Public Policy and Technical Alert, July 2020
Friday, August 7, 2020
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:
- Credit ratings, procyclicality and related financial stability issues: Select observations
- SEC and FDIC adopt final rule on the orderly liquidation of covered broker-dealers under Title II of the Dodd-Frank Act
- SEC announces creation of the Event and Emerging Risk Examination Team in the Office of Compliance Inspections and Examinations and the appointment of Adam D. Storch as Associate Director
- Board member Brown’s speech at the CFA Institute’s Corporate Disclosure Policy Council and Capital Markets Policy Council
- The PCAOB posts “Conversations with audit committee chairs: COVID-19 and the audit”
- FASB issues proposal to delay long-duration insurance standard and ease early adoption provisions
- FASB proposes concepts for defining elements in a financial statement
- IAASB publishes COVID-19 related guidance on review engagements on interim financial information
- FRC: Audit firms implement ‘additional measures’ to enhance their evaluation of going concern assessments
- FRC principles for operational separation of audit practices
- FRC revises auditing standard ISA (UK) 315
- IOSCO: Monitoring Group publishes its recommendations to strengthen the international audit and ethics standard-setting system
- FRC: results of audit inspections
- IASB defers the effective date of amendments to IAS 1
- IASB proposes changes to the IFRS Taxonomy to reflect amendments to IFRS 17, IFRS 4, and IAS 16
- FRC publishes annual report
- FRC: High-quality disclosures needed to reflect impact of COVID-19
- FRC proposes amendments to UK accounting standards
- FRC announces key Executive Director appointments
- IAASB auditor reporting post-implementation review: Stakeholder survey
- FRC announces supervision division appointments
- FRC publishes its second Annual Enforcement Review
- APESB and IESBA Staff Collaborate on Ethics Guidance for Professional Accountants Navigating COVID-19 Circumstances
- AICPA issues updated standard on accounting estimates and disclosures for auditors navigating a complex financial reporting environment
- Updated AICPA digital assets practice aid examines client acceptance and continuance
- AICPA provides Congress with six recommendations for next phase of COVID-19 relief legislation
- AICPA’s Financial Reporting Executive Committee seeks feedback on insurance entities working draft: Targeted improvements to long-duration contracts
- New report reveals how auditors enhance the reliability of company-prepared ESG information
- CAQ COVID-19 Resources
Credit ratings, procyclicality and related financial stability issues: Select observations
The SEC’s COVID-19 Market Monitoring Group issued several initial observations concerning ratings actions, procyclicality, and financial stability issues. The group has been exploring whether credit assessments and credit rating agency downgrades may contribute to negative procyclicality in certain circumstances and have implications for financial stability.
SEC and FDIC adopt final rule on the orderly liquidation of covered broker-dealers under Title II of the Dodd-Frank Act
The SEC and the FDIC adopted a final rule required by the Dodd-Frank Act clarifying and implementing provisions relating to the orderly liquidation of certain brokers or dealers in the event the FDIC is appointed receiver under Title II of the Dodd-Frank Act. Among other things, the final rule clarifies how the relevant provisions of the Securities Investor Protection Act of 1970 would be incorporated into a Title II proceeding.
SEC announces creation of the Event and Emerging Risk Examination Team in the Office of Compliance Inspections and Examinations and the appointment of Adam D. Storch as Associate Director
The SEC announced the creation of the Event and Emerging Risks Examination Team (EERT) in the Office of Compliance Inspections and Examinations (OCIE). The EERT is tasked with proactively engaging with financial firms about emerging threats and current market events and quickly mobilizing to provide expertise and resources to the SEC’s regional offices when critical matters arise. The team will be led by Adam D. Storch, previously the Senior Adviser to the Director of OCIE.
