It’s almost Halloween and when you are in Washington DC, you never know if you’ll get a trick or treat! We’re seeing the colors and feeling the temperatures of fall, hoping a government shutdown can be avoided, and eagerly monitoring regulatory agendas.
To help keep you current, we scour available resources and keep up with regulatory developments. Read on to stay informed on these relevant developments for audit committee members.
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You’re Invited to Attend a CAQ and WilmerHale Event feat. Christina Ho, PCAOB Board Member
The Center for Audit Quality and WilmerHale are partnering to provide a multi-part series that will explore recent developments in accounting, auditing and the law, with particular relevance for issuers, audit committees and accounting firms. The first event in this series, Part I: NOCLAR and Responsibilities of the Auditor, will take place on Thursday, November 2, 2023 from 3:30-6:30pm ET at WilmerHale’s Washington DC office, as well as remotely, and will feature a substantive panel discussion followed by a networking reception.
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Reminder to Complete the CAQ and Deloitte Audit Committee Practices Survey
The Center for Audit Quality (CAQ) and Deloitte’s Center for Board Effectiveness are asking audit committee chairs and audit committee members at public and private companies to take a 5-8 minute survey to provide insights on their audit committee’s priorities and practices.
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Audit Committee Observations: Low Staff Turnover and Strong Communications Enable a Smooth Audit; Focus on Non-GAAP
The PCAOB spoke to over 200 audit committee chairs in 2022 to discuss topics related to the 2021 audit of their company’s financial statements. In a recent Spotlight, 2022 Conversations with AC Chairs, the Board provided these observations:
- Staffing – Turnover on the audit engagement teams and within the financial reporting roles at their respective public companies were areas of significant discussion as they both impacted efficiencies in conducting the audit.
- COVID-19 / Remote work – Auditing remotely seemed more effective for lower-risk areas, such as vouching cash, as opposed to procedures such as inventory observation. They also highlighted the need for heightened supervision and review when working remotely.
- Communications – Most commended their auditors for strong communication. However, in some cases, inconsistent or last-minute communication with auditors was problematic and that they would like to see improvement in this area.
- Critical Audit Matters (CAMs) – AC chairs are generally pleased; a small percentage questioned whether CAMs reporting is becoming a generic compliance exercise, sometimes resulting in “boilerplate” language provided by the auditor.
- Information Outside of the Financial Statements – AC chairs are focused on non-GAAP and other metrics and asking auditors about upcoming regulatory developments such as climate disclosures.
The Board also issued a New PCAOB Staff Report shedding light on rising inspection deficiencies related to Engagement Quality Reviews and included the following suggested questions for audit committees:
- What policies and procedures does the audit firm have in place to provide reasonable assurance that the EQR reviewer has sufficient competence, independence, integrity, and objectivity to perform the EQR in accordance with the standards of the PCAOB?
- Does the audit firm have individuals with experience in their specific industry that have not served as the engagement partner during either of the two audits preceding the current audit, who can serve as the EQR reviewer? If not, will the auditor go outside of the audit firm to fill this role?
- Were there any significant judgments discussed or challenged by the EQR reviewer? What was the outcome of those discussions?
- Has the auditor obtained concurring approval of issuance from the EQR reviewer prior to the issuance of the engagement report (or communicating its conclusion if no report is issued)?
Climate Disclosures and Assurance Required in California Beginning in 2026
2026. That’s not far away. Today’s college sophomores will graduate in 2026. On October 7, 2023, California enacted two climate-disclosure laws that apply to both public and private entities that do business in the state and meet certain annual revenue thresholds. EY highlights what you need to know:
- Both laws require initial disclosures in 2026.
- Entities with more than $1 billion in annual revenue that do business in California will be required to annually disclose their Scope 1, Scope 2 and Scope 3 emissions in accordance with the GHG Protocol and obtain assurance over those disclosures.
