As part of the Center for Audit Quality’s (CAQ) ongoing effort to keep members and stakeholders informed on significant public policy and accounting matters, we are pleased to offer the Public Policy and Technical Alert (PPTA). Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession. Please note that the PPTA is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages member firms to refer to the rules, standards, guidance, and other resources in their entirety at the hyperlinks provided below. All entities should carefully evaluate which requirements apply to their respective organizations.
In This Issue
SEC Investor Advisory Committee September 21, 2023 Meeting Agenda
The SEC posted the agenda for its Investor Advisory Committee meeting on September 21, 2023.
The Importance of a Comprehensive Risk Assessment by Auditors and Management
The SEC posted a statement by Chief Accountant Paul Munter on the importance of a comprehensive risk assessment by auditors and management. This statement discusses management’s obligation to take a holistic approach when assessing information about the business and avoid the potential bias toward evaluating problems as isolated incidents, in order to timely identify risks, including entity-level risks; design processes and controls that are responsive to identified risks; and effectively identify information that issuers are required to communicate to investors. Munter also discusses auditors’ responsibilities as gatekeepers to hold management accountable in the public interest.
SEC Division of Corporation Finance Updates CD&Is
The SEC’s Division of Corporation Finance updated the following Compliance and Disclosure Interpretations (CD&Is):
Exchange Act Rules Section 120. Manipulative and Deceptive Devices and Contrivances: Rule 10b5-1
- Question 120.29
- Question 120.30
- Question 120.31
Section 16 and Related Rules and Forms Section 135. Form 4
- Question 135.04
Regulation S-K Section 133A. Item 408—Insider Trading Arrangements and Policies
- Question 133A.01
- Question 133A.02
Exchange Act Forms Section 113. Form F-SR
- Question 113.01
- Question 113.02
- Question 113.03
Regulation AB and Related Rules Section 111. Form SF-3
- 111.01 Form SF-3 Eligibility Requirements, Timely Transaction Documents
Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers
The PCAOB published its Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers. The report provides:
- Information about PCAOB’s 2022 inspections approach;
- A summary of PCAOB’s 2022 inspections observations;
- A description of “good practices,” which include brief scenarios and possible procedures that may be effective to address those scenarios; and
- Recommended actions for firms
FASB Issues ASU 2023-04Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121
The FASB issued ASU 2023-04—Liabilities (Topic 405): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 121.
FASB Issues 2023 Investor Outreach Report
The FASB issued its 2023 Investor Outreach Report. The report notes the expansion of the FASB Investor Advisory Committee with the addition of three new members, and details the FASB’s ongoing, proactive investor outreach efforts.
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.
FASB Issues New Chapter of Its Conceptual Framework: Recognition and Derecognition
The FASB issued a new chapter of its Conceptual Framework related to the recognition and derecognition of an item in financial statements. The new chapter becomes Chapter 5 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. It provides three criteria an item should meet to be recognized in financial statements. Those criteria are:
- Definitions—The item meets the definition of an element of financial statements.
- Measurability—The item is measurable and has a relevant measurement attribute.
- Faithful Representation—The item can be depicted and measured with faithful representation.
The new chapter also sets forth the concept that derecognition should occur when an item no longer meets any one of the recognition criteria.
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.
What You Need to Know About International Standard on Sustainability Assurance 5000
The IAASB posted a video on International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, What You Need to Know About International Standard on Sustainability Assurance 5000. The IAASB issued the proposed, landmark ISSA 5000 for public consultation on August 2. When approved, ISSA 5000 will be the most comprehensive sustainability assurance standard available to all assurance practitioners across the globe. The IAASB is seeking feedback on the proposed standard from August 2 to December 1.
FRC Consults on Revisions to Ethical Standard for Auditors
The Financial Reporting Council issued a consultation on revisions to the FRC’s Ethical Standard to further enhance and clarify the principles of integrity, objectivity, and independence auditors must abide by. The proposed revisions to the Ethical Standard enhance prohibitions where an audit firm’s independence could be threatened by an economic over reliance on fees from specific entities that are connected. Additional changes reflect significant developments in the International Ethics Standards Board for Accountants Code since the FRC last revised the Ethical Standard in 2019. The new standard has also been revised to ensure breaches of ethical standards are reported to the FRC on a more timely basis. The consultation closes on October 31, 2023.
FRC Publishes Latest Accountancy and Audit Facts and Trends Report
The FRC published the 21st edition of its Key Facts and Trends report, providing the latest statistical information and trends on the UK accountancy and audit profession. This year’s report highlights continued growth in accountancy membership, with nearly 400,000 members now in the UK and Republic of Ireland, up 2.1% on the previous year. The concentration of audits with the Big Four firms continued to reduce with 33 FTSE 350 audits being undertaken by non-Big Four audit firms, compared with 27 last year.
