Public Policy and Technical Alert | August 2022
Friday, September 9, 2022
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.
SEC appoints Anthony C. Thompson to second term on PCAOB
The SEC announced the appointment of Anthony (Tony) C. Thompson to a second term as a Board Member of the PCAOB. Thompson joined the Board on January 3, 2022, filling a term that expires on October 24, 2022. His second term will run until October 24, 2027.
SEC publishes draft FY22-26 strategic plan for public comment
The SEC released for public comment a draft strategic plan for fiscal years 2022 to 2026. Comments should be received on or before September 29, 2022. The draft strategic plan establishes three primary goals:
- Protecting working families against fraud, manipulation, and misconduct;
- Developing and implementing a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and
- Supporting a skilled workforce that is diverse, equitable, inclusive, and is fully equipped to advance agency objectives.
Among the initiatives to meet these goals, the SEC intends to modernize design, delivery, and content of disclosures to investors so they can access consistent, comparable, and material information while making investment decisions. The agency also aims to update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets.
SEC adopts pay versus performance disclosure rules
The SEC adopted amendments to its rules to require registrants to disclose information reflecting the relationship between executive compensation actually paid by a registrant and the registrant’s financial performance. The rules implement a requirement mandated by the Dodd-Frank Act. Specifically, the amendments require registrants to provide a table disclosing specified executive compensation and financial performance measures for their five most recently completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total shareholder return (TSR), the TSR of companies in the registrant’s peer group, its net income, and a financial performance measure chosen by the registrant.
SEC Updated Questions and Answers (Q&A) for Compliance and Disclosure Interpretations (C&DI) of Rule 14a-19
The SEC added three Q&As in their proxy rules and schedule 14A C&DIs relating to dissident or contested shareholder notices in Questions 139.01, 139.02, and 139.03.
Auditor independence and ethical responsibilities: Critical points to consider when contemplating an audit firm restructuring
The SEC posted a statement by acting chief accountant Paul Munter regarding complex business relationships and audit firm restructurings. In the view of the Office of the Chief Accountant (OCA) staff, complex transactions with investors that are not traditional accounting firms, and have not previously been subject to the same independence and ethical responsibilities, elevate the risk to an auditor’s independence with respect to its audit clients. In the current environment, as some accounting firms may be considering changes to their capital and firm structures, OCA expects accounting firms to keep as their top priority a focus on their vital gatekeeper function. OCA reminds accountants that they are required to be independent in both fact and appearance.
PCAOB seeks public comment on five-year strategic plan for protecting investors
The PCAOB released a draft of its five-year strategic plan, inviting the public to comment on how the organization will pursue its mission of protecting investors from 2022 to 2026. Comments on the draft plan must be received by September 15, 2022. The plan lays out an ambitious roadmap built around four goals:
- Modernizing standards;
- Enhancing inspections;
- Strengthening enforcement; and
- Improving organizational effectiveness.
The PCAOB releases 2022 audit committee resource
The PCAOB released its 2022 Spotlight Audit Committee Resource. It spotlights fraud and other risks, initial public offerings and mergers and acquisitions, audit execution, independence, quality control, and technology.
The PCAOB issues annual report on inspections of broker-dealer audits
The PCAOB issued its annual report on inspections of broker-dealer audits. The PCAOB’s program identifies and addresses any significant issues observed in audits and related attestation engagements. Key observations from the report include the following:
- The percentage of firms inspected where one or more audit and/or attestation engagement deficiencies was identified remained high at 78% in 2021, consistent with 2020.
- The percentage of audit engagements reviewed where deficiencies were identified declined to 49% in 2021, from 61% in 2020, but remained high, primarily due to deficiencies associated with auditing revenue.
- Generally, the results of inspections of firms that audited 100 or fewer broker-dealers resulted in higher percentages of audit engagements with identified deficiencies, compared to the results for firms that audited more than 100 broker-dealers. For firms that audited 100 or fewer broker-dealers, the percentage of audit engagements with identified deficiencies declined to 60% from 71% in 2020 and 84% in 2019. For firms that audited more than 100 broker-dealers, the percentage of audit engagements with identified deficiencies declined to 32% in 2021 from 38% in 2020 and 41% in 2019.
