Audit Committee Insights | July 2025

It’s a little bit hard to believe we are into the second half of the year. The cold winter temps in the Washington area are a distant memory and the hot, humid summer weather has returned. We have been busy, busy, busy – conducting research and advocating on behalf of the public company auditing profession. And so have stakeholders in the ecosystem – firms and associations – who develop great resources to assist audit committee members. We keep up with it all. Read on to learn about the latest developments.

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PCAOB Chair Williams Steps Down July 22 

SEC Chair Paul Atkins accepted PCAOB Chair Erica Williams’ resignation on July 15. Her last day will be July 22.

Tariffs Uncertainty: Ask the Right Financial Reporting Questions 

They say the only thing you can count on is death and taxes. That is, unless tariffs are considered a tax, and then… not much certainty at all. To help audit committees navigate this uncertain environment, KPMG has published a report to help ask the right questions:

1. Inventory costs and impairment risk
   • What are the judgments and risks involved in the tariff positions and strategies taken by the company?
   • How will product margins be affected by tariffs?
   • Can and will selling prices be raised on affected products?
   • Does the company have firm purchase commitments?
   • Are controls operating at an appropriate precision and frequency?
2. Revenue
   • Are customer prices being increased?
   • Does the company have an enforceable right to pass along the cost of tariffs to customers?
   • Is there price concession or collectability risk?
   • What are the effects of tariffs on over-time or long-term revenue contracts?
   • Is accounting for new contracts appropriately considering the changes to selling prices, costs and customer behavior?
3. Contract modifications as a response
   • Is legal counsel involved in evaluating the contractual rights related to price changes?
   • Has the company recognized the benefits of price changes based on estimates before there is an enforceable right?
   • Has the company allocated the benefits to the appropriate sales/purchases?
4. Projected financial information sensitivity
   • How are cash flows and liquidity being affected?
   • Have secondary impacts on the company’s planned tariffs response been considered?
   • Has sensitivity analysis been performed to assess the range of possible outcomes?
   • What is the level of documentation of assumptions and significant judgments?
5. Impairment testing essentials
   • Are tariff policies disrupting supply or demand for products?
   • What is the extent, country of origin and nature of products being imported
   • How have tariffs impacted the company’s suppliers and customers?
   • Is financial performance declining or expected to decline?
   • Have multiple scenarios been considered?
   • Does the company have any development projects impacted by tariffs?
6. Financing implications
   • Are debt agreements expected to be modified?
   • Has debt covenant compliance been projected under revised forecasts?
   • Have credit rating agencies been engaged or issued updates recently?
   • Is additional borrowing or refinancing required to support near-term liquidity?
   • Has sensitivity analysis been performed to assess the level of risk of a going concern issue?
7. Consequential operational changes
   • Are agreements being terminated early?
   • Have plans been made to abandon assets?
   • Will changes be made to the company’s workforce?
   • What related internal controls and processes are in place?
   • Are any assets or businesses being disposed of?
8. Disclosure matters
   • Are disclosures about estimation uncertainties and the underlying basis for critical judgments adequate?
   • Are disclosures company-specific rather than boilerplate?
   • Are there certain risks, which may have previously been discussed hypothetically, that should be framed differently amid tariffs uncertainty?
   • Are there adequate procedures and controls related to reviewing and updating disclosures?
9. Risk assessment reminders
   • Which executives are responsible for identifying material financial, liquidity, and operating risks?
   • How is management identifying and mitigating these risks?
   • Does management have an incident response plan?
   • Have you engaged directly with the independent auditor?

Asking the right questions can promote constructive dialogue with management and ensure high quality financial reporting.