- Entities with more than $500 million in annual revenue that do business in California will be required to biennially provide disclosures (1) in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, which includes Scope 1 and Scope 2 emissions without assurance, and (2) on the measures they adopted to reduce and adapt to identified climate-related risks.
- California also enacted a third climate-disclosure law that requires entities that operate in California and make net zero emissions claims, carbon-neutral claims or significant greenhouse gas emissions reduction claims to disclose — starting in 2024 — information about those claims and the purchase or use of voluntary carbon offsets used to achieve those claims.
Are you doing business in California?
EY points out that the laws do not define the term “does business” in California. However, the state senate floor analysis uses the definition of “doing business” from the California tax code. The California Franchise Tax Board considers an entity to be “doing business” if it (1) engages in any transaction for the purpose of financial gain in California, (2) is organized or commercially domiciled in California or (3) has California sales, property or payroll exceeding specified amounts, which are adjusted annually.
What assurance is required?
For entities with more than $1 billion in revenue, annual assurance is required as follows:
- Scope 1 and 2 emissions disclosures:
- Limited assurance in the first year of reporting (i.e., in 2026 on 2025 data).
- Reasonable assurance starting in 2030 (on 2029 data).
- Scope 3 emissions disclosures:
- Limited assurance starting in 2030 (on 2029 data).
However, the California Air Resources Board (CARB) can modify the dates based on trends in third-party assurance requirements for Scope 3 emissions.
Assurance providers need to be independent and have significant experience in measuring, analyzing, reporting or attesting to GHG emissions. The CARB is required to establish regulations regarding the assurance requirement by January 1, 2025.
The CARB is required to review the qualifications for third-party assurance providers in 2029 based on an evaluation of trends in education related to emissions and the qualifications of third-party assurance providers.
An entity will need to submit a copy of the assurance report and the name of the assurance provider to the emissions reporting organization.
We think CPAs are the right choice for ESG assurance. Your external auditor is already independent as required by the new CA laws. Check out more from the CAQ about ESG assurance.
Get Prepared for Year-End: SEC Clawback Due to Restatements Is Here and Three New FASB Standards
PwC summarizes key developments for audit committees preparing for Q3; this guidance is also helpful heading into year-end. Here are a few highlights:
SEC’s Clawback of erroneously awarded executive compensation is here:
In 2022, the SEC adopted rules directing US securities exchanges to establish standards to require listed issuers to develop and implement a written policy providing for the recovery of incentive-based compensation received by current and former executive officers in the event of required accounting revisions and restatements.
The listing standards took effect on October 2, 2023, and companies will have until December 1, 2023 to adopt a compliant recovery policy; however, the policy must be applied to erroneously awarded compensation received on or after October 2, 2023.
For annual reports filed after adopting a recovery policy, a company is required to file its policy as an exhibit and disclose any actions taken pursuant to the policy. Additionally, a company will indicate on the cover page of Form 10-K (or Form 20-F) whether the financial statements included in the filing reflect the correction of an error and whether the error correction required an incentive-based compensation recovery analysis. The audit committee will want to understand management’s processes and controls for complying with the disclosure requirements.
There are three new FASB standards that will soon be effective:
1. Segment reporting
The new segment reporting standard will add required disclosures of significant expenses for each reportable segment.
Effective date (for calendar-year-end public companies): In the 2024 annual period and in 2025 for interim periods, with early adoption permitted.
2. Income tax disclosures
The new income tax standard will require significant additional disclosures, focused on the disclosure of income taxes paid and the rate reconciliation table. The new guidance will be applied prospectively (with retrospective application permitted).
Effective date (for calendar-year-end public business entities): In the 2025 annual period and in 2026 for interim periods, with early adoption permitted. All other entities will have an additional year to adopt the new guidance.
3. Accounting for and disclosure of crypto assets
The new standard on crypto assets will provide accounting and disclosure guidance for crypto assets that meet the definition of an intangible asset and certain other criteria, including that the asset does not provide the holder with enforceable rights to, or claims on, underlying goods, services or other assets. In-scope assets will be subsequently measured at fair value, with changes recorded in the income statement. The standard will require separate presentation of (1) in-scope crypto assets from other intangible assets and (2) changes in the fair value of those crypto assets. Disclosure of significant crypto asset holdings and an annual reconciliation of the beginning and ending balances of crypto assets will also be required.
Companies will apply the new guidance by making a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the annual period the guidance is adopted.
Effective date (for all calendar-year-end companies): In 2025, including interim periods, with early adoption permitted.
ICYMI: CAQ Public Policy Technical Alert (PPTA), August/September 2023
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 August 2023 and September 2023 Alerts included these featured articles.
SEC Appoints George Botic to the Public Company Accounting Oversight Board
The SEC has appointed George Botic, CPA to a term as a Board Member of the PCAOB. Mr. Botic will replace current Board member Duane DesParte, CPA whose term ends on October 24, 2023. Mr. DesParte became a PCAOB Board member in April 2018 and served as its Acting Chair from June 2021 to January 2022. Mr. Botic was most recently the Director of the PCAOB’s Division of Registration and Inspections, which includes the Global Network Firm Inspection Program, the Non-Affiliate Firm Inspection Program, the Broker-Dealer Auditor Interim Inspection Program, and the registration program. The PCAOB applauded appointment of Mr. Botic.
FASB Issues Standard That Improves Accounting for Joint Venture Formations
The FASB issued an ASU intended to provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements, and reduce diversity in practice in this area of financial reporting. The ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. The amendments in this ASU are effective prospectively for all joint ventures with a formation date on or after January 1, 2025, and early adoption is permitted.
IAASB Launches Public Consultation on Landmark Proposed Global Sustainability Assurance Standard
The International Auditing and Assurance Standards Board (IAASB) issued its proposed International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. With its focus on assurance on sustainability reporting, ISSA 5000, when approved, will be the most comprehensive sustainability assurance standard available to all assurance practitioners across the globe. ISSA 5000 is a principles-based, overarching standard suitable for both limited and reasonable assurance engagements on sustainability information reported across any sustainability topic. The IAASB invites all stakeholders to comment on the proposed revisions via the IAASB website by December 1, 2023.
Trick or Treat Trivia
Is it the costumes or the candy that make Halloween so fun? Or maybe it’s the fun trivia:
- Are pumpkins technically a fruit or vegetable? Answer: Fruit
- Which U.S. state produces the most pumpkins? Answer: Illinois, per the U.S. Department of Agriculture
- Which first lady was the first to decorate the White House for Halloween? Answer: In 1958, Mamie Eisenhower decorated the White House for a Halloween luncheon (p.s., did she start a trend? It seems like house décor for Halloween is growing every year!)
- How much money are consumers expected to spend on Halloween in 2023? Answer: $12.2 billion, per the NRF (that’s b-illions with a “b” as in “boy”!). This exceeds last year’s record of $10.6 billion.
- How much money are consumers expected to spend on just Halloween decorations in 2023? Answer: $3.9 billion according to the NRF (see the trend that first lady Eisenhower started in 1958?)
- How much money are consumers expected to spend on Halloween costumes in 2023? Answer: $4.1 billion according to the NRF
- What are the most popular children’s costumes? Answer: According to the NRF, in order: Spiderman, princess, and ghost. While Barbie was #7 on the kid list, it ranks #3 on the adult costume list. Our money is on Weird Barbie in particular. Barbie is beaten out by witches and vampires for adults. Oppenheimer is noticeably absent. Pumpkin tops the pets’ costume list.
- Which U.S. president told a group of schoolkids that the White House was haunted by the ghost of Abraham Lincoln? Answer: In 1989, George H.W. Bush jokingly told a group of children that Lincoln was rumored to haunt the White House. (#whitehousehumor)
Have a Happy and Safe Halloween!
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.