Public Policy and Technical Alert, March 2021
Wednesday, April 7, 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 Division of Examinations announces 2021 examination priorities
- SEC announces enforcement task force focused on climate and ESG issues
- SEC Acting Chair Allison Herren Lee requests public input on climate change disclosures
- SEC issues amendments, seeks public comment on Holding Foreign Companies Accountable Act
- SEC issues two statements on select topics pertaining to SPACs
- PCAOB approves formation of new Standards Advisory Group
- SEC accepts 2021 GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy
- IFRS Foundation Trustees announce strategic direction and further steps based on feedback to sustainability reporting consultation
- IESBA releases additional guidance on its proposed definition of a public interest entity
- IFIAR urges continued audit quality improvement efforts
- BEIS develops proposals to strengthen UK corporate governance, audit, and reporting
- IAASB issues support material intended to help auditors address risk of overreliance on technology
- IOSCO statement on going concern assessments and disclosures during the COVID-19 pandemic
- IFRS Foundation publishes IFRS Taxonomy 2021
- FRC approach to audit supervision
- IASB proposes a new approach aimed to improve communication in the notes in financial statements
- FRC announces new approach to publishing corporate reporting reviews
- IASB seeks comments to help shape its five-year plan
- IASB extends support for lessees accounting for COVID-19-related rent concessions
- IOSCO announces the establishment of a new Technical Expert Group under its Sustainable Finance Task Force
- The role of auditors in company-prepared ESG information: A deeper dive on assurance
- Guide to PCAOB inspections
SEC Division of Examinations announces 2021 examination priorities
The SEC’s Division of Examinations announced its 2021 examination priorities, including a greater focus on climate-related risks, conflicts of interest for brokers and investment advisers, and attendant risks relating to financial technology. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets.
SEC announces enforcement task force focused on climate and ESG issues
The SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force will develop initiatives to proactively identify sustainability and environmental, social, and governance (ESG) related misconduct and coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations. The initial focus will be to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The task force also will analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
SEC Acting Chair Allison Herren Lee requests public input on climate change disclosures
SEC Acting Chair Allison Herren Lee issued a statement welcoming public input from investors, registrants, and other market participants on climate change disclosure. “Since 2010, investor demand for, and company disclosure of information about, climate change risks, impacts, and opportunities has grown dramatically. Consequently, questions arise about whether climate change disclosures adequately inform investors about known material risks, uncertainties, impacts, and opportunities, and whether greater consistency could be achieved,” Herren Lee said. The statement also requests the SEC staff to evaluate disclosure rules with an eye toward facilitating the disclosure of consistent, comparable, and reliable information on climate change. 15 questions are included in the statement for consideration and public input is requested by June 13, 2021.
SEC issues amendments, seeks public comment on Holding Foreign Companies Accountable Act
The SEC adopted interim final amendments to implement congressionally-mandated submission and disclosure requirements of the Holding Foreign Companies Accountable Act. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report on Forms 10-K, 20-F, 40-F, or N-CSR with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the Public Company Accounting Oversight Board (PCAOB) has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant will have to comply with the interim final amendments, the SEC must implement a process for identifying such a registrant. Therefore, the SEC is seeking public comment on this identification process. The interim final amendments become effective 30 days after publication in the Federal Register and comments on the amendments are due by the same date.
SEC issues two statements on select topics pertaining to SPACs
The SEC issued two separate statements pertaining to Special Purpose Acquisition Companies (SPAC) on March 31, 2021. A statement issued by Acting Chief Accountant, Paul Munter, summarizes some key considerations around the risks and challenges for private companies contemplating SPAC transactions. These include: market and timing, financial reporting, internal controls, and corporate governance and audit committees. Additionally, the statement includes auditor considerations for auditors that are considering involvement in a SPAC transaction.
A separate statement issued by the SEC staff within the Division of Corporation Finance addresses certain accounting, financial reporting and governance issues that the SEC believes should be carefully considered before a private operating company undertakes a business combination with a SPAC. Specific topics within this statement include shell company restrictions, books and records requirements, internal control requirements, and initial listing standards of the national securities exchanges.
