PUBLIC POLICY AND TECHNICAL ALERT, DECEMBER 2019
Friday, January 3, 2020
As part of the Center for Audit Quality’s 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:
- PCAOB publishes Critical Audit Matters Spotlight
- PCAOB issues quality control concept release
- PCAOB publishes Conversations with Audit Committee Chairs
- PCAOB makes senior appointments
- SEC approves 2020 PCAOB budget
- SEC proposes new rules and amendments
- SEC appoints two deputy chief accountants
- SEC releases report on 38th Annual Small Business Forum
- SEC Proposes to Codify Certain Consultations and Modernize Auditor Independence Rules
- FASB issues a standard to improve accounting for income taxes
- Richard R. Jones appointed FASB Chair
- FAF Board appoints new Chair and members
- 2020 GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy released
- IASB proposes a new standard to bring greater transparency to ‘non-GAAP’ measures
- IAASB enhances and modernizes ISA 315
- Brydon publishes review of UK audit quality and effectiveness
- FRC moves to strengthen auditor independence and ban conflicts of interest
- FRC updates aid to Audit Committees in evaluating audit quality
- AICPA issues new standards
- FinREC seeks feedback on insurance entities working drafts
- AICPA issues guidance on accounting for digital assets
- AICPA targets technology and core skills with CPA exam practice analysis
- Anti-Fraud Collaboration webcast focuses on assessing an organization’s culture
- FEI publishes a guide to internal controls in business combinations
- COSO issues guidance on managing cyber risk in a digital age
- CAQ white paper highlights the role of auditors in company-prepared information
- CAQ Executive Director discusses state of profession and what lies ahead
- CAQ posts highlights of IPTF meeting with the SEC Staff
PCAOB publishes Critical Audit Matters Spotlight
The PCAOB published a Critical Audit Matters (CAM) Spotlight (Spotlight). In 2019, the PCAOB Board (Board) selected 12 audits of large accelerated filers with fiscal years ending on or after June 30, 2019 to review specifically how auditors of these filers implemented the CAM requirements.
The Spotlight focuses on observations from the Board’s inspections of the new requirements and from its outreach and data analysis activities. It also notes that PCAOB staff will conduct a preliminary analysis in 2020 to evaluate whether early evidence from implementation of CAM requirements is suggestive of significant costs or unintended consequences. The Board also will assess stakeholders’ experiences and the results of its analysis and determine whether further action may be necessary.
PCAOB issues quality control concept release
The PCAOB issued a Concept Release, Potential Approach to Revisions to PCAOB Quality Control Standards (Quality Control CR). The Quality Control CR solicits public comment to inform the Board on the approach and what changes it might propose in the future to strengthen the PCAOB’s requirements for audit firms’ quality control systems.
Information gathered through the PCAOB’s oversight, outreach, and research activities signals that future revisions to the PCAOB’s quality control standards should be built on an integrated risk-based framework. The Board is considering using the recently proposed IAASB’s analogous firm-level quality management standard, International Standard on Quality Management (ISQM) 1, as a starting point for a future PCAOB quality control standard.
The Quality Control CR explains that many firms that follow PCAOB standards also follow the IAASB standards (or standards based on IAASB’s standards), and therefore, the Board believes that it would not be practical to require firms to comply with fundamentally different quality control standards. The Quality Control CR also describes certain incremental or alternative requirements to ISQM 1 that may be appropriate for firms performing engagements under PCAOB standards.
The deadline for submitting comments is March 16, 2020.
PCAOB publishes Conversations with Audit Committee Chairs
The PCAOB published Conversations with Audit Committee Chairs: What We Heard & FAQs. In 2019, the Board had conversations with the audit committee chairs of almost all of the U.S. issuers whose audits were inspected and offered them the opportunity to speak with the inspection teams.
The conversations focused broadly on audit quality, with specific discussions around such topics as audit committee perspectives on the auditor, new auditing and accounting standards, and technology and innovation. Audit committee chairs provided informative and valuable feedback on these topics and expressed particular interest in learning more about the PCAOB’s inspections process.
PCAOB makes senior appointments
The PCAOB announced two senior appointments:
Patrick Bryan was named the Director of the Division of Enforcement and Investigations. In this role, Mr. Bryan will advance the organization’s investigations and litigation of violations of PCAOB rules and other applicable securities regulations.
Mr. Bryan currently serves as the Assistant General Counsel for Enforcement at the Board of Governors of the Federal Reserve System. Previously, he served as a Supervisory Assistant Chief Litigation Counsel in the Division of Enforcement at the SEC where he managed investigations and prosecutions of complex enforcement actions. He also spent more than ten years in private practice on complex commercial disputes including in the area of financial fraud.
Kenneth Lench was named the General Counsel. In this role, Mr. Lench will provide legal advice and counsel to the Board regarding all PCAOB operations and activities.
Mr. Lench is currently a partner in Kirkland & Ellis LLP’s Government, Regulatory, and Internal Investigations Practice Group where he focuses on securities law. Prior to that, he served for more than 23 years in several positions at the SEC. In his last role at the SEC he served as Chief of the Structured and New Products Unit of the Division of Enforcement.
SEC approves 2020 PCAOB budget
The SEC approved the PCAOB’s 2020 budget and the related annual accounting support fee.
The 2020 PCAOB budget totals $284.7 million, an increase of approximately 4.0 percent from its 2019 budget. The accounting support fee totals $270.2 million, approximately 2.8 percent more than the 2019 accounting support fee, of which $239.7 million will be assessed on public companies and $30.5 million will be assessed on broker-dealers.
SEC proposes new rules and amendments
Following a series of SEC actions, court proceedings and Congressional action, the SEC voted to propose rules that would require resource extraction issuers to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas, or minerals.
The SEC voted to propose amendments to the definition of accredited investor, one of the principal tests for who is eligible to participate in our private capital markets. The proposal seeks to update the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.
Comments should be received on or before 60 days after publication in the Federal Register.
SEC appoints two deputy chief accountants
The SEC announced the appointment of two deputy chief accountants:
Paul Munter was named Deputy Chief Accountant in the Office of the Chief Accountant. He will lead the office’s activities on international matters, which includes working closely with various international organizations including the International Organization of Securities Commissions (IOSCO), IASB, IAASB, among others.
Mr. Munter joins the SEC with professional experience in both academia and as a partner at KPMG, LLP. Mr. Munter retired from KPMG where he served as the lead technical partner for the U.S. firm’s international accounting. He currently joins the SEC from the University of Colorado Boulder, where he was a senior instructor of accounting.
John Vanosdall was named Deputy Chief Accountant in the Office of the Chief Accountant. In that role, he will lead the activities of the accounting group, which includes understanding investor and other perspectives on accounting matters, and consulting with public companies, auditors, and divisions and offices within the SEC on the application of accounting standards and financial disclosure requirements. He also will be involved in discharging the SEC’s oversight of the FASB.
He joins the SEC from PricewaterhouseCoopers LLP, where he was a partner in the firm’s mergers and acquisitions practice.
SEC releases report on 38th Annual Small Business Forum
The SEC released a report on the 38th Annual Government-Business Forum on Small Business Capital Formation (Forum). The report provides an executive summary of the Forum proceedings, the recommendations made by the 2019 Forum participants, and the SEC’s responses to the recommendations.
SEC Proposes to Codify Certain Consultations and Modernize Auditor Independence Rules
The SEC announced that it is proposing amendments to codify certain staff consultations and modernize certain aspects of its auditor independence framework. The proposed amendments would update select aspects of the nearly two-decade-old auditor independence rule set to more effectively structure the independence rules and analysis so that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time-consuming audit committee review of non-substantive matters.
Comments should be received on or before 60 days after publication in the Federal Register.
FASB issues a standard to improve accounting for income taxes
The FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 removes specific exceptions to the general principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP in four other areas.
Richard R. Jones appointed FASB chair
The Board of Trustees of the Financial Accounting Foundation (FAF) announced the appointment of Richard R. Jones as the next Chair of the FASB. Jones will succeed Russell G. Golden, and his appointment is effective July 1, 2020. He is expected to join the organization in early 2020 in order to enable a smooth, orderly leadership transition for the FASB.
Mr. Jones is chief accountant and partner at Ernst & Young LLP (EY), leading a large and diverse team of EY professional colleagues in the firm’s national office. Mr. Jones has spent his entire career at EY, joining in 1987 following his graduation with a BS in accounting from the State University of New York, Binghamton.
FAF Board appoints new Chair and members
The Board of Trustees of the FAF announced that it has elected Kathleen L. Casey as its next Chair. Ms. Casey’s three-year appointment begins January 1, 2020. She succeeds Charles H. Noski, whose term concluded at the end of 2019. Ms. Casey originally joined the FAF Board of Trustees on January 1, 2018.
Ms. Casey is a senior advisor at Patomak Global Partners in Washington, DC, a financial services consultancy that specializes in strategic advisory, compliance, enforcement, and litigation support services.
Prior to joining Patomak Global Partners, she had a distinguished 18-year public service career. Ms. Casey previously served a five-year appointment as a SEC commissioner, where she acted as the SEC’s principal representative in various international matters, including multilateral and bilateral regulatory dialogues, the G-20 Financial Stability Board, and IOSCO.
In addition, the FAF Board of Trustees announced the appointment of new Trustees Bruce Herring, Michael Rollings, Timothy Ryan, Lawrence Salva, and Shundrawn Thomas. All of these appointees’ terms begin January 1, 2020 and conclude December 31, 2024.
2020 GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy now available
The FAF announced the availability of the 2020 GAAP Financial Reporting Taxonomy (Taxonomy) and the 2020 SEC Reporting Taxonomy (SRT), along with the 2020 XBRL U.S. Data Quality Committee Rules Taxonomy (DQCRT).
The Taxonomy contains updates for the accounting standards and other recommended improvements. The SRT contains improvements to the dimensional elements whose underlying recognition and measurement are not specified by GAAP but are elements commonly used by GAAP filers. The DQCRT is a FASB taxonomy that includes in a derivative format XBRL U.S. DQC Rules published by the XBRL U.S. as validation checks for XBRL filings with the SEC. The purpose of the DQCRT is to improve exposure and access to and thereby compliance with the DQC Rules.
IASB proposes a new standard to bring greater transparency to ‘non-GAAP’ measures
The IASB proposed a new IFRS standard to replace International Accounting Standard (IAS) 1, Presentation of Financial Statements, and amend other IFRS standards to reflect these proposals. The proposals would require more comparable information in the statement of profit or loss and a more disciplined and transparent approach to the reporting of management-defined, non-GAAP, performance measures.
Under the proposed standard, companies would be required to:
- provide three new profit subtotals, including “operating profit;”
- disclose management performance measures – subtotals of income and expenses that are not specified in IFRS Standards – in a single note to the financial statements; and,
- provide better analysis of their operating expenses and to identify and explain in the notes any unusual income or expenses, using the IASB’s definition of “unusual.”
The deadline for submitting comments is June 30, 2020.
IAASB enhances and modernizes ISA 315
The IAASB issued International Standard on Auditing (ISA) 315 (Revised 2019), its revised standard for identifying and assessing risks of material misstatement.
In finalizing the changes, the IAASB focused on the understandability, complexity and length of the standard, and made enhancements and clarifications to encourage a more consistent and robust risk assessment, which forms the foundation of the auditor’s efforts to gather sufficient appropriate audit evidence. The revisions also modernize the standard to keep up with the evolving environment in which businesses operate, in particular in relation to technology, as well as a focus on why procedures are required.
Brydon publishes review of UK audit quality and effectiveness
Sir Donald Brydon published the report of his review (Brydon Review) on how the UK audit process and product could be developed to better serve the needs of users and the wider public interest.
The final report makes 64 recommendations, including the establishment of a new corporate auditing profession with a unifying purpose and set of principles. It also makes recommendations in relation to:
- the prevention and detection of material fraud;
- communication and transparency within the audit process and audit report;
- the role of shareholders and other stakeholders;
- reporting by companies on their approach to assurance and resilience; and,
- the effectiveness of companies’ internal controls over financial reporting.
The recommendations are aimed primarily at the audit of Public Interest Entities in accordance with the Brydon Review’s terms of reference.
FRC moves to strengthen auditor independence and ban conflicts of interest
The UK Financial Reporting Council (FRC) issued a revision to its Ethical Standard and revised Auditing Standards. The changes are intended to strengthen auditor independence and prevent conflicts of interest.
FRC updates aid to Audit Committees in evaluating audit quality
The FRC has issued an update of its Practice Aid to assist audit committees in evaluating audit quality in their assessment of the effectiveness of the external audit process.
The update takes account of developments since the first edition was issued in 2015, including revisions of the UK Corporate Governance Code, the requirement for all Public Interest Entities to conduct a tender at least every 10 years and rotate auditors after at least 20 years, and increasing focus generally on audit quality and the role of the audit committee. It also takes account of commentary from audit committees suggesting how the Practice Aid could be more practical in focus and more clearly presented.
AICPA issues new standards
The AICPA’s Auditing Standards Board (ASB) issued three new standards:
Statement on Auditing Standards (SAS) No. 138 and Statement on Standards for Attestation Engagements (SSAE) No. 20, Amendments to the Description of the Concept of Materiality, align the materiality concepts discussed in AICPA Professional Standards with the description of materiality used by the U.S. judicial system, PCAOB, SEC, and FASB.
SSAE No. 19, Agreed-Upon Procedures Engagements, provides flexibility to a practitioner performing an agreed-upon procedures engagement by:
- removing the requirement that the practitioner request an assertion from the responsible party;
- allowing procedures to be developed over the course of the engagement;
- allowing the practitioner to develop or assist in developing the procedures;
- removing the requirement that intended users take responsibility for the sufficiency of the procedures and instead requiring the engaging party to simply acknowledge the appropriateness of the procedures prior to the issuance of the practitioner’s report; and
- permitting the practitioner to issue a general-use report.