Board member Brown’s speech at the CFA Institute’s Corporate Disclosure Policy Council and Capital Markets Policy Council
Board member J. Robert Brown delivered a speech to the CFA Institute’s Corporate Disclosure Policy Council and Capital Markets Policy Council about the PCAOB’s decision to become more transparent about its inspections. Brown discussed the new template for public inspection reports, which includes a section that discloses additional types of deficiencies uncovered during the inspection process and provides investors and the public with additional insight into the inspection process and audit quality.
The PCAOB posts “Conversations with audit committee chairs: COVID-19 and the audit”
The PCAOB asked audit committee chairs how they are thinking about the effect of COVID-19 on financial reporting and the audit as they perform their oversight duties. The ensuing report summarizes certain common themes mentioned by audit committee chairs related to the effects of COVID-19 through the first half of the year.
FASB issues proposal to delay long-duration insurance standard and ease early adoption provisions
The FASB issued a proposed Accounting Standards Update (ASU) to provide relief to insurance companies adversely affected by the COVID-19 pandemic by giving them an additional year to implement ASU No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
The comment period ends on August 24, 2020.
FASB proposes concepts for defining elements in a financial statement
The FASB issued for public comment a proposed new chapter of its Conceptual Framework. The proposed chapter defines 10 elements of financial statements to be applied in developing standards for public and private companies and not-for-profit organizations. They are assets, liabilities, equity (net assets), revenues, expenses, gains, losses, investments by owners, distributions to owners, and comprehensive income.
The comment period ends on November 13, 2020.
IAASB publishes COVID-19 related guidance on review engagements on interim financial information
The International Auditing and Assurance Standard Board (IAASB) released COVID-19 pandemic-related guidance on review engagements on interim financial information. The guidance highlights key areas of focus in the current environment when undertaking a review of interim financial information in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity.
FRC: Audit firms implement ‘additional measures’ to enhance their evaluation of going concern assessments
Audit firms have introduced a range of additional measures to enhance their evaluation of companies’ going concern assessments since the start of the COVID-19 emergency, according to a review initiated and undertaken by the Financial Reporting Council (FRC). The FRC’s review covered the going concern policies and procedures of the seven largest UK audit firms required in accordance with International Standard on Auditing (ISA) (UK) 570, Going Concern. The review found that the additional policies and procedures introduced were appropriate and reasonably consistent across the firms.
FRC principles for operational separation of audit practices
The FRC has announced its principles for operational separation of the audit practices of the Big Four firms. The objectives of operational separation are to ensure that audit practices are focused above all on delivery of high-quality audits in the public interest, and do not rely on persistent cross subsidy from the rest of the firm. The FRC has asked the Big 4 firms to agree to operational separation of their audit practices and to provide a transition timetable to complete implementation by June 30, 2024.
FRC Revises Auditing Standard ISA (UK) 315
The FRC issued a revision of its standard for the identification and assessment of risks of material misstatement in an audit of financial statements. The revised standard ISA (UK) 315, Identifying and Assessing the Risks of Material Misstatement, adopts the revisions made to the underlying international standard issued by the IAASB. The FRC also issued International Standard on Assurance Engagements (ISAE) (UK) 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. The standard adopts the corresponding ISAE issued by the IAASB but has been modified to require that assurance practitioners applying it for engagements that the FRC has designated as “public interest assurance engagements” comply with the FRC’s Ethical Standard.
IOSCO: Monitoring Group publishes its recommendations to strengthen the international audit and ethics standard-setting system
The Monitoring Group (MG) of the International Organization of Securities Commissions (IOSCO) published recommendations for strengthening the international audit and ethics standard-setting system. The MG is responsible for the overall governance of the international audit and ethics standard-setting process and the review of its effectiveness. The MG’s recommendations cover the following:
- Accountability, public interest oversight, and governance
- Purpose, structure, and process of standard-setting
FRC: results of audit inspections
The FRC on July 14 released its latest audit inspection results for the seven largest firms. The FRC’s Audit Quality Review team reviewed 88 audits across these firms and concluded that two-thirds of the audits were of a good standard or required limited improvement. The FRC listed a number of steps that it is taking, or intends to take, in the short to medium term to ensure that the audit firms take swift actions to respond robustly to concerns.
