Public Policy and Technical Alert, November 2020
Monday, December 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:
- Statement on third meeting with audit firm representatives regarding audit quality in emerging markets and recent developments
- SEC Division of Trading and Markets posts updates to frequently asked questions concerning the COVID-19 pandemic and the broker-dealer financial responsibility rules
- SEC Division of Corporate Finance provides disclosure considerations for China-based issuers
- SEC adopts amendments to modernize and adjust management’s discussion and analysis and other financial disclosures
- SEC adopts rules to facilitate electronic submission of documents to the agency
- SEC Chairman Jay Clayton confirms plans to conclude tenure at year end
- SEC Division of Corporate Finance updates CD&Is
- SEC posts transitional FAQs regarding amended Regulation S-K Items 101, 103, and 105
- SEC Division of Enforcement publishes annual report for fiscal year 2020
- SEC harmonizes and improves “Patchwork” exempt offering framework
- PCAOB posts resource for audit committees regarding new requirements related to estimates and specialists
- PCAOB posts spotlight on the PCAOB’s use of economic analysis and stakeholder input in standard setting
- PCAOB approves 2021 budget, reaffirms strategic direction
- PCAOB adopts amendments to align independence requirements with SEC rules
- PCAOB: Megan Zietsman sworn in as a PCAOB Board member
- FASB issues standard that delays long-duration insurance guidance and updates early adoption provisions
- Financial Accounting Foundation trustees appoint Frederick L. Cannon and reappoint Christine A. Botosan to the FASB
- FAF names five new members to the Board of Trustees
- IAASB communique details plans to address complexity, understandability, scalability, and proportionality
- FRC statement on non-financial reporting frameworks
- IFRS: Andreas Barckow appointed as IASB chair from July 2021
- FRC announces company reporting expectations for 2020/2021
- Key takeaways from the IAASB’s roundtable series on fraud and going concern
- IAASB: Deadline extended for the IAASB’s discussion paper on fraud and going concern
- FRC: Preparation of cash flow statements needs to improve
- IFRS: IASB begins post-implementation review of classification and measurement requirements in IFRS 9
- IESBA releases new role and mindset fact sheet
- IAASB issues new support for assessing risks of material misstatement when using automated tools and techniques
- IFRS publishes educational material: The effects of climate-related matters on financial statements prepared applying IFRS Standards
- IOSCO annual meeting addresses the impact of COVID-19 and other critical matters on securities markets
- FRC: Audit firms enhance going concern assessments
- IASB proposes amendment to its leases standard to improve accounting for sale and leaseback transactions
- Fraud and emerging tech: Cybercrime on the rise during COVID-19
- Anti-fraud in action: The fraud risk landscape of COVID-19
- RAB request for proposals for 2021:
- Topics of interest
- Academic research in auditing
- Profession in focus: Auditor risk assessment, scoping, and COVID-19
- Perspectives on management review controls: Challenges and solutions
Statement on third meeting with audit firm representatives regarding audit quality in emerging markets and recent developments
The PCAOB continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. This limitation on inspections also includes PCAOB access to audit work and practices of Hong Kong-based audit firms, to the extent their audit clients have operations in mainland China. SEC Chairman Jay Clayton, SEC Chief Accountant Sagar Teotia, and PCAOB Chairman Bill Duhnke issued a recent public statement on the matter.
SEC Division of Trading and Markets posts updates to frequently asked questions concerning the COVID-19 pandemic and the broker-dealer financial responsibility rules
The SEC posted responses to frequently asked questions about certain provisions of the broker-dealer financial responsibility rules during the COVID-19 pandemic.
SEC Division of Corporate Finance provides disclosure considerations for China-based Issuers
The SEC Division of Corporate Finance has provided guidance on their views regarding certain disclosure considerations for companies based in or with the majority of their operations in the People’s Republic of China (“PRC” or “China”). China-based Issuers that access the U.S. public capital markets generally have the same disclosure obligations and legal responsibilities as other non-U.S. issuers; however, restrictions put in place by the Chinese government may materially limit the SEC’s ability to promote and enforce high-quality disclosure standards for China-based Issuers. As a result, the SEC believes that there is an increased risk that disclosures for China-based Issuers may be incomplete or misleading. The guidance highlights disclosure considerations that these Issuers should consider as they seek to fulfill their disclosure obligations under the federal securities laws.
