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Newsletter

Audit Committee Insights | January 2022

Thursday, January 20, 2022

Happy New Year! It’s that time of renewal and resolutions. It’s time to look ahead to the challenges we face with optimism and determination. Despite COVID fatigue and related difficulties, there is much to look forward to in 2022.

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What’s Happening? Audit committees dealing with increased complexity, “scope creep,” according to new report from Deloitte and the Center for Audit Quality (CAQ)

The CAQ and Deloitte’s Center for Board Effectiveness released a new report, Audit Committee Practices Report: Common Threads Across Audit Committees, a survey of 246 audit committee members of primarily large-cap, public companies in the U.S. The report provides an illuminating snapshot about how audit committee oversight is changing. In particular, the report shows that while nearly all respondents (96%) rank financial reporting and internal controls — including fraud risk – as their top priority, audit committees are also responsible for cybersecurity (53%), data privacy security (48%), ethics and compliance (48%), third-party risk (47%) and enterprise risk management (42%).

Audit committees are increasingly adding cybersecurity expertise, according to the survey. More than one-half (53%) of respondents said they have oversight responsibility for cybersecurity while 69% anticipate spending more time on cybersecurity next year – more than any other area. At the same time, 35% of respondents reported their audit committee has a cybersecurity expert, with 41% acknowledging they needed additional expertise in this area.

The survey also demonstrates that audit quality among public companies remains high – 98% of respondent stated audit quality either increased or remained the same as the previous year – and that competence of the engagement team and strong communication between the engagement partner and the audit committee contribute most to audit quality.

What does this report mean to audit committees? Check out the full report to see what topics are on the agenda, what experts audit committees have and anticipate needing, how much time is spent on meetings, and how respondents are thinking about emerging topics such as ESG.

 

The Role of the Audit Committee: Be Bold. Be Ambitious.

The accounting profession will never waver in its commitment to always doing better.​ Pursuing greater diversity and inclusion is the right thing to do – it advances equity and opportunity, while recognizing each individual’s identity. It is also the smart thing to do – it helps the accounting profession better perform its public mission and, ultimately, improve audit quality.

That’s why the CAQ has launched two new initiatives, Bold Ambition and Accounting+, to attract a diverse talent pipeline and bring awareness to the profession’s progress on diversity, equity, and inclusion. Bold Ambition and Accounting+ are supported by the eight CAQ Governing Board firms (BDO, Crowe, Deloitte, EY, Grant Thornton, KPMG, PwC and RSM). More on each:

  • Bold Ambition: With $470 million and growing in public commitments previously announced, the accounting profession has made significant progress towards increasing diversity, equity and inclusion. The Bold Ambition website showcases the profession’s collective actions to improve representation and retention of people from underrepresented minority communities. The website collects the work the profession has done – from research to best practices – and shares it with the public to increase transparency and create accountability.
  • Accounting+: Accounting+ is a website to help students understand the benefits and possibilities of a career in accounting. Accounting+ offers resources for high school and college students from underrepresented minority groups, particularly Black, Hispanic, and Latino students, to discover the potential for a career in accounting that matches their own passion and goals.

In addition to the launch of these programs, the CAQ has released a research report on student attitudes and perceptions of accounting. A few highlights:

  • The market research found substantial openness to accounting as a profession, with 52% of Black and 48% of Hispanic students’ expression an interest in accounting as a major.
  • For Black and Hispanic students, a personal connection to an accountant can be highly influential. 73% of accounting majors/minors surveyed knew an accountant personally.
  • Students rely on social media to find information about careers. 58% of Black students and 55% of Hispanic students use YouTube, as well as other social platforms like Instagram.

What does this matter for audit committees? Audit committee members can spread the word in their network of these resources to help those who may be interested in the accounting and auditing profession.

Regulatory Developments: Focus on Accounting Estimates

BDO’s Center for Corporate Governance provides 5 key areas for the audit committee to focus on heading into 2022:

  1. Evolving Roles and Increasing Responsibilities
  2. Topical Financial Reporting Implications
  3. Ongoing Pandemic Impacts
  4. Digital Investment While Countering Cybersecurity
  5. Increased Disclosure and Reporting Demands

Of note, we highlight the excerpt discussed in the Topical Financial Reporting Implications area related to focusing on the oversight of the audit of accounting estimates. BDO states:

Accounting estimates, including forecasts and fair value estimates, require a high degree of professional judgment and evaluation. While it is management’s responsibility to develop the assumptions and data methods supporting accounting estimates, it is up to the audit committee to understand and challenge management, which includes consideration of potential management bias in the development of estimates. This has been an area of increased interest and scrutiny from both the SEC and the PCAOB.

