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Audit Committee Insights | August/September 2021

Wednesday, September 29, 2021

It’s finally feeling like fall. The air is getting cooler. School has started, and Q3 is drawing to a close. Put on a cozy sweater and continue reading to find the latest financial reporting news and insights for audit committees. We welcome input; please let us know what you think.

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What’s Important? Board Diversity. Nasdaq is Requiring It.

Audit committee insights

You care about diversity, equity and inclusion. You don’t want the focus on this important topic to die down. Nasdaq doesn’t either. Beginning in August 2022, all Nasdaq-listed companies, with limited exceptions, must have at least two diverse board members or explain why they do not. The new listing standard will require disclosure, in an aggregated form, of information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board.

Disclosure of board diversity data will be required annually and companies have until August 8, 2022 or the date the company files its proxy statement or information statement for its annual shareholder meeting during 2022. Read more here from BDO on this new requirement approved by the SEC on August 6, 2021.

Need more on board diversity trends? Deloitte’s Missing Pieces Report, 6th Edition reviews data providing insight into board diversity changes from 2018 to 2020 across the Fortune 500. The report quotes Michael C. Hyter, president and CEO, The Executive Leadership Council:

“There is no doubt that the spotlight on racial inequities for Black executives in corporate America last year spurred momentum to diversify corporate boardrooms. The real question is are we experiencing a trend, or is this the beginning of sustainable progress?  Although Black women continue to gain board seats, the loss of board seats by Black men is alarming. Board diversity in the Fortune 500 is growing at a rate of 2% which is not quickly enough. On top of that, the recycle rate among Black directors remains high. If corporations are serious about achieving true board diversity, they must be intentional about reaching outside of their traditional networks and tapping the plethora of qualified, Black board-ready executives who are ready to serve.”

Nasdaq and the SEC agree.

Role of the Audit Committee: How to Oversee 3rd Party Risk

Audit committee insights

Third party risk is growing. And so is dependence of 3rd parties.

What are the hurdles to managing 3rd party risks? PwC’s Governance Insights Center provides insights: Lack of inventory of 3rd party relationships and lack of understanding of what 3rd parties are doing.

What are common third-party risks? Cyber and data security, bribery/FCPA, compliance, ethical/social/environmental issues, brand/reputation, and operational vulnerability.

What should boards be doing? Companies are developing robust third-party risk management programs (TPRM) with 10 key elements:

  1. Ongoing monitoring of third parties
  2. Alignment to ERM program
  3. Clear accountability via a governance model
  4. Use of automation and other tech to expand scope and scale of TPRM
  5. AC and board reporting of 3rd party risk landscape, on a regular cadence
  6. In-depth assessment of third parties supporting critical functions
  7. Accurate inventory of all third-party relationships
  8. Pre and post contract processes and controls
  9. Mapping of applicable regulations to third parties
  10. Third-party functions formally defined, governed, controlled, measured & reported

Go to page 10 for questions boards can ask about third-party risk.

Regulatory Developments: SEC Comment Letter Trends – Non-GAAP Still No. 1, Climate Emerging

Audit committee insights

EY analyzed SEC comment letters (issued to registrants from Corp Fin) so you don’t have to. 39 pages of analysis. God love them.

Here are the quick hits:

  • The volume of SEC staff comment letters was down by 20% from the previous year.
  • Comment letters continue to address registrants’ COVID-19 disclosures in management’s discussion and analysis, business descriptions, and risk factors in addition to disclosures about fair value measurements and other topics, including the use of non-GAAP financial measures.
  • SEC staff has started issuing comments on climate-related disclosures, including considerations of the Commission’s 2010 guidance. (EY’s Technical Line deciphers the SEC’s guidance). Side note – received a comment letter on climate disclosures? You are likely not alone. The SEC published a sample comment letter with 9 examples comments that companies may receive regarding their climate-related disclosures.
  • Companies planning to go public through an initial public offering or merger with a special purpose acquisition company (SPAC) should consider the topics of frequent comment when preparing their initial registration statements and subsequent filings.

What else is the SEC contemplating? In a recent speech, SEC Chair Gary Gensler discussed mandatory disclosures on climate risk and human capital that his staff is working on. On climate-related disclosures, SEC staff is:

  • Considering governance, strategy, and risk management related to climate risk;
  • Looking into a range of specific metrics, such as greenhouse gas emissions, to determine which are most relevant to investors in our markets.
  • Considering potential requirements for companies that have made forward-looking climate commitments, or that have significant operations that have jurisdictions with national requirements to achieve specific, climate-related targets.

On human capital disclosures, investors have said that they want to better understand one of the most critical assets of a company: its people. To that end, the SEC staff is working on recommendations that could include a number of metrics, such as workforce turnover, skills and development training, compensation, benefits, workforce demographics including diversity, and health and safety.

What should audit committees be doing now? Consider the adequacy of current disclosures based on current requirements. Engage with the SEC when proposed rules are issued for public comment to have your voice heard.

ICYMI: CAQ Public Policy and Technical Alert (PPTA), July/August 2021

Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession.  The July and August PPTAs included these featured articles:

  • Joint public statement by board members Rebekah Goshorn Jurata and Megan Zietsman
    • PCAOB board members Rebekah Goshorn Jurata and Megan Zietsman notified the SEC that they plan to resign from the PCAOB on the earlier of October 1 or on the date of the appointment of new board members. In a joint statement, they expressed “sincere gratitude and appreciation” for the PCAOB staff, writing, “Thanks to their efforts and adaptability, the PCAOB has been able to advance key initiatives and accomplish its statutory mandate in very challenging times.”
  • S&P 500 and ESG Reporting
    • The CAQ posted a summary and analysis of the most recent publicly-available ESG data for S&P 500 companies. We found that 95% of S&P 500 companies had detailed ESG information publicly available. The information the CAQ examined was primarily outside of an SEC submission in a standalone ESG, sustainability, corporate responsibility, or similar report. Of the remaining 5%, most companies published some high-level policy information on their website.

Most S&P 500 companies referenced at least one framework or standard. A majority referenced multiple frameworks and standards. More than half of S&P 500 companies (264 companies) had some form of assurance or verification over ESG metrics.

The pandemic has been hard on friendships (and work relationships). Here’s how to reconnect.

Audit committee insights

According to the Washington Post, spending time with a good friend feels easy and uplifting. It happens naturally in the formative years of life. It takes more than 200 hours of time spent with a person to consider them a close friend. These hours shared over meals and meaningful conversations facilitate deeper connection. So, yes – we can manage virtually and get work done. But true joy comes from friends and often work relationships.

Without the routine of in-person meetings, conferences, lunches or dinners, relationships may be languishing. Be intentional to maintain those relationships that are important to you. If it’s not possible to be in person, how else can you support your friend or colleague? The Washington Post points out, “When we give ourselves, your time or otherwise, that benefit is what actually makes us feel good: The benefit it gives to other people.”

Questions and comments about Audit Committee Insights can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (