Public Policy and Technical Alert | January 2021

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

• Acting Enforcement Director Marc P. Berger to depart the SEC, Melissa Hodgman named acting replacement
• Sagar Teotia to conclude tenure as SEC Chief Accountant, Paul Munter named acting replacement
• Shelley E. Parratt, Acting Director of the Division of Corporation Finance, to conclude SEC tenure
• Allison Herren Lee named Acting Chair of the SEC

PCAOB

• Board member J. Robert Brown, Jr. to leave the PCAOB

FASB

• FASB clarifies scope of recent reference rate reform guidance

International

• IFRS Foundation publishes educational material to support companies in applying going concern requirements
• IESBA underlines importance of objectivity for engagement quality reviewers and other appropriate reviewers through enhanced guidance
• FRC and IESBA jointly issue staff guidance to highlight the ethical and auditing implications arising from government-backed COVID-19 business support schemes
• FRC: Joint regulators statement for companies, auditors, and users of financial accounts
• IESBA proposes holistic approach to defining a public interest entity
• IASB proposes a new IFRS Standard to give investors a more complete picture of the financial performance of rate-regulated companies

AICPA

• AICPA promotes Sue Coffey, CPA, CGMA to chief executive officer of public accounting
• New non-authoritative AICPA guidance intends to provide clarity for practitioners performing third-party assessment engagements

CAQ Updates

• Discussion document: Monitoring inflation in certain countries, November 2020
• Mitigating the risk of common fraud schemes: Insights from SEC enforcement actions
• SEC Regulations Committee highlights – October 21, 2020
• CAQ year in review 2020
• Profession in focus: PCAOB Hot Topics

Other Developments

• Jean-Paul Servais appointed Co-Chair of the Monitoring Group

Upcoming Events

SEC

Acting Enforcement Director Marc P. Berger to depart the SEC, Melissa Hodgman named acting replacement

The SEC announced that Marc P. Berger, Acting Director of the Division of Enforcement, concluded his tenure at the end of January. The SEC also announced that Melissa Hodgman, formerly an associate director in the Division of Enforcement, has replaced Berger as acting director of the Division of Enforcement. Hodgman began working in the SEC’s Division of Enforcement in 2008 as a staff attorney and was promoted to associate director in 2016.

Sagar Teotia to conclude tenure as SEC Chief Accountant, Paul Munter named acting replacement

The SEC announced that Chief Accountant Sagar Teotia will leave the agency by the end of February. As chief accountant, Teotia is the principal advisor to the SEC on accounting and auditing matters. The SEC also announced Paul Munter will serve as the acting chief accountant upon Teotia’s departure. Munter currently serves as deputy chief accountant.

Shelley E. Parratt, Acting Director of the Division of Corporation Finance, to conclude SEC tenure

The SEC announced that Shelley E. Parratt, Acting Director of the SEC’s Division of Corporation Finance, is retiring in February after 35 years with the Commission. Parratt joined the Division of Corporation Finance in 1986, became its deputy director in 2003, and served as acting director three separate times.

Allison Herren Lee named Acting Chair of the SEC

The SEC announced that President Joseph R. Biden, Jr. has designated Allison Herren Lee as Acting Chair of the agency. Lee was sworn in as Commissioner on July 8, 2019, after unanimous confirmation by the Senate.

PCAOB

Board member J. Robert Brown, Jr. to leave the PCAOB

The PCAOB announced that J. Robert Brown, Jr. concluded his tenure on the board in January. Brown was sworn in on February 1, 2018, after his appointment by the SEC in December 2017. He served as the Chair of the Investor and Other Stakeholders Working Group of the International Forum of Independent Audit Regulators.

FASB

FASB clarifies scope of recent reference rate reform guidance

The FASB issued an Accounting Standards Update (ASU) that clarifies the scope of the FASB’s recent reference rate reform guidance. The ASU relates to Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting guidance that was issued by the FASB last March and intended to ease the potential accounting burden expected when global capital markets move away from the London Interbank Offered Rate. The amendments in the new ASU clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

International

IFRS Foundation publishes educational material to support companies in applying going concern requirements

The International Financial Reporting Standards (IFRS) Foundation published educational material to support companies in applying going concern requirements. The educational material highlights the interaction of other ‘overarching’ disclosure requirements in International Accounting Standards that interact with the specific going concern requirements.  The educational material is intended to support consistent application of IFRS Standards and does not change, or add to, existing requirements.

IESBA underlines importance of objectivity for engagement quality reviewers and other appropriate reviewers through enhanced guidance

The International Ethics Standards Board for Accountants (IESBA) released revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards). The revisions seek to address the objectivity of an engagement quality reviewer (EQR) and other appropriate reviewers. The revisions provide guidance that supports International Standards on Quality Management (ISQM) 2 in addressing the eligibility of an individual to serve in an EQR role, focusing on the critical attribute of objectivity. Among other matters, the guidance:

• Elaborates on the need to identify, evaluate and address threats to compliance with the fundamental principle of objectivity that might arise in the appointment of an individual as an EQR for a given engagement;
• Explicitly refers to and supports the requirement in ISQM 2 for a firm to establish, as a condition for eligibility, a cooling-off period of two years before an engagement partner can assume the EQR role on the same engagement; and
• Emphasizes that this cooling-off requirement in ISQM 2 serves the dual objective of supporting compliance with the fundamental principle of objectivity and the high quality of engagements.

The enhanced guidance will become effective December 2022.

FRC and IESBA jointly issue staff guidance to highlight the ethical and auditing implications arising from government-backed COVID-19 business support schemes

The IESBA and the Financial Reporting Council (FRC) jointly released a publication, Ethical and Auditing Implications Arising from Government-Backed COVID-19 Business Support Schemes. The document includes guidance for those who prepare related financial information and disclosures, as well as for those who independently audit or provide assurance services regarding these support schemes.

FRC: Joint regulators statement for companies, auditors, and users of financial accounts

The FRC and the Financial Conduct Authority published updated guidance for companies and auditors to ensure high-quality financial information continues to flow to users to support decision-making. The joint guidance encourages preparers and auditors to allow more time to publish their financial accounts, making use of available flexibilities. It also urges investors, lenders, and other users of financial statements to take into account the unique set of circumstances arising from COVID-19.

IESBA proposes holistic approach to defining a public interest entity

The IESBA released for public comment the Exposure Draft, Proposed Revisions to the Definitions of Listed Entity and Public Interest Entity in the Code. The proposed revisions broaden the definition of a Public Interest Entity (PIE) to include more categories of entities, given the level of public interest in their financial condition, for the purposes of additional independence requirements in an attempt to enhance confidence in their audits. Among other matters, the proposed revisions:

• Introduce an overarching objective for additional requirements to enhance confidence in the audits of financial statements of PIEs;
• Provide guidance on factors to consider when determining the level of public interest in an entity;
• Broaden the definition of PIE to additional categories of entities;
• Replace the term “listed entity” with the term “publicly traded entity” and redefine that PIE category;
• Introduce new requirements for firms to determine if additional entities should be treated as PIEs for independence purposes and to publicly disclose if an audit client was treated as a PIE;
• Recognize and encourage local regulators to refine PIE categories in regard to national conditions.

Comments are due by May 3, 2021.

IASB proposes new IFRS Standard to give investors a more complete picture of the financial performance of rate-regulated companies

The International Accounting Standards Board (IASB) has published proposals for a new accounting standard that would require companies subject to rate regulation to give investors more information about their financial performance. In some cases, the period when a company supplies goods or services differs from the period when the company can charge customers for those goods or services—and thus differs from the period when the company reports revenue in its income statement.

