Public Policy and Technical Alert | November 2022

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.

SEC publishes FY22-26 Strategic Plan

The SEC released its Strategic Plan for fiscal years 2022 to 2026, outlining agency objectives to fight against fraud, maintain a robust and relevant regulatory framework, and sustain a skilled and diverse workforce to serve America’s investors and capital-raising entrepreneurs. The SEC’s new Strategic Plan establishes three primary goals:

• Protect the investing public against fraud, manipulation, and misconduct
• Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies
• Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives

SEC Final Rule, Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers

The SEC is adopting amendments to enhance the information mutual funds, exchange-traded funds, and certain other funds currently report about their proxy votes and to make that information easier to analyze. The Commission also is adopting rule and form amendments that would require an institutional investment manager subject to the Exchange Act to report on Form N-PX how it voted proxies relating to executive compensation matters. The reporting requirements for institutional investment managers complete implementation of those requirements added by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule is effective July 1, 2024.

PCAOB’s Standards and Emerging Issues Advisory Group (SEIAG) meeting

The PCAOB’s SEIAG met on November 2, 2022, and discussed standard setting updates, updates from the PCAOB’s Office of Economic and Risk Analysis, firm engagement and performance metrics, and fraud considerations. A replay of the meeting can be found here.

PCAOB approves 2023 budget, strategic plan to protect investors

The PCAOB approved its fiscal year 2023 budget and 2022-2026 strategic plan. The PCAOB’s strategic plan is built around four central goals to help the PCAOB fulfill its investor-protection mission:

• Modernizing standards;
• Enhancing inspections;
• Strengthening enforcement; and
• Improving organizational effectiveness.

The Board is also reimagining the PCAOB’s approach to stakeholder engagement and giving investors a seat at the table.

PCAOB proposes a new quality control standard

The PCAOB issued for public comment a proposed standard that the Board believes would, if adopted, lead registered public accounting firms to significantly improve their quality control (QC) systems. The Board requests public comment on the proposal by February 1, 2023. The proposed standard, if adopted, would replace the current QC standards in their entirety and would provide a framework for a firm’s QC system that is grounded in proactively identifying and managing risks to quality, with a feedback loop from ongoing monitoring and remediation designed to drive continuous improvement. Among other provisions, the proposal would foster a more structured approach where a firm would annually evaluate its QC system and report the results of its evaluation on new Form QC.

PCAOB launches Technology Innovation Alliance Working Group

The PCAOB announced the formation of the Technology Innovation Alliance (TIA) Working Group, a group of external professionals with expertise in emerging technologies, including such technologies used by financial statement preparers and auditors. The TIA Working Group will serve two primary functions:

• Advise the Board on the use of emerging technologies by auditors and preparers relevant to audits and their potential impact on audit quality; and
• Make recommendations to the Board regarding how the Board’s existing or future oversight programs might address the use of emerging technologies by auditors and preparers.

FASB seeks input on proposed new chapter of its Conceptual Framework: Recognition and derecognition

The FASB issued a proposed new chapter of its Conceptual Framework related to the recognition and derecognition of an item in financial statements. Stakeholders are encouraged to review and provide comment on the proposed chapter by February 21, 2023. The proposed chapter would become Chapter 5 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. The FASB seeks input on three proposed recognition criteria an item should meet to be recognized in financial statements, subject to the pervasive cost constraint and materiality considerations. Those proposed criteria are:

• Definitions—The item meets the definition of an element of financial statements.
• Measurability—The item is measurable and has a relevant measurement attribute.
• Faithful Representation—The item can be depicted and measured with faithful representation.

The Board also seeks input on whether derecognition should occur when an item no longer meets any one of the recognition criteria.

FASB seeks input on proposed improvements to leases guidance on related party arrangements between entities under common control

The FASB issued a proposed Accounting Standards Update (ASU) intended to improve accounting guidance for arrangements between entities under common control. During the FASB’s post-implementation review (PIR) of ASU No. 2016-02, Leases (Topic 842), stakeholders expressed concerns with applying Topic 842 to related party arrangements between entities under common control. The proposed ASU would change the accounting for leasehold improvements associated with leases for all entities (including public companies) under common control. Leasehold improvements associated with those leases would be amortized by the lessee over the economic life of the leasehold improvements as long as the lessee controls the use of the leased asset. The FASB is seeking comments on the proposed ASU by January 16, 2023.