PCAOB signed a Statement of Protocol with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China
The PCAOB signed a Statement of Protocol with China, taking the first step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong completely, consistent with U.S. law. The agreement includes three provisions that, if abided by, would grant the PCAOB complete access for the first time:
- The PCAOB has sole discretion to select the firms, audit engagements and potential violations it inspects and investigates – without consultation with, nor input from, Chinese authorities.
- Procedures are in place for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed.
- The PCAOB has direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
The PCAOB provides 2021 observations from the target team, a group of inspectors who focus on emerging audit risks and topics
The PCAOB posted a link to its August 2022 report Spotlight: Observations From the Target Team’s 2021 Inspections. It spotlights fraud, interim reviews of special purpose acquisition companies, going concern, and cash and cash equivalents.
FASB issues 2022 Investor Outreach Report
The FASB issued its 2022 Investor Outreach Report. The report notes a threefold increase in investor participation in the FASB’s most recent agenda consultation process over the last one conducted in 2016, with the top seven most frequently cited investor priorities currently included on the technical agenda or undergoing further analysis on the research agenda. The report also details the FASB’s ongoing, proactive investor outreach efforts, which included more than 485 investor interactions over the year ended June 30, 2022.
SEC accepts 2022 Q3 Supplemental GAAP Taxonomy
The FASB announced that the SEC has accepted the 2022 Q3 Supplemental GAAP Taxonomy, which includes improvements to the GAAP Financial Reporting Taxonomy and the SEC Reporting Taxonomy. The 2022 Q3 Supplemental GAAP Taxonomy includes improvements for the SEC Release Nos. 33–10771; 34–88606; IC–33836. In addition, the 2022 Q3 Supplemental GAAP Taxonomy includes improvements needed to tag disclosures discussed in SEC Staff Accounting Bulletin No. 121.
FASB seeks input on proposal to improve accounting for investments in tax credit structures
The FASB issued a proposed Accounting Standards Update (ASU) intended to improve the accounting and disclosures for investments in tax credit structures. The amendments in this proposed ASU would allow reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met, regardless of the program from which the income tax credits are received. The election would be on a program-by-program basis. The proposed amendments would also require disclosures to enable financial statement users to better understand the nature and effects of the entity’s investments that generate income tax credits and other income tax benefits. Stakeholders are encouraged to review and provide comments on the proposed ASU by October 6, 2022.
More companies obtaining ESG assurance, according to global survey
The International Federation of Accountants and the AICPA co-authored a report, The State of Play in Reporting and Assurance of Sustainability Information, that shows the percentage of companies around the world that had ESG assurance provided on their reporting rose to 58% in 2020 from 51% the previous year. The United States and the United Kingdom continue to lag behind when it comes to having auditors provide ESG assurance.
Embrace fluidity and remove the risks of remote audits
The AICPA posted an article about remote audits. The AICPA says remote audits offer flexibility, but also present possible concerns over security breaches or document legitimacy. A hybrid approach to audits can possibly help mitigate those risks, but these environments also are not free of risk. Auditors should stay alert to ensure their audits remain high quality. Processes and systems will need to remain fluid, as they will surely evolve.
IAASB issues new frequently asked questions for reporting going concern matters in the auditor’s report
The International Auditing and Assurance Standards Board (IAASB) issued a non-authoritative publication to address some of the common questions related to reporting going concern matters in the auditor’s report. The publication focuses on the use of and interrelationship of the Material Uncertainty Related to Going Concern and Key Audit Matters sections, and the Emphasis of Matter paragraphs, in an auditor’s report prepared in accordance with the International Standards on Auditing.
IFRS Foundation completes consolidation with Value Reporting Foundation
The IFRS Foundation announced the completion of the consolidation of the Value Reporting Foundation (VRF) into the IFRS Foundation. It follows the commitment made at COP26 to consolidate staff and resources of leading global sustainability disclosure initiatives to support the IFRS Foundation’s new International Sustainability Standards Board’s work to develop a comprehensive global baseline of sustainability disclosures for the capital markets. The VRF’s SASB Standards serve as a key starting point for the development of the IFRS Sustainability Disclosure Standards, while the Integrated Reporting Framework provides connectivity between financial statements and sustainability-related financial disclosures.