SEC adopts amendments to modernize and adjust management’s discussion and analysis and other financial disclosures
The SEC announced that it has voted to adopt amendments designed to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. The amendments are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants. The changes include eliminating Item 301 (Selected Financial Data) and updating Items 302(a) (Supplementary Financial Information) and Item 303 (MD&A). In addition, the SEC adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the Commission’s rules and forms.
SEC adopts rules to facilitate electronic submission of documents to the agency
The SEC voted to adopt rules and rule amendments that will provide additional flexibility in connection with documents filed with the Commission by permitting the use of electronic signatures in authentication documents, and facilitate electronic service and filing in the Commission’s administrative proceedings.
- In the first action, the Commission adopted rule amendments to permit the use of electronic signatures when executing authentication documents in connection with many documents filed with the Commission.
- In the second action, the Commission adopted rule amendments to require electronic filing and service of documents in administrative proceedings. These rule amendments also require redaction of sensitive personal information from many of these documents before filing with the Commission.
These amendments will become effective 30 days after publication of the adopting release in the Federal Register. However, compliance will not be required until April 12, 2021, and there will be an initial 90-day phase-in period following the compliance date.
SEC Chairman Jay Clayton confirms plans to conclude tenure at year end
Jay Clayton, Chairman of the SEC, confirmed that after serving for more than three and a half years, he will conclude his tenure at the end of this year. He was sworn in on May 4, 2017.
SEC Division of Corporate Finance updates CD&Is
The SEC’s Division of Corporate Finance updated the following Compliance and Disclosure Interpretations (CD&Is):
- Securities Act Forms
- Question 139.13
- Questions 139.15-139.20 were withdrawn
SEC posts transitional FAQs regarding amended Regulation S-K Items 101, 103, and 105
The SEC posted answers to frequently asked questions about the disclosure requirements and related rules adopted in the Modernization of Regulation S-K Items 101, 103, and 105. The questions addressed in the transitional FAQs are as follows:
- A registrant has a Registration Statement on Form S-3 that became effective before November 9, 2020. If the registrant files a prospectus supplement to the Form S-3 on or after November 9, 2020, must the prospectus supplement comply with the new rules?
- Does new Item 101 require registrants to disclose information in their Report on Form 10-K for more than the fiscal year covered by the Report?
- Must a registrant always provide a full discussion of the general development of its business pursuant to new Item 101(a) (or new Item 101(h) for a smaller reporting company) in an annual report or registration statement that requires Item 101 disclosure?
SEC Division of Enforcement publishes annual report for fiscal year 2020
The SEC’s Division of Enforcement issued its annual report for fiscal year 2020. This year’s report discusses how the Division took affirmative steps to prevent potential fraud related to the COVID-19 pandemic and brought actions against wrongdoers who attempted to capitalize on it, while at the same time continuing to focus on the multitude of existing and new non-COVID-related enforcement issues arising in the normal course. The report also describes strategic changes the Division implemented to improve its operations in several key areas, including by implementing a number of efficiencies in the whistleblower program and increasing the pace of investigations. Additionally, as in prior years, the report highlights the Division’s commitment to core principles such as protection of retail investors, focus on individual accountability, and imposition of remedies that most effectively further enforcement goals.
SEC harmonizes and improves “Patchwork” exempt offering framework
The SEC voted to amend its rules in order to harmonize, simplify, and improve the multilayer and overly complex exempt offering framework. These amendments intend to promote capital formation and expand investment opportunities while preserving or improving important investor protections and are the next step in the Commission’s efforts to improve the exempt offering framework for the benefit of investors, emerging companies, and more seasoned issuers. The amendments follow the Commission’s June 2019 concept release and March 2020 proposing release on the harmonization of offering exemptions and benefit from extensive public engagement.
PCAOB posts resource for audit committees regarding new requirements related to estimates and specialists
The PCAOB posted a resource for audit committees relating to its new requirements on auditing accounting estimates and using the work of specialists. The resource aims to provide audit committees with key takeaways about the new requirements and poses some questions audit committees may consider asking their auditors. The key takeaways highlighted in the resource are as follows:
- The effects of the new requirements will not be uniform across all audits;
- The extent of the effects of the new requirements will depend on the nature and extent of accounting estimates included in the company’s financial statements, and also on whether the company uses a specialist;
- The new standard and amendments do not change the requirements for the auditor’s communications with audit committees, including those communications related to critical accounting estimates; and
- Auditors are applying these new requirements in extraordinary times and in situations that continue to evolve due to the COVID-19 pandemic.
