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 Proposes Rule Amendments to the Broker-Dealer Customer Protection Rule
The SEC proposed amendments to Rule 15c3-3 (the Customer Protection Rule) to require certain broker-dealers to increase the frequency with which they perform computations of the net cash they owe to customers and other broker-dealers (known as PAB account holders) from weekly to daily. Net cash owed to customers and PAB account holders must be held in a special reserve bank account. By reducing the timeframe between computations, the proposal would assist broker-dealers in more dynamically matching the net amount of cash owed to customers and PAB account holders with the amount on deposit in the broker-dealer’s customer and PAB reserve bank accounts.
SEC Adopts Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies
The SEC adopted rules requiring registrants to disclose material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance. The final rules will become effective 30 days following publication of the adopting release in the Federal Register. The Form 10-K and Form 20-F disclosures will be due beginning with annual reports for fiscal years ending on or after December 15, 2023.
SEC Proposes New Requirements to Address Risks to Investors From Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers
The SEC proposed new rules that would require broker-dealers and investment advisers to take certain steps to address conflicts of interest associated with their use of predictive data analytics and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests. The proposing release will be published in the Federal Register. The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.
PCAOB Launches New Online Tools to Help Users Find and Compare Inspection Report Data
The PCAOB unveiled an array of website transparency enhancements that allow investors, audit committee members, and other stakeholders to better access and understand data from PCAOB inspection reports. The enhancements add six new filters that can be applied to PCAOB inspection reports. The filters are:
- Inspection type
- Total issuer audit clients
- Part I.A deficiency rate
- Specific global network
- Inspection year
- Audits reviewed
Additionally, users can now download the entire data set into three formats: CSV, XML, and JSON.
PCAOB Report: Audits With Deficiencies Rose for Second Year in a Row to 40% in 2022
The PCAOB announced a new staff report showing a year-over-year increase in the number of audits with deficiencies at audit firms that the PCAOB inspected in 2022. The report, “Staff Update and Preview of 2022 Inspection Observations,” presents aggregate observations from the PCAOB’s inspections of certain public company audits conducted by 157 audit firms in 2022. PCAOB Chair Erica Y. Williams challenged firms to sharpen their focus on investor protection.
FASB Issues ASU 2023-03
The FASB issued ASU 2023-03—Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): SEC SAB 120, SEC 3-24-2022 Staff Announcement, and ASR 280. This ASU amends or supersedes various SEC paragraphs within the Codification to conform to past SEC announcements and guidance issued by the SEC. The ASU does not provide any new guidance so there is no transition or effective date associated with it.
FASB Seeks Public Comment on Proposal to Improve Disclosures Around Income Statement Expenses
The FASB published a proposed Accounting Standards Update intended to provide investors with more decision-useful information about a public business entity’s expenses. The proposed ASU would require public companies to provide detailed disclosure of specified categories underlying certain expense captions in interim and annual periods. The amendments in the proposed ASU do not change or remove existing expense disclosure requirements and do not change requirements for presentation of expenses on the face of the income statement. Stakeholders are encouraged to review and provide comment on the proposal by October 30, 2023.
AICPA & CIMA Launch New Climate Resilience Accounting Resource
AICPA & CIMA, together as the Association of International Certified Professional Accountants, have launched Accounting for Climate Resilience – a new online educational brief designed to help finance professionals build their sustainability literacy so they can lead and support the journeys of their organizations, firms, and clients as they adapt business models and operations in response to increasing climate-related risks.
AICPA Debuts New Practice Aid for Tech-Enabled Auditing
The AICPA Auditing Standards Board’s Technology Working Group announced a new practice aid, Use of Technology in an Audit of Financial Statements, that emphasizes how technology should be seen as a key enabler, elevating audit effectiveness and efficiency for the future. The practice aid covers the following:
- The use of technology in performing risk assessments
- The value of obtaining an understanding of the entity’s use of technology to help auditors determine their use of technology
- Examples of automated tools and techniques for performing risk assessment procedures
The free, downloadable practice aid also highlights the differences between traditional risk assessment procedures and technology-enabled procedures.
Stakeholders Reminded of IFRS Accounting Requirements for Climate-Related Matters in Financial Statements
The International Financial Reporting Standards (IFRS) Foundation published an updated version of its educational material developed to help companies determine how to consider climate-related matters when preparing their financial statements applying IFRS Accounting Standards. The IFRS Foundation is publishing this updated version in light of developments including the International Sustainability Standards Board’s (ISSB) inaugural IFRS Sustainability Disclosure Standards, issued on June 26, 2023. The International Accounting Standards Board (IASB) is also working on a project on Climate-related Risks in the Financial Statements to explore whether and how financial statements can better communicate information about climate-related risks.
FRC Inspections Show Continued Improvement at Largest Audit Firms
The Financial Reporting Council (FRC) published its annual inspection and supervision results of the largest audit firms (BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, and PwC). The report shows continued improvement in audit quality at the Tier 1 firms, and inspection results for largest company audits (FTSE 350) remain strong. The report also highlights how management and audit committees play an integral role in the audit ecosystem and sets out examples of steps that audit committees can take to drive responsive and high-quality audits.