The SEC requires companies to describe valuation techniques and inputs they use for determining fair value, including those used by third parties. Public entities are also required to disclose the range and weighted average used to develop significant unobservable inputs and are asked about the use of third-party pricing services. The SEC asks companies to describe the procedures they performed to validate the fair value information received from third parties and if adjustments were made, to explain why. The SEC has indicated it is seeking more robust fair value measurement disclosure to assist stakeholders in understanding valuation techniques and inputs used, quantitative information about significant unobservable inputs and the use of third-party pricing services.

The PCAOB released Auditing Standard 2501 in 2020 to provide a single audit standard with a uniform, risk-based approach for the evaluation of accounting estimates including fair value measurements which may be referenced by audit committees in their oversight role. Directors may also refer to the joint FEI-CAQ’s publication Understanding the Auditing Requirements for Accounting Estimates and the Use of Specialists.

Disruption from the pandemic, together with evolving guidance from professional organizations over the past several years, provide the impetus for audit committees to have a keener understanding of how to identify and challenge any potential bias from management as it relates to accounting estimates.

Directors are encouraged to ask:

  • Which areas are affected by accounting estimates and fair value measurements?
  • Have we considered all the evidence that led to this accounting decision?
  • Do the choices management is making hold up against increased scrutiny and industry peer data?
  • Does the management team have the experience and track record to accurately project these forecasts?
  • Would the use of a specialist, advisor, or service organization help?

The ability for the audit committee to skeptically consider and independently verify management’s approach to financial reporting as well as engage with auditors on the work performed is a critical component of audit quality and a basis for the integrity of financial reporting.

 

ICYMI: CAQ Public Policy and Technical Alert (PPTA), December 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 CAQ’s December Alert included these featured articles:

  • PCAOB makes HFCAA determinations regarding mainland China and Hong Kong
    The PCAOB issued a report on its determinations that it is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong because of positions taken by People’s Republic of China (PRC) authorities in those jurisdictions. “To protect investors and to carry out the PCAOB’s mandate, our inspectors and investigators need consistent access across all jurisdictions to the audit work performed for public companies in U.S. capital markets,” said PCAOB Acting Chairperson Duane M. DesParte.
  • The demand for assurance engagements on sustainability and ESG reporting is high. Here is how the IAASB is responding.
    Tom Seidenstein, the chair of the IAASB, issued a statement predicting that the push for added corporate reporting and disclosure on sustainability and climate-related information will only accelerate. “We see the trend moving from voluntary reporting commitments to requirements mandated by jurisdictions throughout the world,” he said. In the statement, Seidenstein highlights some aspects of the IAASB’s 2022-2023 work plan, including an agreement to dedicate capacity and resources to the assurance of sustainability/ESG reporting.
  • CAQ Audit planning alert for auditors of brokers and dealers
    The CAQ issued an Audit Planning Alert for Auditors of Brokers and Dealers. In the alert, the CAQ poses questions for auditors of brokers and dealers to consider as they plan both their audit and attestation engagements. The alert focuses on six areas:

    • Auditing revenue;
    • Audit evidence produced by service organizations and/or the broker or dealer;
    • Auditing related-party transactions;
    • Auditing the supplemental information;
    • Performing examination engagements; and
    • Performing review engagements.

 

For Inspiration: Remembering Martin Luther King Jr.

According to CNN, activists and athletes reflected on King’s words recently. Nneka Ogwumike, a WNBA player and president of the Women’s National Basketball Players Association, chose this quote,

“Shallow understanding from people of good will is more frustrating than absolute misunderstanding from people of ill will.” – Martin Luther King Jr.

Why did Ogwumike pick those words? “It is not enough for good people to know they are good for goodness to take place,” she said. “We must hold ourselves to actionable accountability that plants the seeds for sustainable change; allowing both its roots and branches to grow over time, naturally and intentionally.”

 


Questions and comments about Audit Committee Insights can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).

This newsletter is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages readers to refer to applicable rules, standards, guidance, and other resources in their entirety. All entities should carefully evaluate which requirements apply to their respective organizations.

Check out the CAQ’s Audit Committee Resource Webpage for more information.