Compilation of Agenda Decisions: Volume 7 published

The International Financial Reporting Standards Foundation’s (IFRS) seventh Compilation of Agenda Decisions brings together agenda decisions published by the IFRS Interpretations Committee from May 2022 to October 2022. The agenda decisions are organized by the IFRS Accounting Standards to which they relate. The agenda decisions in this compilation include:

• Special Purpose Acquisition Companies
• Lessor Forgiveness of Lease Payments
• Principal versus Agent: Software Reseller
• Transfer of Insurance Coverage under a Group of Annuity Contracts
• Multi-currency Groups of Insurance Contracts

ISSB at COP27: CDP to incorporate ISSB Climate-related Disclosures Standard into global environmental disclosure platform

CDP, the not-for-profit that runs the global environmental disclosure platform for corporations, and the IFRS Foundation announced that CDP will incorporate the ISSB IFRS S2 Climate-related Disclosures Standard into its global environmental disclosure platform. The standard, currently being finalized, will be incorporated into CDP’s existing questionnaires, which are issued to companies annually on behalf of 680 financial institutions with over $130 trillion in assets. CDP’s decision accelerates the early adoption of IFRS S2 disclosures, thereby providing investors with the consistency of climate-related information they need sooner, and reducing the reporting burden on entities through an alignment of requirements.

FRC launches consultation on audit committees standard

The Financial Reporting Council launched a consultation on its draft proposal for a minimum standard for audit committees. The purpose of the standard will be to increase performance across audit committees in the FTSE350, ensuring a consistent approach and supporting a well-functioning audit market. The FRC is now seeking the views of its stakeholders on the draft standard. Following the consultation, the plan is for the standard to be available to committees on a voluntary basis by the end of 2023, ahead of the planned legislation that will make the standard mandatory. The consultation will run until February 8.

IOSCO statement on financial reporting and disclosure during economic uncertainty

The Board of the International Organization of Securities Commissions (IOSCO) issued a public statement encouraging issuers, external auditors, as well as audit committees (or those charged with governance) to be particularly vigilant in times of economic uncertainty in their consideration of how risks and uncertainties that could affect or have affected an issuer’s operations, financial condition, cash flows, and prospects can be transparently communicated to investors. The statement also highlights IOSCO’s commitment to the consistent application and enforcement of high-quality reporting standards and disclosure regulations, which are of critical importance to the proper functioning of the capital markets, in line with its Principles of Securities Regulation.

FRC sets out principles for public interest test

The FRC published a set of principles that it will use to assess whether the public interest is best served by carrying out regulatory, supervisory, and enforcement work that is outside of its primary regulatory perimeter as it transitions to the Audit, Reporting, and Governance Authority (ARGA). Much of the scope of ARGA’s work is expected to be determined by the government’s new definition of a public interest entity; however, the government also recognized there will be exceptional circumstances where ARGA should take regulatory action in areas of public interest that are not within this regulatory focus. The principles form the basis of the public interest considerations ARGA will take into account when determining whether it would be appropriate to act.

IAASB issues guidance on how amendments made to IFRS Standard IAS 1 impact the ISAs

The International Auditing and Assurance Standards Board (IAASB) published new guidance to help users understand the impact on the International Standards on Auditing (ISAs) due to narrow-scope amendments made to International Accounting Standard (IAS) 1, Presentation of Financial Statements by the International Accounting Standards Board (IASB). Amendments to IAS 1 and the Impact on the ISAs: Disclosure of Material Accounting Policy Information, among other matters, provides users with guidance on how to address the effect of the amendments on a number of illustrative auditor reports throughout the ISAs that assume, as part of the fact pattern, that the financial statements are prepared by the management of the entity in accordance with IFRS.

IFRS Foundation proposes changes to the IFRS Accounting Taxonomy 2022 to improve quality of tagged data

The IFRS Foundation published Proposed Update 1 General Improvements and Common Practice, which amends the IFRS Accounting Taxonomy 2022. The proposed changes aim to improve the quality of tagged data and to make the IFRS Accounting Taxonomy easier to use. The proposed changes include:

• a change in the practice for deprecation of elements;
• new common practice elements for antidilutive instruments, other comprehensive income, property, plant and equipment including right-of use assets and for reconciliation of the denominator used in calculating basic and diluted earnings per share;
• deprecation of a duplicate element for right-of-use assets; and
• replacing of broad text block elements with abstract elements and amended labels of other text block elements to clarify their intended use.

The deadline for submitting comments is December 16, 2022.

IESBA releases comprehensive research on impacts of technology on ethics; reaffirms relevance, applicability, and need for #IESBACode in accounting profession

The International Ethics Standards Board for Accountants (IESBA) released the final IESBA Technology Working Group Phase 2 Report. The final report documents the impacts of disruptive and transformative technologies on the work of professional accountants, and provides extensive analysis and insights into the ethical dimension of those developments. The report also discusses the relevance and importance of the overarching principles and specific provisions in the International Code of Ethics for Professional Accountants (including International Independence Standards) in laying out the ethical guardrails for professional accountants as they face opportunities and challenges in their work as a result of rapid digitalization. The report summarizes the outcomes of fact-finding into the ethics implications of innovative technologies such as artificial intelligence, blockchain, and cloud computing.