IASB Sets Out Accounting Requirements for When a Currency Is Not Exchangeable
The International Accounting Standards Board (IASB) issued amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates that will require companies to provide more useful information in their financial statements when a currency cannot be exchanged into another currency. The amendments will help companies and investors by addressing a matter not previously covered in the accounting requirements for the effects of changes in foreign exchange rates. These amendments will require companies to apply a consistent approach in assessing whether a currency can be exchanged into another currency and, when it cannot, in determining the exchange rate to use and the disclosures to provide. The amendments will become effective for annual reporting periods beginning on or after January 1, 2025. The amendments will be consolidated into IAS 21 and IFRS 1 in March 2024.
Comment Letter: PCAOB: AS 2405, A Company’s Noncompliance With Laws and Regulations (NOCLAR)
The CAQ posted a comment letter that provides views to the PCAOB regarding its request for comment on its proposed amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments. The CAQ is concerned that the proposed amendments would result in requirements that may not be practical or achievable and could cause considerable confusion with respect to the appropriate role of auditors, ultimately to the detriment of investors. The CAQ’s key observations on the proposal fall in the following five categories:
- Fundamental shift in the objectives of an audit
- Scope of the proposal
- Auditors are not lawyers or forensic specialists
- Role of auditor versus role of management
- Costs and benefits of NOCLAR proposal require further study
Comment Letter, Sign-on Letter: PCAOB: AS 2405, A Company’s Noncompliance with Laws and Regulations (NOCLAR)
The CAQ posted a comment letter in which over 170 audit committee chairs, board members, and other capital markets stakeholders signed on to share their concerns about proposed amendments to PCAOB Auditing Standards related to a Company’s Noncompliance with Laws and Regulations and Other Related Amendments. These stakeholders support the PCAOB’s mission to protect investors by modernizing audit standards that support the performance of continued high-quality audits in today’s complex business environment. However, they are concerned that the proposed amendments do not advance that mission. The board members are concerned that the PCAOB’s proposal risks reducing audit quality and lessening investor protections while unnecessarily increasing the cost and complexity of audits.
Comment Letter: IAASB: Proposed International Standard on Auditing 570 (Revised 202X) Going Concern and Proposed Conforming and Consequential Amendments to Other ISAs
The CAQ posted a comment letter that provides views to the IAASB related to its request for comment on its Proposed International Standard on Auditing 570 (Revised 202X) Going Concern and Proposed Conforming and Consequential Amendments to Other ISAs. The CAQ is supportive of the Board’s objectives to strengthen the auditor’s evaluation of management’s assessment of going concern and consider ways to enhance transparency with respect to the auditor’s responsibilities and work related to going concern. Overarchingly, the CAQ has three primary concerns about the proposal, as follows:
- Need for Improvements to the Applicable Financial Reporting Framework
- There Are Opportunities to Enhance Scalability
- KAMs Are a Better Approach to Increase Transparency Through the Auditor’s Reporting Requirements
Comment Letter: PCAOB Technology-Assisted Analysis
The CAQ posted a comment letter that provides views to the PCAOB related to its request for comment on its Proposed Amendments Related to Aspects of Designing and Performing Audit Procedures that Involve Technology-Assisted Analysis of Information in Electronic Form. The CAQ is supportive of the PCAOB’s objective, but encourages the Board to potentially think broader about technology, the audit, and audit quality. The CAQ’s most significant comments relate to:
- Clarification provided by defining tests of details
- Evaluating the reliability of external information maintained by the company in electronic form
- Investigation of items meeting the criteria established by the auditor when designing and performing substantive procedures
Video: The Current State of ESG Reporting and What to Expect Leading Up to the SEC’s Climate Rule, Presented by Desiré Caroll
The CAQ posted a video that gives a rundown of the current state of ESG reporting among S&P 500 companies, pulled from the CAQ’s recent analysis. Additionally, given where companies currently are, the implications of the SEC’s anticipated climate-related disclosure for public companies is a question. The discussion is presented by Desiré Carroll, Director at the CAQ. Carroll walks through key takeaways from the CAQ’s analysis and key information to know leading up to the SEC’s climate-related rule.
The Center for Audit Quality is a nonpartisan public policy organization serving as the voice of U.S. public company auditors and matters related to audits of public companies. The CAQ promotes high quality performance by U.S. public company auditors; convenes capital market stakeholders to advance the discussion of critical issues affecting audit quality, U.S. public company reporting, and investor trust in the capital markets; and using independent research and analyses, champions policies and standards that bolster and support the effectiveness and responsiveness of U.S. public company auditors and audits to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs. For more information, visit www.thecaq.org.
The CAQ Public Policy and Technical Alert (PPTA) is intended as general information and should not be relied upon as being definitive or all-inclusive. As with all other CAQ resources, this is not authoritative and readers are urged to refer to relevant rules and standards. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The CAQ makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. This publication does not represent an official position of the CAQ, its board, or its members.
Questions and comments about the Public Policy & Technical Alert can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).