IASB defers the effective date of amendments to IAS 1
The International Accounting Standards Board (IASB) issued an amendment to defer by one year the effective date of “Classification of Liabilities as Current or Non-current,” which amends International Accounting Standard (IAS) 1: Presentation of Financial Statements. “Classification of Liabilities as Current or Non-current” was issued in January 2020, and is now effective for annual reporting periods beginning on or after January 1, 2023.
IASB proposes changes to the IFRS Taxonomy to reflect amendments to IFRS 17, IFRS 4, and IAS 16
The IASB published a proposed update to the International Financial Reporting Standards (IFRS) Taxonomy 2020 to reflect recent amendments to IFRS Standards. The proposed changes reflect amendments to:
- IFRS 17, Insurance Contracts and IFRS 4, Insurance Contracts, issued in June 2020
- IAS 16, Property, Plant, and Equipment, issued in May 2020
The comment period ends on September 14, 2020.
FRC publishes annual report
The FRC published its annual report. The report includes a review of the FRC’s governance and structure, with changes designed to streamline operations, clarify accountabilities, and improve the effectiveness and speed of decision making.
FRC: High-quality disclosures needed to reflect impact of COVID-19
The FRC completed its first thematic review of company reporting since the onset of the COVID-19 pandemic. The review found that although companies provided sufficient information to enable a user to understand the impact COVID-19 had on their performance, position, and future prospects, some, particularly interim reports, would have benefited from more extensive disclosure. The FRC listed six reminders for companies currently preparing their interim or annual financial statements.
FRC proposes amendments to UK accounting standards
The FRC issued two Exposure Drafts proposing amendments to UK and Ireland accounting standards. Both reflect topical issues, including clarifying the requirement to assess the going concern basis of accounting and requiring the disclosure of any related material uncertainties, as well as proposing explicit requirements for accounting for temporary rent concessions for operating leases occurring as a direct consequence of the COVID-19 pandemic.
The comment period for both Exposure Drafts ends on September 1, 2020.
FRC announces key Executive Director appointments
The FRC announced the appointment of Mark Babington as Executive Director, Regulatory Standards, and Alex Kuczynski as Executive Director, Corporate Services and General Counsel.
IAASB auditor reporting post-implementation review: Stakeholder survey
The IAASB invited interested stakeholders to complete an online survey sharing their experience with, and providing feedback relating to, the Auditor Reporting Standards that were issued in 2015. The Auditor Reporting Standards were written to enhance the communicative value and relevance of the auditor’s report. The IAASB is now seeking comment on whether the revised standards are achieving this goal.
The survey closes on October 23, 2020.
FRC announces supervision division appointments
The FRC announced three new senior appointments for its supervision division. Claire Lindridge has been appointed Director of Audit Market Supervision (AFMAS), Andrew Meek has been appointed Director of Audit Firm Supervision, and Anthony Barrett has been appointed Director of Audit Quality Review (AQR).
FRC publishes its second Annual Enforcement Review
The FRC published its second Annual Enforcement Review. The report highlights the FRC’s efforts to drive audit quality improvements through securing cultural change by those responsible as a key priority for the FRC. The report makes clear the FRC’s view that constructive engagement does not replace financial sanctions, which remain an important tool for driving improved behavior.
APESB and IESBA Staff Collaborate on Ethics Guidance for Professional Accountants Navigating COVID-19 Circumstances
The Staff of the Accounting Professional & Ethical Standards Board (APESB) and the International Ethics Standards Board for Accountants (IESBA) released a new publication, Applying the Code’s Conceptual Framework in COVID-19 Circumstances: Scenarios in Taxation and Valuation Services, providing guidance to professional accountants in applying the conceptual framework in the International Code of Ethics for Professional Accountants (including International Independence Standards) during certain circumstances brought on by the COVID-19 pandemic. The publication uses four hypothetical scenarios covering services or activities relating to taxation and valuation services. Two scenarios include guidance for professional accountants in public practice, and two scenarios are focused on professional accountants in business.
