Public Policy and Technical Alert | July 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.

Statement on investor protection related to recent developments in China

SEC Chair Gary Gensler addressed recent guidance from the Chinese government over China-based companies raising capital offshore, including through associated offshore shell companies. “In a number of sectors in China, companies are not allowed to have foreign ownership and cannot directly list on exchanges outside of China. … A China-based operating company typically establishes an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders,” Gensler explained. “While the shell company has no equity ownership in the China-based operating company, for accounting purposes the shell company is able to consolidate the operating company into its financial statements. I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company.” Gensler has asked the SEC to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective.

Chair Gensler announces composition of policy team

The SEC announced the appointments of Corey Klemmer, Adam Large, Mika Morse, Sirimal Mukerjee, and Sai Rao to Chair Gary Gensler’s policy staff, led by the Policy Director Heather Slavkin Corzo. “Each of their respective portfolios is critical to the SEC’s mission. I look forward to working with these highly respected advisers to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation,” said Chair Gensler. The appointments are as follows:

• Corey Klemmer is corporation finance counsel;
• Adam Large and Sai Rao are trading and markets counsel;
• Mika Morse is climate counsel; and
• Sirimal Mukerjee is investment management counsel.

FASB issues standard to improve a lessor’s accounting for certain leases with variable lease payments

The FASB issued an Accounting Standards Update intended to improve an area of the leases guidance related to a lessor’s accounting for certain leases with variable lease payments. Specifically, a lessor is now required to classify and account for a lease with variable payments as an operating lease if (a) the lease would have been classified as a sales-type lease or a direct financing lease, and (b) the lessor would have otherwise recognized a day-one loss.

FRC revises UK quality management standards

The FRC issued revised quality management standards for an audit firm’s responsibilities to design, implement, and operate a system of quality management. These standards seek to introduce a new quality management approach focused on proactively identifying and responding to risks to quality. This new approach requires a firm to customize the design, implementation, and operation of its system of quality management based on the nature and circumstances of the firm, using an integrated approach that reflects upon the quality management system as a whole.

IASB decides to extend the comment period for Exposure Draft Disclosure Requirements in IFRS Standards A Pilot Approach

The IASB announced it is extending the comment period for the Exposure Draft “Disclosure Requirements in IFRS Standards—A Pilot Approach” to January 12, 2022. The IASB said the unusually long comment period is because of the unique nature of, and significant new thinking in, the proposals. The IASB is seeking input from all jurisdictions and all company sizes applying full IFRS Standards.

FRC is seeking views on amendments made to the Audit Enforcement Procedure

The FRC called for feedback and comment on proposed amendments to the Audit Enforcement Procedure. The FRC is especially interested in the views of statutory auditors and audit firms and other regulatory bodies, including professional associations.

FRC annual audit quality inspection results 2020/21

The FRC published its annual inspection and supervision results for 2020/21 covering the seven largest UK audit firms: BDO, Deloitte, EY, Grant Thornton, KPMG, Mazars, and PwC. The FRC reviewed 103 audits and assessed 71% to be of a good standard or requiring only limited improvement.

IAASB public consultation opens for proposed new standard for audits of financial statements of less complex entities

The IAASB published an exposure draft of its new, stand-alone standard for audits of financial statements of less complex entities. The new draft standard responds to demands to have high-quality requirements tailored for the needs of less complex entities. The release of the exposure draft is part of the IAASB’s broader effort to reduce complexity, improve understandability, and make International Standards on Auditing more scalable and proportionate to circumstances of audited entities.

IASB proposes reduced disclosure requirements for subsidiaries

The IASB proposed a new IFRS Standard that would permit eligible subsidiaries to apply IFRS Standards with a reduced set of disclosure requirements. The proposals seek to save subsidiaries time and money by:

• Eliminating the need to maintain an additional set of accounting records for reporting purposes if the subsidiary currently does not apply IFRS Standards in its own financial statements; and
• Reducing the disclosures required to comply with IFRS Standards.

Additional International Headlines:

• IFRS: Meet the New IASB Chair Andreas Barckow
• FRC outlines necessary action for effective ESG reporting
• IFIAR report: Internationally relevant developments in audit markets
• FRC publishes Annual Report and Accounts
• FRC publishes Future of Corporate Reporting Feedback Statement

BEIS Consultation on Restoring Trust in Audit and Corporate Governance

In this comment letter, the CAQ provides views to the UK Department for Business, Energy & Industrial Strategy’s (BEIS) consultation, Restoring trust in audit and corporate governance: Consultation on the government’s proposals. The CAQ discusses how the United States enactment of Sarbanes-Oxley Act of 2002 (SOX) strengthened how all of the key stakeholders in the US financial reporting ecosystem – companies, regulators, corporate directors, and the audit profession – must work together constructively and continuously to produce high quality financial reporting. The CAQ is supportive of the Consultations presented measures that would enhance or establish requirements for all stakeholders in the financial reporting ecosystem, and we encourage the government and regulatory bodies to not lose sight of this key aspect of restoring trust in audit and corporate governance. Read the full comment letter here.

PCAOB Proposed Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act

In this comment letter, the CAQ provides views to the PCAOB related to its Proposed Rule Governing Board Determinations Under the Holding Foreign Companies Accountable Act (HFCAA). The proposed rule provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The CAQ provides input regarding consideration of confidential information, providing notification to registered firms about Board determinations, and supports firms having a right to request a re-evaluation of the Board’s determination when warranted. Read the full comment letter here.

IFRS Foundation Exposure Draft Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards

In this comment letter, the CAQ  provides views to the International Financial Reporting Standards or “IFRS” Foundation, on the Proposed Targeted Amendments to the IFRS Foundation Constitution to Accommodate an International Sustainability Standards Board to Set IFRS Sustainability Standards.  Broadly, the CAQ is pleased to see the views reached by the Trustees on the establishment of an international sustainability standards board.  The comment letter provides details on our views of specific proposed amendments. Read the full comment letter here.

Questions and comments about the Public Policy & Technical Alert can be addressed to Matt Sickmiller, Senior Manager, Professional Practice (msickmiller@thecaq.org).

This newsletter is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages readers to refer to applicable rules, standards, guidance, and other resources in their entirety. All entities should carefully evaluate which requirements apply to their respective organizations.

About the Center for Audit Quality
​​​​The Center for Audit Quality (CAQ) is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high-quality performance by public company auditors; convenes and collaborates with other stakeholders to advance the discussion of critical issues that require action and intervention; and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs.