The staff comments have become increasingly focused on risk. For example: –Registrant will have to repatriate earnings to meet current liquidity demands –Historical effective tax rate is not sustainable and may increase materially –Net deferred tax assets are not realizable –Tax positions taken during the preparation of returns will ultimately not be sustained SEC comment trends (cont.) Income taxes

Copyright © 2011 Deloitte Development LLC. All rights reserved. 8 Timing of goodwill impairment disclosures Determination of asset groupings used in goodwill impairment testing MD&A disclosures related to goodwill and critical accounting estimates Long-lived assets at risk of impairment –Frequency of impairment tests –Factors used to evaluate recoverability of assets –Facts and circumstances leading to impairments SEC comment trends (cont.) Long-lived assets and impairment testing

Copyright © 2011 Deloitte Development LLC. All rights reserved. 9 Factors, negative and positive, used to make conclusions on other-than- temporary impairments (OTTI) Underlying assumptions used to determine that an investment is not other-than-temporarily impaired Was the OTTI recorded in the appropriate period Equity security OTTI: SAB Topic 5.M considerations Debt security comments: –Why longer duration credit losses are not indicative of credit losses –Whether interest payments continue to be received timely –How various significant inputs were considered –Additional questions regarding: Cash flow projection assumptions Credit ratings and credit spreads How credit enhancements affect registrant’s OTTI conclusion SEC comment trends (cont.) Investments and other-than-temporary impairments

Copyright © 2011 Deloitte Development LLC. All rights reserved. 10 Additional disclosures about valuation methods and assumptions are needed Determination of fair value classification in the fair value hierarchy (i.e., Level 1, 2, or 3) Quantitative and qualitative MD&A disclosures about the impact of fair value measurement: –Techniques –Assumptions –Related financial statement changes SEC comment trends (cont.) Fair value

Copyright © 2011 Deloitte Development LLC. All rights reserved. 11 Recurring themes Introductory or overview section Early warning disclosures Liquidity and capital resources discussion SEC comment trends (cont.) Management’s discussion and analysis

Copyright © 2011 Deloitte Development LLC. All rights reserved. 12 Be consistent in use of non-GAAP measures Cannot be misleading Recent compliance and disclosure interpretations provide greater flexibility on use Non-GAAP financial measures should not be presented with greater prominence than GAAP measures Titles of non-GAAP measures should not be confusingly similar to GAAP measures SEC comment trends (cont.) Non-GAAP financial measures

Question and answer

PCAOB update

Copyright © 2011 Deloitte Development LLC. All rights reserved. 15 Areas of focus Auditor independence and firm rotation Auditor’s report Audit committee communications Disclosure of engagement partner and other participants in audits PCAOB Update

Copyright © 2011 Deloitte Development LLC. All rights reserved. 16 Board levelStandard settingRecent practice alerts Inspection process International issues Focus on enforcement Aggressive standard setting agenda Auditor independence, including consideration of mandatory firm rotation Auditor’s reporting model Communications with audit committees Auditor transparency — Identification of the engagement partner and other public accounting firms involved in the audit Audit risks in certain emerging markets Potential for a 2011 year- end audit risk alert Areas of focus

Copyright © 2011 Deloitte Development LLC. All rights reserved. 17 Auditor independence and firm rotation Objective: To enhance auditor objectivity, independence, and professional skepticism. However, the concept release focuses on firm rotation. June 2, 2011August 16, 2011December 14, 2011Q Doty speech on topic Comments due to PCAOB Concept release issued PCAOB public roundtable

Copyright © 2011 Deloitte Development LLC. All rights reserved. 18 The PCAOB wants data and analysis through the comment process: Analysis of auditor tenure and inspection findings Request for data regarding potential costs and disruption Other alternatives responsive to improving auditor objectivity and professional skepticism Auditor independence and firm rotation (cont.) One cannot talk about audit quality without discussing independence, skepticism, and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor. That leads to consideration of firm rotation as a counterweight to that conflict. — PCAOB Chairman James Doty

Copyright © 2011 Deloitte Development LLC. All rights reserved. 19 Objectivity is central to the role auditors play in the capital markets Mandatory firm rotation will not benefit investors, as the perceived benefits will be outweighed by the costs –Risk that rotation will reduce, not enhance, audit quality –Limits audit committees’ freedom of action with respect to auditor selection –Loss of continuity of knowledge coupled with increased costs to issuers We will offer alternatives that enhance auditor independence, objectivity, and professional skepticism Auditor independence and firm rotation (cont.) Deloitte’s preliminary views on firm rotation

Copyright © 2011 Deloitte Development LLC. All rights reserved. 20 Discuss the concept release with your colleagues in senior management and with the audit committee Express your views on your experience with auditors, their objectivity, and impacts of Sarbanes-Oxley Consider data about the cost of rotation to your company Are there alternatives to firm rotation you would support? Auditor independence and firm rotation (cont.) Engaging in the debate on firm rotation Messages from corporate America will resonate better than the views of accounting firms on this issue. And letters from audit committees will resonate the most with the PCAOB.