PCAOB posts spotlight on the PCAOB’s use of economic analysis and stakeholder input in standard setting
The PCAOB posted a spotlight document outlining how the PCAOB conducts economic analysis and gathers stakeholder input before and after their standards take effect. The spotlight document also includes a mini case study on how the PCAOB has used, and intends to continue to use, economic analysis and stakeholder input related to the requirement for auditors to determine and communicate critical audit matters in the auditor’s report.
PCAOB approves 2021 budget, reaffirms strategic direction
The PCAOB approved its fiscal year 2021 budget and its five-year strategic plan during an open meeting. The 2021 budget includes investments in personnel, processes, and technology and is subject to approval by the SEC. The PCAOB also reaffirmed that the same key factors, goals and objectives identified in their prior year strategic plan remain appropriate.
PCAOB adopts amendments to align independence requirements with SEC rules
The PCAOB adopted amendments to its independence standards to align its independence requirements with the SEC’s recent revisions to their auditor independence rules. The amendments to the PCAOB’s independence standards will be effective subject to SEC review.
PCAOB: Megan Zietsman sworn in as a PCAOB Board member
The PCAOB announced that Megan Zietsman was sworn in as a PCAOB Board member. Zietsman was previously the PCAOB’s chief auditor and director of professional standards. Prior to joining the PCAOB in 2019, Zietsman was a Partner in Deloitte & Touche LLP’s professional practice network in the U.S., where she was responsible for leading activities relating to audit standard-setting, the global implementation of new and revised auditing standards and rules, and talent-related processes and initiatives.
FASB issues standard that delays long-duration insurance guidance and updates early adoption provisions
The FASB issued an Accounting Standards Update (ASU) intended to help 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 (LDTI). For insurers that do not need the extra time, the ASU aims to make it easier and more cost-effective to maintain their current timelines and early adopt.
Financial Accounting Foundation trustees appoint Frederick L. Cannon and reappoint Christine A. Botosan to the FASB
The Board of Trustees of the Financial Accounting Foundation (FAF) announced the appointment of Frederick L. Cannon and the reappointment of Christine A. Botosan to the FASB. Cannon currently serves as the Director of Research and Chief Equity Strategist for Keefe, Bruyette & Woods, Inc., a subsidiary of Stifel Financial. Cannon’s term is effective July 1, 2021 and ends June 30, 2026. Botosan was first appointed to the FASB on July 1, 2016, and her new term will conclude on June 30, 2026.
FAF names five new members to the Board of Trustees
The FAF Board of Trustees announced the appointment of new Trustees Timothy L. Christen, Lynnette Kelly, Richard N. Reisig, Sarah E. Smith, and Robin L. Washington. All appointees’ terms will begin January 1, 2021 and conclude on December 31, 2025.
IAASB communique details plans to address complexity, understandability, scalability, and proportionality
The International Auditing and Assurance Standards Board (IAASB) published a communique detailing its next steps to address complexity, understandability, scalability, and proportionality, including in the audits of financial statements of less complex entities. The communique details the IAASB’s efforts to balance the needs of all its stakeholders by developing a separate standard focused on less complex entities while simultaneously addressing complexity, understandability, scalability, and proportionality in the International Standards on Auditing more broadly.
FRC statement on non-financial reporting frameworks
The Financial Reporting Council (FRC) published a statement on non-financial reporting standards. The FRC expressed its support for global standards for non-financial reporting but cautioned that reaching international agreement on any new standard setter will take some time. The statement highlights the FRC’s 2020 review of climate-related considerations in corporate reporting and auditing and their finding that they believe boards and companies, auditors, professional associations, regulators and standard-setters need to do more. The FRC also encourages UK public interest entities voluntarily to report against the Task Force on Climate-related Financial Disclosures’ 11 recommended disclosures and, with reference to their sector, using the Sustainability Accounting Standards Board metrics. Further, the FRC encourages companies to report on these areas within their next reporting cycle, where possible, and consider disclosure in the context of the existing strategic reporting framework in the UK.
IFRS: Andreas Barckow appointed as IASB chair from July 2021
The Trustees of the International Financial Reporting Standards (IFRS) Foundation announced the appointment of Andreas Barckow as chair of the International Accounting Standards Board (IASB), effective July 2021. He will succeed Hans Hoogervorst, who completes his second five-year term in June 2021. Since 2015, Barckow has served as President of the Accounting Standards Committee of Germany (Deutsches Rechnungslegungs Standards Committee e.V.).