IESBA Emphasizes the Critical Importance of Ethical Behavior for All Professional Accountants
The International Ethics Standards Board for Accountants (IESBA) released a statement that says among all professions, the global accountancy profession stands apart in having a comprehensive and robust code of ethics in its International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) that it must apply. Professional accountants must act in all business and professional dealings or relationships in accordance with the five fundamental principles of the Code:
- Integrity;
- Objectivity;
- Professional competence and due care;
- Confidentiality; and
- Professional behavior.
The fundamental principles clearly establish the standard of behavior expected of all professional accountants.
APESB and IESBA Staff Jointly Issue Guidance Illustrating Application of IESBA Code to Technology-Related Services Provided by Auditors
The Staff of the Australian Accounting Professional & Ethical Standards Board and the Staff of the IESBA jointly released Applying the Code’s Conceptual Framework to Independence: Practical Guidance for Auditors In Technology-related Scenarios. The publication describes key technology-related provisions of the International Code of Ethics for Professional Accountants (including International Independence Standards) and provides auditors with three practical examples involving technology-related non-assurance services to illustrate how to apply the Code’s requirements with respect to independence.
What You Need to Know About International Standard on Sustainability Assurance 5000
The International Auditing and Assurance Standards Board (IAASB) announced it will issue the proposed, landmark International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, 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. From August 2 to December 1, the IAASB will seek feedback on the proposed standard from those who:
- Prepare, use, or provide assurance on sustainability information
- Use reported sustainability information to make decisions, including audit committee members, investors, and others.
IASB Completes Technical Work on Two New IFRS Accounting Standards
The IASB concluded its decision-making on two projects—its final steps before drafting and balloting two new IFRS Accounting Standards. The first of these forthcoming Accounting Standards is designed to clarify and enhance information companies provide about their financial performance. The other will simplify the financial statements prepared by subsidiaries of listed groups. The IASB expects to issue the new Accounting Standards in the first half of 2024. The IASB has decided that the effective date of both new Accounting Standards will be for annual reporting periods beginning on or after January 1, 2027, to give companies sufficient time to implement the new requirements. Earlier application will be permitted.
ISSB Consults on Proposed Digital Taxonomy to Improve Global Accessibility and Comparability of Sustainability Information
The International Sustainability Standards Board published the Proposed IFRS Sustainability Disclosure Taxonomy for public comment. The proposals reflect the disclosure requirements in the ISSB’s first two Standards—IFRS S1 and IFRS S2. The ISSB is seeking feedback on the proposals over a 60-day consultation period closing on September 26, 2023. The ISSB will review feedback on the proposals in the second half of 2023 and aims to issue the final digital taxonomy early in 2024, subject to the feedback received.
Monitoring Group Reports on Progress to Implement Recommendations to Strengthen the International Audit, Assurance, Ethics, and Independence Standard-Setting System
The International Organization of Securities Commissions announced the Monitoring Group, supported by strong stakeholder engagement, has made significant progress in implementing its Recommendations to strengthen the standard-setting system (Strengthening the International Audit and Ethics Standard-Setting System). Strong momentum continues around the globe regarding voluntary and mandatory reporting of sustainability information and assurance over that information. One important implementation step was the establishment of the International Foundation for Ethics and Audit. Increasing the size and technical abilities of the staff ensures technical expertise is available to the IAASB and the IESBA. Key to maintaining the progress made towards an independent and inclusive multi-stakeholder standard-setting system is securing a sustainable, long-term funding mechanism.
Significant Barriers Deter Students From Pursuing a Degree in Accounting, According to CAQ Report
The CAQ announced a new report that reveals undergraduate business students are encountering obstacles to pursuing a degree in accounting. Among the findings in the report, Increasing Diversity in the Accounting Profession Pipeline: Challenges and Opportunities, July 2023, the most significant reasons for not choosing accounting as a major included a lack of interest or passion for the major (driven in part by negative experiences with introductory accounting classes), higher starting salaries in other majors, and students not wanting to pursue the 150 academic credit hours required for CPA licensure. Despite the barriers, students are open to accounting and opportunities exist to drive them to pursue the degree.
ACC Comment Letter: PCAOB Non-compliance With Laws and Regulations (NOCLAR)
The CAQ posted a comment letter that provides the views of its Audit Committee Council to the PCAOB related to its request for comment on a proposed new auditing standard, AS 2405, A Company’s Noncompliance with Laws and Regulations, or “NOCLAR.” The letter expressed concern that the proposed amendments would significantly expand the auditor’s responsibilities with respect to noncompliance with laws and regulations. Among its concerns:
- The proposed scope is too broad.
- The proposed amendments would expand the auditor’s role to require knowledge and expertise outside their core competencies.
- The proposal does not sufficiently take into account a company’s existing three lines of defense and the shared responsibility of the board of directors, the audit committee, the chief compliance officer, and the general counsel.
- The proposal will substantially increase the cost of the audit without a commensurate benefit.
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).