PCAOB approves formation of new Standards Advisory Group
The PCAOB approved the formation of a new advisory group in an effort to expand its stakeholder engagement and provide new opportunities for investors and other stakeholders to advise it. The unanimous vote to approve the charter of the Standards Advisory Group (SAG) created an 18-person expert body. Under the charter, representatives from the investor community will hold the most SAG seats (five), followed by audit professionals (four, who will be nominated by the CAQ), and three seats each for audit committee members or directors, financial reporting oversight personnel, academics and others with specialized knowledge. As established in its charter, the SAG will primarily conduct its business by carrying out specific tasks assigned by the PCAOB.
SEC accepts 2021 GAAP Financial Reporting Taxonomy and SEC Reporting Taxonomy
The FASB announced that the SEC has accepted the 2021 GAAP Financial Reporting Taxonomy and the 2021 SEC Reporting Taxonomy (collectively referred to as the “GAAP Taxonomy”). The 2021 GAAP Taxonomy contains updates for accounting standards, improvements for two SEC final rules, and other recommended improvements. The FASB also announced it has finalized the 2021 DQC Rules Taxonomy.
IFRS Foundation Trustees announce strategic direction and further steps based on feedback to sustainability reporting consultation
The International Financial Reporting Standards (IFRS) Foundation Trustees announced they will continue their work on the establishment of an international sustainability reporting standards board within the existing governance structure of the IFRS Foundation. Based on the feedback to the Consultation Paper on Sustainability Reporting, the IFRS Foundation Trustees shared the following views about the strategic direction of a new board:
- Investor focus for enterprise value: the new board would focus on information that is material to the decisions of investors, lenders and other creditors.
- Sustainability scope, prioritizing climate: the new board would initially focus its efforts on climate-related reporting, while also working towards meeting the information needs of investors on other ESG matters.
- Build on existing frameworks: the new board would build upon the well-established work of the Financial Stability Board’s Task Force on Climate related Financial Disclosures, as well as work by the alliance of leading standard-setters in sustainability reporting focused on enterprise value.
- Building blocks approach: by working with standard setters from key jurisdictions, standards issued by the new board would provide a globally consistent and comparable sustainability reporting baseline, while also providing flexibility for coordination on reporting requirements that capture wider sustainability impacts.
IESBA releases additional guidance on its proposed definition of a public interest entity
The International Ethics Standards Board for Accountants (IESBA) released a new staff publication providing additional context to its recently-proposed revisions to the definition of a public interest entity (PIE). The staff publication aims to help local regulators, national standard setters, or other relevant local bodies in considering and planning for the adoption of the revised PIE definition when finalized and issued by the IESBA.
IFIAR urges continued audit quality improvement efforts
The International Forum of Independent Audit Regulators (IFIAR) called for the continuation of audit quality improvement efforts. The IFIAR also released its ninth annual survey of inspection findings arising from its member regulators’ individual inspections of audit firms affiliated with the six largest global audit firm networks.
BEIS develops proposals to strengthen UK corporate governance, audit, and reporting
The UK Department for Business, Energy & Industrial Strategy (BEIS) launched a consultation “Restoring trust in audit and corporate governance.” The consultation aims to improve the UK’s audit, corporate reporting and corporate governance systems. The consultation also sets out proposals in response to Sir Donald Brydon’s Independent Review of the Quality and Effectiveness of Audit.
Comments are due by July 8, 2021.
IAASB issues support material intended to help auditors address risk of overreliance on technology
The Technology Working Group of the International Auditing and Assurance Standards Board (IAASB) released non-authoritative support material intended to help auditors address the risk of overreliance on technology, whether it arises from using automated tools and techniques or from using information produced by an entity’s systems.
IOSCO statement on going concern assessments and disclosures during the COVID-19 pandemic
The International Organization of Securities Commissions (IOSCO) reaffirmed its commitment to the development, consistent application, and enforcement of high-quality accounting standards, especially during times of uncertainty, like the COVID-19 pandemic. In a statement, the IOSCO discusses the COVID-19 pandemic’s implications for the preparation of annual financial statements as well as implications for the annual audit. IOSCO also reminds issuers, audit committees and/or those charged with governance, and external auditors of the important role each plays in providing investors with high-quality, reliable, timely, and transparent financial information, especially in times of heightened uncertainty.
IFRS Foundation publishes IFRS Taxonomy 2021
The IFRS Foundation published the IFRS Taxonomy 2021. The IFRS Taxonomy enables electronic reporting of financial information prepared in accordance with IFRS Standards. Preparers can use the IFRS Taxonomy to tag disclosures, in an effort to make them easily accessible to investors who prefer to receive financial information electronically. The IFRS Taxonomy 2021 is based on IFRS Standards as of January 1, 2021, including those issued but not yet effective.