FRC publishes what makes a good environment for auditor skepticism and challenge

The FRC published a new report setting out examples of good practice to improve auditor skepticism and challenge. The report summarizes what good looks like and provides examples of good practice from the FRC’s ongoing supervision work. The report will be of interest to audit firms, audit committee chairs, and those with an interest in audit quality. The FRC also published a report conducted by BritainThinks based on qualitative research to explore the drivers and barriers to auditors exercising professional skepticism and effective challenge.

IASB votes to retain impairment-only approach for goodwill accounting

At its November 2022 meeting, the IASB voted to retain the impairment-only approach to account for goodwill. This tentative decision culminates a thorough evaluation that began with the Post-implementation Review (PIR) of IFRS 3 Business Combinations in 2014. In September 2022, the IASB also voted to add disclosure requirements to IFRS 3 on information about the subsequent performance of an acquisition, in response to investors’ feedback on the PIR. The IASB will next consider whether to publish these proposals in an exposure draft. If so, the IASB will finalize details of its proposals to require better disclosure on the subsequent performance of acquisitions and explore potential improvements and simplifications to the impairment test before it publishes such an exposure draft.

IASB proposes accelerated narrow-scope amendments to Accounting Standard on income taxes

At its November 2022 meeting, the IASB decided to add to its work plan an accelerated project proposing narrow-scope amendments to IAS 12 Income Taxes. In December 2021, the Organization for Economic Co-operation and Development published its Pillar Two model rules. The IASB’s project responds to stakeholders’ concerns about the potential implications of the imminent implementation of these rules on the accounting for income taxes. In particular, the IASB has tentatively decided to introduce:

• a temporary exception from accounting for deferred taxes arising from the implementation of the rules; and
• targeted disclosures requirements for affected companies.

The IASB expects to publish an exposure draft in January 2023. The IASB aims to finalize any amendments, which would be effective immediately, in the second quarter of 2023.

Jumpstart your digital assets journey: A tool for audit committees

The CAQ posted a primer for audit committees on the emerging area of digital assets, from crypto assets to NFTs (non-fungible tokens). The publication will help:

• Set the stage for why and how companies may be engaging with digital assets
• Lay out questions audit committees may pose to management and their auditors regarding their digital assets
• Review risk and financial reporting considerations when it comes to digital assets

Audit Partner Pulse Survey, Fall 2022

The CAQ posted its 2022 Fall Audit Partner Pulse Survey, which asked audit partners at some of the country’s largest firms about what they are observing in the industries they audit in terms of economic health indicators, challenges and risks facing businesses within their sectors, and how those businesses are adjusting their strategies in the current environment. The CAQ observed notable shifts in audit partners’ perspectives that suggest U.S. businesses are responding to inflation and a possible recession by scaling back on certain growth strategies while increasing focus on cost savings, liquidity, and improving productivity.

2022 Audit Committee Transparency Barometer

The CAQ and Audit Analytics – an Ideagen solution released the 2022 Audit Committee Transparency Barometer. In its ninth year of analyzing disclosures of audit committee oversight in proxy statements, the CAQ continues to observe an overall uptick in key areas of disclosure, reflecting positive long-term disclosure trends. Going beyond the initial scope set out in 2014, the CAQ explores a bit more into the quality of disclosures with some additional questions, new in 2022. Two focus on digging deeper into how audit committees execute their oversight responsibilities. Two other new questions relate to disclosure of ESG oversight, similar to existing questions on cybersecurity expertise. The full report offers a summary table of disclosure rates, examples of effective disclosure, and insight into the benefits of audit committee disclosures.

Audit Committee: The Kitchen Sink of the Board

The CAQ released a report on how audit committees can manage their evolving responsibilities and improve proxy disclosures related to their oversight responsibilities. The report is based on interviews with audit committee members and chairs as well as members of the investor community and those charged with preparing proxy disclosures. The following areas have been identified as the greatest opportunities for enhanced audit committee disclosures:

• Clearly define the allocation of risk oversight for the overall board and the committees.
• Explain why the audit committee members, individually and as a whole, are appropriate for this specific company.
• Highlight continuing education.
• Describe how the audit committee addresses key risks.
• Discuss more than just external audit oversight.

​​​​Missed something? Read up on past PPTA Newsletters.

The Center for Audit Quality is a nonpartisan public policy organization serving as the voice of U.S. public company auditors and matters related to audits of public companies. The CAQ The CAQ promotes high quality performance by U.S. public company auditors; convenes capital market stakeholders to advance the discussion of critical issues affecting audit quality, U.S. public company reporting, and investor trust in the capital markets; and using independent research and analyses, champions policies and standards that bolster and support the effectiveness and responsiveness of U.S. public company auditors and audits to dynamic market conditions. Based in Washington, DC, 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 Public Policy & Technical Alert can be addressed to Joseph Bailey, Manager, Professional Practice (jbailey@thecaq.org).