AICPA

AICPA promotes Sue Coffey, CPA, CGMA to chief executive officer of public accounting

The AICPA announced Sue Coffey, CPA, CGMA has been promoted to chief executive officer of public accounting. In her new role, Coffey is tasked with leading key strategic initiatives within the public accounting profession. Her role includes identifying and supporting the performance of emerging advisory and assurance services as well as evolving the CPA pipeline and the value of the CPA, among other tasks.

New non-authoritative AICPA guidance intends to provide clarity for practitioners performing third-party assessment engagements

The AICPA issued non-authoritative guidance in the form of Technical Questions and Answers (TQA) for CPA firms performing third-party assessment engagements. The TQAs outline the steps practitioners follow when conducting these engagements. The guidance clarifies when the practitioner is required to perform the assessment engagement in accordance with AICPA Statements on Standards for Attestation Engagements and reminds practitioners of the various independence requirements that apply when performing third-party assessment engagements.

CAQ Updates

Discussion document: Monitoring inflation in certain countries, November 2020

The CAQ published a discussion document for its framework for compiling inflation data to assist registrants in monitoring inflation statistics in connection with their determination of the inflationary status of countries in which they have operations. The CAQ’s International Practices Task Force compiled cumulative inflation data by country and then categorized the countries based on their cumulative inflation rates and the implementation guidance in Accounting Standards Codification 830, Foreign currency matters.

Mitigating the risk of common fraud schemes: Insights from SEC enforcement actions

The CAQ conducted a study focusing on 204 SEC enforcement actions related to financial statement frauds, from which it identified 140 fraud schemes. The objective of the CAQ’s study was to provide observations on higher risk areas that are susceptible to fraud and insights into what companies can do to identify and mitigate these types of fraud risks more effectively. The most common types of fraud included:

• Improper revenue recognition;
• Reserves manipulation;
• Inventory misstatement; and
• Loan impairment deferral.

SEC Regulations Committee highlights – October 21, 2020

The CAQ posted highlights from its SEC Regulations Committee’s virtual meeting with the SEC’s Division of Corporation Finance staff on October 21, 2020. Topics discussed included:

• Modernization of Regulation S-K Items 101, 103, and 105;
• Implementation questions regarding Final 3-10 amendments;
• Impact of COVID-19 and observations on disclosures;
• Implementation questions regarding Final 3-05 amendments;
• S-X Rule 3-05 financial statements when the acquired entity previously elected to use a risk-free discount rate to account for its leases under ASC Topic 842, Leases; and
• Determining the numerator for the income component of the income test in connection with the disposition of a business.

CAQ year in review 2020

The CAQ published a year in review document looking back at 2020. The year in review includes a message from CAQ Executive Director Julie Bell Lindsay, a look at the CAQ’s activities last year, and a look ahead at 2021.

Profession in focus: PCAOB Hot Topics

In this video, the CAQ’s Vice President of Professional Practice, Catherine Ide, sits down with PCAOB Board Member Rebekah Goshorn Jurata to discuss topics that are top of mind regarding the PCAOB for 2021.

Other Developments

Jean-Paul Servais appointed Co-Chair of the Monitoring Group

The Monitoring Group of the International Organization of Securities Commissions announced that Jean-Paul Servais will serve as its new co-chair. Servais’ term lasts for a period of two years. He has prior experience in senior leadership positions in the field of financial market regulation, corporate reporting, and audit. He is joining Sagar Teotia, the outgoing chief accountant of the SEC, as co-chair.

Upcoming Events

March 5, 2021

PLI’s Corporate Governance – A Master Class, Virtual

MARCH 8-10, 2021

CII Spring 2021 Conference, Virtual

MARCH 15-19, 2021

IAASB Board Meeting, Virtual

March 23-25, 2021

Nareit’s REITwise, Virtual

May 3-5, 2021

AICPA & CIMA Employee Benefit Plans Conference, Las Vegas, NV

OCTOBER 25-27, 2021

ICGN Annual Conference, Toronto, Canada

 

 

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 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: info@thecaq.org.