To Govern, or Not to Govern (AI)? That is The Question

Is AI governance the responsibility of the audit committee? That is really the question, and one that many boards are evaluating. There are a variety of resources that can help. Deloitte’s Center for Board Effectiveness published a Strategic AI governance roadmap which identifies six components of AI governance:

1. Strategy
2. Risk
3. Governance
4. Performance
5. Talent
6. Culture and Integrity

Related to the governance component, Deloitte points out that the board can work with management and oversee the following:

Here are questions for the board to consider:

• Are changes to board structure (i.e., allocation of responsibility to new or existing committees) necessary to facilitate effective AI oversight?
• Does management have a governance framework or supporting policies over the use, development, and integration of AI within the organization? How does it incorporate concepts of responsible innovation or Trustworthy AI?
• Does the board understand which executive, team, and/ or management committee is responsible for AI strategy implementation?
• Does the board have a clear understanding of who in management will report to the full board or committees overseeing AI strategic initiatives?
• Does the board have a cadence for how often AI will be on the board’s agenda and what information will be presented and by whom?

Another useful resource in this arena comes from PwC, Oversight in the AI era: understanding the audit committee’s role. This resource outlines six areas of key risk oversight for audit committees:

1. Financial Reporting, Internal Controls, and Financial Statements
   • AI is streamlining financial reporting through automation, forecasting, and disclosure drafting. Audit committees must ensure internal controls over financial reporting are updated, risks are managed, and human oversight validates AI outputs.
2. Internal Audit
   • Internal audit is using AI to enhance planning, testing, and reporting. Audit committees should ensure strong governance over these tools and understand how AI is reshaping audit strategies and skills.
3. External Audit
   • External auditors are adopting AI to improve audit efficiency and insight. Audit committees should ask how these tools are tested, how risks are addressed, and how regulators are responding.
4. Compliance, Ethics and Fraud Prevention
   • AI supports compliance by monitoring behavior, analyzing regulation and detecting fraud, but ethical use, misuse, etc. is also a factor. Committees must oversee how AI is managed, ensure ethical use, and guard against misuse like deepfakes or phishing.
5. Risk Management
   • AI can improve risk identification and prediction. Audit committees should ensure AI risks are fully integrated into ERM programs and that high-risk models are properly governed and monitored.
6. Cybersecurity
   • AI enhances both cyber defense and cyber threats. Committees should work with security leaders to understand how AI is used for threat detection and how the company is protecting against AI-driven attacks.

Read the full report here.

Going Public? What You Need to Know About Corporate Governance (2025 Edition)

PwC’s Governance Insights Center released its 2025 edition related to corporate governance for companies considering going public. Their advice? Start early!

Both the SEC and stock exchanges have rules affecting a public company’s board structure and governance practices. In addition to deciding how to implement those rules, companies must make a number of other decisions. They range from board size and composition to which governance policies to adopt.

PwC’s guide helps companies understand:

• Key questions to consider in setting up the board;
• Other key governance decisions necessary; and
• Who will scrutinize your governance practices and what do they want?

This guide is chock-full of important details, including listing requirements. Here are some key takeaways, but check out the full guide for more details:

1. Tackle key governance decisions earlier rather than later in the IPO process.
   • Having your governance structure and processes established and operating by the time you go public can send an important message to potential investors.
   • It can take more time than you think to recruit the directors you really want.
2. Governance practices at larger and more established public companies often differ from those at smaller, newly public companies.
   • Pick the practices that you think will work for you — ones that reflect your size, ownership, and state of maturity.
   • The type of transaction, the stock exchange, your filer status, and other factors will impact your governance practices.
3. How many directors should you have and how often should the board meet?
   • Generally, between 6 and 12 directors.
   • Here are some Corporate Governance by the Numbers from EY: 
4. Don’t go overboard.
   • Institutional Shareholder Services (ISS), a major proxy advisory firm, recommends against voting for directors who sit on more than five public company boards.
   • It sets the threshold lower for CEOs — limiting them to no more than two other public company boards.
   • Some institutional investors set the levels at which they consider a director to be over-boarded even lower than ISS.
5. How much should you pay directors? 
6. What board committees should you have?
   • Independent audit committees and compensation committees are required by both the NYSE and NASDAQ.
   • A nominating/governance committee is also required by the NYSE. While not required by NASDAQ, it does require that directors who handle director nominations be independent.
   • About two in 10 IPO companies have at least one additional board committee when they go public. Among the most common are executive committees, compliance committees and risk committees.
7. Create a charter and stick to requirements at the start.
   • You’ll need to draft or review/update charters for each committee.
   • They should describe membership requirements, responsibilities, processes and authority. They’ll also need to align with specific stock exchange rules.
   • You’ll have to post the audit, compensation and nominating/ governance committee charters on your website.
   • You’ll have to describe every board committee in your proxy statement, including how often each met during the year and which directors are on each committee.
   • There are lots of “best” practices that many companies have captured in charters. If your company is just figuring out how to form and run these committees, it may be best to stick to what’s required at the start. You can always update the charters for other practices once both the management team and committees are ready to take on more.
8. Should all of your directors be up for election every year?
   • Often, companies use one-year terms. If you choose a longer term (say three years, with one-third of the board elected each year) it’s referred to as a “classified” or “staggered” board.
   • For their part, institutional investors don’t like classified boards. They want the right to vote on each director every year. If you want a classified board, you need to put the policy in place before you go public.
   • IPO companies are much more likely to have a classified board when they go public. 
9. What can you do now to encourage future board refreshment?
   • According to PwC’s 2024 Annual Corporate Directors Survey, 49% of directors believe that one or more of their fellow directors should be replaced, but the annual turnover rate of S&P 500 board seats is approximately 8%.
   • That’s quite a disparity. Here are some mechanisms to consider: 