Copyright © 2011 Deloitte Development LLC. All rights reserved. 21 Auditor’s report Objective: To re-evaluate the auditor’s reporting model with a view toward increasing transparency and relevance to financial statement users. June 21, 2011September 15, 2011September 30, 2011Q Concept release issued Comments due to PCAOB PCAOB public roundtable Proposed standard expected

Copyright © 2011 Deloitte Development LLC. All rights reserved. 22 Four alternatives presented in the concept release: Inclusion of an Auditor’s Discussion & Analysis (AD&A) section Required and expanded use of “emphasis of matter” paragraphs in the auditor’s report Reporting on information outside the financial statements Clarification of certain language in the auditor’s report Auditor’s report (cont.)

Copyright © 2011 Deloitte Development LLC. All rights reserved. 23 We support responsible changes to the auditor’s report that meet the following overarching principles: Auditors should not be the original source of disclosure about an entity Any changes: –Need to enhance, or at least maintain, audit quality –Should narrow, or at least not expand, the expectations gap –Should add value and not create investor confusion Auditor reporting should focus on objective information rather than the subjective Auditor’s report (cont.) Deloitte’s recommendations: We submitted our comment letter to the PCAOB on September 30.

Copyright © 2011 Deloitte Development LLC. All rights reserved. 24 Our recommendations for changes to the auditor’s report: Include an additional paragraph that references those footnotes in the financial statements which the auditor has determined are the most important to a user’s understanding of the financial statements Require the auditor to provide assurance on the portion of the Management’s Discussion and Analysis related to critical accounting estimates Provide more information, in a form prescribed for all audits, about what an audit is and the responsibilities of the auditor, management, and the audit committee Auditor’s report (cont.) Deloitte’s recommendations: Overall, however, we believe a holistic approach to improving financial reporting is necessary and warranted.

Copyright © 2011 Deloitte Development LLC. All rights reserved. 25 InvestorsIssuers and audit committees Auditors Want more information directly from auditors –Management estimates –Critical accounting policies –Risk areas –Difficult or contentious issues –Audit procedures performed –Name of partner –Other firms/networks involved in the audit –Better explanation of reasonable assurance and responsibility for fraud detection –Auditor communications with the audit committee Concerned with suggestion that auditors be the direct source of information Believe current assurance model is the correct model Support auditors providing more information regarding audit procedures performed Open to providing more information about procedures performed and clarifying auditor’s report Do not want to be direct source of information Concerned about expanded reporting within current filing deadlines Suggest management reporting and audit committee reporting be considered at same time Concerned about making current audit committee communications public Auditor’s report (cont.) Comment letter themes

Copyright © 2011 Deloitte Development LLC. All rights reserved. 26 Audit committee communications Objectives: Enhance relevance and effectiveness of communications Emphasize the importance of effective, two-way communications between the auditor and the audit committee March 29, 2010May 28, 2010September 21, 2010Q Proposed standard issued PCAOB public roundtable Initial comments due PCOAB to re-propose standard

Copyright © 2011 Deloitte Development LLC. All rights reserved. 27 Audit committee communications (cont.) Communications required by the proposed standardNew or expanded requirement Significant issues discussed with management before the auditor’s appointment or retention Establish a mutual understanding of the terms of the auditExpanded Overview of the audit strategy and timing of the auditNew Accounting policies, practices, and estimatesExpanded Auditor’s evaluation of the quality of the company’s financial reportingExpanded Other information in documents containing audited financial statements Management consultations with other accountants Going concernNew Corrected and uncorrected misstatements Departure from the standard auditor’s reportNew Disagreements with management Difficulties encountered in performing the audit Other matters significant to the oversight of financial reporting processNew

Copyright © 2011 Deloitte Development LLC. All rights reserved. 28 Additional requirements in proposed standard: Auditor to evaluate two-way communications with the audit committee If communications not adequate, auditor to consider: –Communicating with full board –Modifying opinion –Withdrawing from engagement Communication requirements in other standards would remain in place: Material weaknesses and significant deficiencies in internal control Fraud and illegal acts Management representations Communications in connection with interim reviews Preapproval of services Independence matters Audit committee communications (cont.)

Copyright © 2011 Deloitte Development LLC. All rights reserved. 29 Audit committee communications (cont.) Comment letter themes InvestorsIssuers and audit committees Auditors Support the proposal and the new requirements Believe current auditor communications appropriate and effective Concerned new requirements will: –Stifle communications –Impede ability to focus on most important issues –Lead to information overload Proposal fails to recognize role played by management One way evaluation of communications not meaningful Willing to provide more information to audit committees Do not believe increasing requirements will make communications more effective Concerned about evaluating communications –No criteria –Implications unclear

Copyright © 2011 Deloitte Development LLC. All rights reserved. 30 Disclosure of engagement partner and other participants in audits Current status PCAOB proposed amendments for comment on October 11, 2011 Comment letter period closes on January 9, 2012 Objective To increase transparency of public company audits by providing investors with information about certain participants in the audit Proposed amendments by the PCAOB Require disclosure of the name of the engagement partner: –In the audit report –In Board’s Annual Report Form 2 Require disclosure in the audit report of: –Other independent public accounting firms –Other persons that took part in the audit

Question and answer

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Copyright © 2011 Deloitte Development LLC. All rights reserved. 33 Contact information Greg Keith

Copyright © 2011 Deloitte Development LLC. All rights reserved. 34 This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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