FRC approach to audit supervision
The FRC published a new report, “Our Approach to Audit Supervision,” which outlines what firms can expect from the FRC in the course of their supervision of audit firms. The FRC approach is intended to be forward-looking – identifying and prioritizing what firms need to do to improve audit quality and enhance resilience and holding them accountable for delivering it.
IASB proposes a new approach aimed to improve communication in the notes in financial statements
The International Accounting Standards Board (IASB) called for public comments on a new approach to developing disclosure requirements in IFRS Standards and new disclosure requirements for the Standards on fair value measurement and employee benefits. These proposals seek to better enable companies, auditors, and others to make more effective materiality judgments and thus provide disclosures that are more useful to investors. The IASB is seeking stakeholder feedback by October 21, 2021 on whether the proposed new approach would help companies and others improve the usefulness of information disclosed.
FRC announces new approach to publishing corporate reporting reviews
The FRC published, for the first time, summaries of its corporate reporting reviews. Each year, the FRC conducts over 200 corporate reporting reviews to assess whether company reports and accounts comply with relevant accounting and reporting requirements. The increased transparency is aligned with a recommendation of Sir John Kingman’s Independent Review of the FRC that reviews should be made publicly available. Under current rules, summaries can only be published with the consent of individual companies, but the UK government is consulting on proposals to allow the FRC to publish summaries without the consent of companies.
IASB seeks comments to help shape its five-year plan
The IASB published a consultation document to seek views on what its priorities should be over the next five years. The IASB is asking for views on the strategic direction and balance of its activities, as well as views on which financial reporting issues it should prioritize and on the criteria for adding projects to its work plan.
IASB extends support for lessees accounting for COVID-19-related rent concessions
The IASB has announced the extension by one year of the application period of the practical expedient in IFRS 16, Leases in an effort to help lessees accounting for COVID-19-related rent concessions. The Board has extended the relief by one year to cover rent concessions that reduce only lease payments due on or before June 30, 2022. The amendment is effective for annual reporting periods beginning on or after April 1, 2021.
IOSCO announces the establishment of a new Technical Expert Group under its Sustainable Finance Task Force
IOSCO announced that it will contribute to the IFRS Foundation efforts to establish an international sustainability standards board. To support these efforts, IOSCO established a new internal Technical Expert Group (TEG) under its Sustainable Finance Task Force. The TEG will work closely with the IFRS Foundation’s working group on assessing refinements to the prototype climate-related disclosure standard and its content, including industry-specific metrics. The TEG will be tasked with reviewing and assessing its technical recommendations focused on enterprise value creation. IOSCO expects that the TEG will complete its initial assessment of the technical recommendations and refinements to the prototype climate-related disclosure standard by November 26, 2021.
The role of auditors in company-prepared ESG information: A deeper dive on assurance
In July 2020, the CAQ released a report, The Role of Auditors in Company-Prepared ESG Information: Present and Future which provided an overview of what ESG reporting is, how investors are using the information, and how public company auditors are well positioned to enhance the reliability of ESG information. This new publication builds on those concepts and provides more detail about the range of assurance services that can be provided to enhance confidence in ESG information, why assurance on ESG information might be needed, and questions that boards should consider when planning to obtain assurance on ESG information.
Guide to PCAOB inspections
The CAQ published a guide to the PCAOB’s inspection program. The guide addresses the following questions, among other considerations:
- What are the PCAOB’s inspection responsibilities?
- How does the PCAOB conduct inspections?
- What is the content of inspection reports? and
- How do audit firms approach the remediation of deficiencies identified in PCAOB inspections?
May 3-5, 2021
AICPA & CIMA Employee Benefit Plans Conference, Virtual
May 5-6, 2021
Baruch College 19th Annual Financial Reporting Conference, Virtual
June 3-4, 2021
SEC and Financial Reporting Institute Conference, Virtual
SEPTEMBER 22-24, 2021
CII Fall 2021 Conference, Chicago
AICPA and CIMA National Tax Conference, Washington, DC
DECEMBER 6-8, 2021
AICPA & CIMA Conference on Current SEC and PCAOB Developments, Washington, DC
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: firstname.lastname@example.org.