The bottom line? Corporate governance is foundational to the success of any public company. Start early, know the requirements, and build from there.

COSO and NACD Withdraw Corporate Governance Framework from Public Comment

The Committee of Sponsoring Organizations of the Treadway Commission (COSO), in collaboration with the National Association of Corporate Directors (NACD), had released an exposure draft of the Corporate Governance Framework (CGF) in May 2025.

On July 16, 2025, COSO announced a withdrawal of its draft CGF. The draft CGF has been withdrawn from public comment as COSO takes time to evaluate the extensive feedback received to date and engage further with stakeholders.

Revenue, M&A Accounting Issues and Audit Committee Communications Among Key Enforcement Trends 

In collaboration with the CAQ, the Anti-Fraud Collaboration’s (AFC) new report, A Comprehensive Analysis of PCAOB and SEC Enforcement Actions: Key Themes and Lessons Learned, analyzes more than 400 SEC and PCAOB enforcement actions from 2021–2024.

Analyzing matters that have been the subject of enforcement actions can serve as a helpful indicator for what future enforcement priorities might look like. The report identified four main enforcement trends and regulatory insights, including:

• Revenue recognition remains a top regulatory focus due to its importance to investors and vulnerability to fraud.
• Post-M&A accounting issues have led to more PCAOB enforcement actions, while SEC actions have declined in this area.
• Auditors face rising penalties, with both the PCAOB and SEC imposing significant fines in cases involving integrity violations.
• Regulators are using sweeps to target compliance issues, including audit committee communications and inadequate disclosures.

Explore the full report here.

ICYMI: CAQ Public Policy Technical Alert (PPTA), May/June 2025 

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 May and June 2025 Alerts included these featured articles.

SEC Names Kurt Hohl as Chief Accountant
The SEC announced that Kurt Hohl, with nearly 40 years of accounting and auditing experience, has been named Chief Accountant, effective July 7, 2025. Hohl most recently founded Corallium Advisors, which helps businesses navigate the complexities of auditing, regulatory compliance, risk management, and initial public offerings. Before that, he spent 26 years as a partner at Ernst & Young in a variety of roles. Hohl previously served at the SEC from 1989 to 1997, rising to Associate Chief Accountant in the Division of Corporation Finance.

S&P 500 Sustainability Reporting and Assurance Analysis
The CAQ analyzed 2023 data from S&P 500 companies to understand what they disclosed about sustainability reporting standards and frameworks, greenhouse gas emissions, assurance, or verification over the sustainability information, and net zero or carbon neutral commitments. Among the key takeaways:

• 99% of S&P 500 companies reported sustainability information in 2023, remaining steady in relation to the 98% that did so in 2022.
• 73% of S&P 500 companies that reported sustainability information in 2023 obtained assurance over certain of that information (up from 70% in 2022).
• The scope of information being subject to assurance continued to increase with most companies assuring their GHG emissions and at least 1–3 other sustainability metrics.
• 24% of companies that obtained assurance, obtained assurance from public company auditors (up from 21% in 2022).
• There remains inconsistency in how other assurance/verification providers describe their compliance with the IAASB assurance standards, raising questions about the consistency of their compliance.