FinREC seeks feedback on insurance entities working drafts
The AICPA’s Financial Reporting Executive Committee (FinREC) is requesting feedback on three working drafts of accounting issues for insurance entities, related to the implementation of FASB ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts, and ASU 2016-13, Financial Instruments–Credit Losses.
The deadline for submitting comments is February 10, 2020.
AICPA issues guidance on accounting for digital assets
The AICPA issued a non-authoritative Practice Aid on accounting for and auditing digital assets. It is based on professional literature and experience from members of the AICPA’s Digital Assets Working Group and is specific to U.S. GAAP.
AICPA targets technology and core skills with CPA exam practice analysis
The AICPA published an Exposure Draft and Invitation to Comment following the completion of a months-long Uniform CPA Examination (CPA Exam) practice analysis. The project focused on the impact data analytics and technology have on the role of newly licensed CPAs and re-examined the core knowledge and skills essential to those entering the profession. The resulting Exposure Draft details major themes from the research along with proposed CPA Exam content additions, changes, and deletions.
The Invitation to Comment gives stakeholders an opportunity to provide additional input on related topics or potential CPA Exam changes that are longer-term proposals and require further consideration. Given the need for more research, there are no definitive plans or anticipated implementation timelines.
Anti-Fraud Collaboration webcast focuses on assessing an organization’s culture
This Anti-Fraud Collaboration webcast highlights leading practices that bring together qualitative and quantitative data that exist within an organization, coupled with key information that companies should collect and monitor to contribute to a robust culture assessment. The webcast provides insights into:
- defining culture;
- evaluating and assessing culture;
- determining actionable steps to implement that can strengthen a culture of ethics and compliance; and,
- understanding key oversight responsibilities of financial reporting supply chain members in assessing corporate culture.
FEI publishes a guide to internal controls in business combinations
Financial Executives International’s (FEI) Committee on Corporate Reporting published a new document, ICFR: Insights, Issues, and Practices that addresses internal control considerations for preparers’ in designing controls and developing documentation to operate an effective system of internal control at the time of a business combination and post-acquisition. The objective of these documents is to improve practice for preparers.
COSO Issues Guidance on Managing Cyber Risk in a Digital Age
Even as companies become more digital savvy, they continue to confront new and emerging data risks that pressure financial and reputational vulnerabilities. To help address these challenges, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), in collaboration with Deloitte Risk & Financial Advisory, is releasing new guidance, “Managing Cyber Risk in a Digital Age.”
Written to boards of directors, audit committee members, executive management, and cyber practitioners, the new guidance addresses how companies can apply COSO’s Enterprise Risk Management–Integrating with Strategy and Performance to protect against cyberattacks. The guidance provides insight into how organizations can leverage the five components and 20 principles of the ERM Framework to identify and manage cyber risks.
CAQ white paper highlights the role of auditors in company-prepared information
The pace of change in business is accelerating, and the volume of information available to investors and other stakeholders in the U.S. financial reporting ecosystem continues to grow. Investors and others are using both audited financial statements and—increasingly—unaudited company-prepared information to make decisions.
The Role of Auditors in Company-Prepared Information: Present and Future provides a foundational understanding of the current role of auditors in various types of company-prepared and publicly disclosed information. It also serves to assist audit committees and investors in understanding how auditors are positioned to help fill existing gaps in enhancing the reliability of decision-useful information.
CAQ Executive Director discusses state of profession and what lies ahead
In keynote remarks before the AICPA Conference on Current SEC and PCAOB Developments, CAQ Executive Director Julie Bell Lindsay highlighted the robust health of audit quality and the public company auditing profession.
Lindsay briefed the audience on key CAQ initiatives, including the organization’s current work to support the implementation of critical audit matters, to collaborate with partners in the fight against financial reporting fraud, and to attract top talent to public company auditing. She also focused on evolution in the markets and how public company auditors can expand their trust-building role to help investors, audit committees, and others cope with the growing amount of unaudited company-prepared information, among other key challenges.
CAQ posts highlights of IPTF meeting with the SEC Staff
The CAQ posted on its website highlights from the May 21, 2019 meeting of the International Practices Task Force (IPTF) with SEC staff.
IASB Board Meeting, London, UK
ICGN Conference, Seoul, Korea
CII Spring Conference, Washington, DC
PLI’s Corporate Governance – A Master Class 2020, New York, NY
AICPA Employee Benefit Plans Conference, Las Vegas, NV
CFA Institute Annual Conference, Atlanta, GA
ICGN Annual Conference, Toronto, Canada
FEI Corporate Financial Reporting Insights Conference, New York, NY
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. 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 PPTA can be addressed to: email@example.com.