FRC publishes recommendations to improve digital security disclosure
The Financial Reporting Council (FRC) Lab published a report on digital security risk disclosure to help companies improve the disclosure of digital security strategies, risks, and governance. The FRC’s research showed that disclosures are not meeting investor needs effectively and companies need to improve to address digital security risk. Companies can improve disclosures by focusing on aspects of strategy, governance, risk, and events. The Lab report provides details about how to optimize disclosure for investors. It also includes practical examples of developing practice.
FRC publishes snapshots of current practice in auditor reporting
The FRC published research into the state of auditor reporting in the UK. A series of six infographic ‘snapshots’ provide an in-depth look at the length and readability of auditors’ reports, as well as how auditors communicate how the audit was performed, the risks they identified, and the responses to those risks. This research represents the first step in meeting the FRC’s undertaking to improve the usability and informativeness of auditor’s reports in its recent Position Paper on Restoring Trust in Audit and Corporate Governance. The six snapshots are:
- Snapshot 1: Understandability and usability of auditor reports
- Snapshot 2: Communicating judgements on materiality and the scope of group audits
- Snapshot 3: Key audit matters
- Snapshot 4: Key audit matters on climate change, Covid-19, alternative performance measures, and graduated findings
- Snapshot 5: Going concern
- Snapshot 6: Fraud and other irregularities
Better ESG data drives more impactful decision-making by companies
The FRC Lab published a report on ESG data production that is designed to help companies consider how to collect and use ESG data more effectively to support better decision-making. The report sets out the three key elements of ESG data production: motivation, method, and meaning. The report outlines some suggested positive actions to address the challenges of identifying and using the most relevant information as well as how Boards can optimize how ESG data is collected and applied.
CAQ Symposium 2022
The CAQ posted video of CAQ Symposium 2022, which was held on August 8 and brought together leading academic scholars, regulators, and top practitioners from the CAQ’s Governing Board Member firms. Hosted by Deloitte & Touche LLP, the “virtual” event featured a presentation that provided an overview of key macroeconomic trends that have impacted companies and their auditors. Following the presentation, the first panel discussed the implications of these issues for financial statement preparers and auditors. The second panel discussion covered the impact of climate-related risks on business strategy and corporate disclosures related to the SEC’s proposed rule released in March. Smaller breakout sessions allowed academics, regulators, and senior practice leaders to explore the topics raised by the panelists.
Pop-up conversation with Rep. Brad Sherman (D-Calif.) and Mark Baer of Crowe
The CAQ posted a video of a Punchbowl News pop-up conversation that the CAQ joined to discuss capital market regulation and maintaining trust in a changing economy. The pop-up conversation featured Rep. Brad Sherman (D-Calif.) and Mark Baer, CEO of Crowe. Following the conversation with Rep. Sherman, CAQ CEO Julie Bell Lindsay and Baer explored changes to the corporate reporting system as a result of the Sarbanes-Oxley Act. Lindsay acknowledged the continuous improvement of audit quality over the past 20 years. When discussing the role of cryptocurrency in auditing, Lindsay highlighted the CAQ’s first-ever Audit Partner Pulse Survey.
LinkedIn Live | Audit partner observations: The economy, corporate reporting and more
The CAQ posted the video of a LinkedIn Live discussion on the results of its inaugural Audit Partner Pulse survey. Hosted by the CAQ, the discussion explored some key themes from the survey, including ESG reporting, cybersecurity risks, and cryptocurrency. Speakers:
- Amanda Iacone, reporter, Bloomberg
- Scott Flynn, vice chair – Audit, KPMG
- Julie Bell Lindsay, CEO, CAQ
Missed something? Read up on past PPTA Newsletters.
The Center for Audit Quality is an autonomous, nonpartisan, nonprofit organization dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality public company audits; collaborating with other stakeholders to advance the discussion of critical issues; and advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions. Based in Washington, D.C., the CAQ is affiliated with the American Institute of CPAs.
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 Joseph Bailey, Manager, Professional Practice (firstname.lastname@example.org).