PCAOB Shares Perspectives From 2024 Conversations with Audit Committee Chairs
The PCAOB released a new staff Spotlight publication, 2024 Conversations With Audit Committee Chairs. This Spotlight presents high-level observations and takeaways from the 272 interviews that staff conducted with audit committee chairs in 2024. The Spotlight also provides answers to questions that audit committee chairs regularly raise in their conversations with the PCAOB, such as:

• How are audits selected for review?
• What does an inspection entail?
• Does the PCAOB have educational training or events for audit committee members?

PCAOB Published New Resource to Help Smaller Audit Firms Address Challenges of Auditing Accounting Estimates
The PCAOB published a new resource, Audit Focus: Auditing Accounting Estimates, that provides auditors with reminders and good practices about accounting estimates, an especially challenging aspect of financial statements. This edition of Audit Focus shares:

• Key reminders for auditors from the PCAOB standards related to auditing accounting estimates;
• Staff’s perspectives on common deficiencies in auditors’ work; and
• Good practices that audit firms that audit smaller companies have implemented in the area of accounting estimates.

FASB Issues Standard That Clarifies Guidance for Identifying the Accounting Acquirer in a Business Combination
The FASB published an Accounting Standards Update (ASU) that improves the requirements for identifying the accounting acquirer in FASB Accounting Standards Codification Topic 805, Business Combinations. The ASU will revise current guidance for determining the accounting acquirer for a transaction effected primarily by exchanging equity interests in which the legal acquiree is a variable interest entity that meets the definition of a business. The amendments require an entity to consider the same factors that are currently required for determining which entity is the accounting acquirer in other acquisition transactions. The ASU, including effective date information, is available at www.fasb.org.

Comment Letter: Response to Commissioner Hester M. Peirce’s Statement ‘There Must Be Some Way Out of Here’
The CAQ posted a comment letter to the SEC Crypto Task Force in response to Commissioner Hester M. Peirce’s Statement There Must Be Some Way Out of Here. In the letter, the CAQ details its views on the following:

• Support for increased regulatory clarity related to crypto assets and the establishment of the SEC Crypto Task Force.
• The importance of coordination between the SEC and other parties, including the FASB and PCAOB, in providing additional accounting and auditing guidance for crypto assets.
• Specific considerations related to auditing crypto asset transactions and holdings, and other attestation services related to crypto assets.

Dun dun… dun dun… dun dun dun dunnnnnnnnnnnnnnnnnnnnnnnn! Jaws is 50 and Other Fun Facts 

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Hindsight is 20-20 in auditing and in movie making. On its 50-year anniversary, it’s hard to imagine that Jaws, released on June 20, 1975, was ever at risk of being a success. Yet, the groundbreaking film – the first to gross over $100 million – was plagued with budget overruns and a mechanical shark that constantly broke down.

Here are some other fun facts about the movie:

• The novel the movie is based on was inspired by a real shark.
• Director Steven Spielberg was only 26 years old at the time.
• The movie was filmed in the open water off Martha’s Vineyard.
• The mechanical sharks (there were three) were collectively nicknamed Bruce after Spielberg’s close friend, lawyer Bruce Ramer.
• The mechanical sharks weren’t designed to withstand saltwater.
• The boat depicted in the film, the Orca, sank during production.
• Because of the mechanical issues, Spielberg focused on suspense and anticipation of the shark, which was more effective.
• The iconic line, “You’re gonna need a bigger boat” was improvised.
• One of the first people to watch the movie vomited during the screening.
• The film created the tradition of the summer blockbuster movie.
• Jaws was selected for the Library of Congress’ National Film Registry in 2001.
• The iconic poster wasn’t designed for the movie. It was taken from the novel’s paperback.

Enjoy the beach this summer. 😊

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.