AICPA issues updated standard on accounting estimates and disclosures for auditors navigating a complex financial reporting environment
The Auditing Standards Board of the AICPA issued Statement on Auditing Standards (SAS) No. 143, Auditing Accounting Estimates and Related Disclosures. The new SAS supersedes SAS No. 122 Section 540 and amends various other AU-C sections in AICPA Professional Standards. SAS No. 143 is effective for audits of financial statements for periods ending on or after December 15, 2023.
Updated AICPA digital assets practice aid examines client acceptance and continuance
The AICPA updated its practice aid “Accounting for and Auditing of Digital Assets” to include nonauthoritative guidance on how to audit digital assets. Digital assets are defined broadly as digital records, made using cryptography for verification and security purposes, on a distributed ledger. The practice aid provides auditors with information to consider when accepting or continuing audit engagements that involve digital assets.
AICPA provides Congress with six recommendations for next phase of COVID-19 relief legislation
The AICPA shared six policy solutions for the next phase of federal COVID-19 relief legislation. The recommendations are focused on small business’ and the American workforce’s urgent need for fast, simple solutions that drive economic recovery. They were shared with Congressional leadership in a letter.
AICPA’s Financial Reporting Executive Committee seeks feedback on Insurance Entities working draft: Targeted improvements to long-duration contracts
The AICPA’s Financial Reporting Executive Committee issued a working draft of an accounting issue for Insurance Entities and is requesting feedback. The draft is related to the implementation of FASB ASU No. 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. The working draft discusses considerations for application of FASB ASU 2018-12 to all types of ceded reinsurance arrangements of traditional and limited payment long-duration insurance contracts.
The comment period ends on September 25, 2020.
New report reveals how auditors enhance the reliability of company-prepared ESG information
The CAQ issued a new report, “The Role of Auditors in Company-Prepared ESG Information: Present and Future,” outlining how investors are using ESG information and the evolving, more prominent role of auditors in advancing the reliability, comparability, and relevance of this reporting. The report examines the type of information companies often capture and the myriad of reporting standards and frameworks for presenting ESG information and highlights current examples of audit firms assuring company-prepared ESG information.
CAQ COVID-19 resources
In July, the CAQ published the following COVID-19 specific resources:
- Auditor reporting: COVID-19 considerations
This resource provides a high-level overview of the auditor reporting requirements under PCAOB auditing standards and how COVID-19 could impact the different types of audit reports.
- Profession in Focus: Going concern and COVID-19
In this video, the CAQ’s Professional Practice Fellow, Yuri Zwick, sat down with Jackie Daylor, KPMG National Managing Partner of Audit Quality and Professional Practice, and Rich Davisson, RSM Assurance Partner and Director, to discuss going concern considerations in the COVID-19 environment and share related insights from the calendar Q1 2020 reporting cycle.
- Profession in Focus: Non-GAAP and COVID-19
In this video, the CAQ’s Dennis McGowan, Senior Director of Professional Practice, sat down with Todd Castagno, Executive Director, Research at Morgan Stanley and Steven Jacobs, Partner, Americas Director, SEC Regulatory Matters and Capital Markets at EY to discuss non-GAAP considerations in the COVID-19 environment and to share related insights as companies and investors prepare for the Q2 2020 reporting cycle.
- Understanding cybersecurity and the external audit in the COVID-19 environment
This resource provides a high-level overview of the impact of COVID-19 on cybersecurity with respect to financial reporting, including the financial statement and internal control over financial reporting audits.
AAA Annual Meeting, Virtual
IAASB Board Meeting, Virtual
The SEC Speaks in 2020, Virtual
October 12 – November 12
NACD Summit 2020, Virtual
SIFMA Annual Meeting, Virtual
ICGN Global Virtual Summit 2020, Virtual
45th IOSCO Annual Meeting, Dubai, UAE
IAASB Board Meeting, Madrid, Spain
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.