FRC announces company reporting expectations for 2020/2021
The FRC published its annual end-of-year letter to CEOs, CFOs, and Audit Committee Chairs setting out its reporting expectations for preparers of reports and accounts for the year ahead. The letter covers what disclosures the FRC believes should be made to understand the impact of particular events on the company’s position and financial performance, as well as any judgements involving significant estimation uncertainty. The FRC also outlined its expectations related to disclosures on the impact of the COVID-19 crisis, the United Kingdom’s exit from the European Union, and climate change.
Key takeaways from the IAASB’s roundtable series on fraud and going concern
The IAASB released a key takeaways publication following three recent virtual roundtables with experts and leaders exploring issues and challenges related to fraud and going concern. These roundtables focused on:
- The impact of technology advancements on fraud perpetration and detection;
- The “expectation gap”, or differences between public perceptions and the auditor’s responsibilities for fraud and going concern; and
- Fraud and going concern in audits of less complex entities.
The full roundtable recordings, including individual breakout sessions, are available on the IAASB’s YouTube channel.
IAASB: Deadline extended for the IAASB’s discussion paper on fraud and going concern
The IAASB extended the deadline for consultation on its discussion paper, “Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences Between Public Perceptions About the Role of the Auditor and the Auditor’s Responsibilities in a Financial Statement Audit.” The deadline is now February 1, 2021. The discussion paper is aimed at gathering perspectives from a broad range of stakeholders across the financial reporting ecosystem about the role of the auditor in relation to fraud and going concern in an audit of financial statements. Stakeholders are being asked for their perspectives on whether the auditing standards related to fraud and going concern need to be updated to reflect the rapidly evolving external reporting landscape, and, if so, in what areas.
FRC: Preparation of cash flow statements needs to improve
The FRC published a review of corporate reporting in relation to International Accounting Standard 7, “Cash flow statement,” and the liquidity disclosure requirements in IFRS 7, “Financial Instruments: Disclosures.” The review outlines that the FRC continues to identify errors in cash flow statements and examines many of the issues faced in their preparation and provides insights into how the FRC believes that the quality of cash flow statements can be improved.
IFRS: IASB begins post-implementation review of classification and measurement requirements in IFRS 9
The IASB started its post-implementation review of the classification and measurement requirements in IFRS 9, “Financial Instruments.” The post-implementation review of IFRS 9 is split into phases. The review of classification and measurement requirements is first and will be followed by a review of impairment and hedge accounting requirements in the future.
IESBA releases new role and mindset fact sheet
The International Ethics Standards Board for Accountants (IESBA) released a new fact sheet providing an overview of the Board’s recently released revisions to the International Code of Ethics for Professional Accountants to better promote the role and mindset expected of all professional accountants.
IAASB issues new support for assessing risks of material misstatement when using automated tools and techniques
The IAASB’s Technology Working Group released a new non-authoritative frequently asked questions publication on using automated tools and techniques in identifying and assessing risks of material misstatements in accordance with ISA 315, Identifying and Assessing Risks of Material Misstatement. The publication addresses considerations regarding the use of machine learning or artificial intelligence when performing risk assessment procedures. It aims to assist auditors in understanding the types of automated tools and techniques that can be used, and how they can be used, in performing risk assessment procedures.
IFRS publishes educational material: The effects of climate-related matters on financial statements prepared applying IFRS Standards
The IFRS Foundation published educational material to highlight how existing requirements in IFRS Standards require companies to consider climate-related matters when their effect is material to the financial statements. The educational material contains a non-exhaustive list of examples of when companies may need to consider climate-related matters in their reporting and is aimed at supporting the consistent application of IFRS standards. The educational material does not add to or change the requirements in the IFRS standards.
IOSCO annual meeting addresses the impact of COVID-19 and other critical matters on securities markets
The International Organization of Securities Commissions (IOSCO) published a recap of its annual meeting, which was held online from November 9-18. The meeting touched on the impact of COVID-19 on capital markets and other priority issues facing securities market regulators and supervisors today.
FRC: Audit firms enhance going concern assessments
The FRC reviewed completed audits and found that audit firms have implemented additional measures to enhance their evaluation of companies’ going concern assessments since the start of the COVID-19 pandemic. The FRC reviewed a sample of 11 audits performed by the seven largest UK audit firms. The FRC review found that the additional policies and procedures introduced earlier in the year had been substantially applied in practice.
IASB proposes amendment to its leases standard to improve accounting for sale and leaseback transactions
The IASB proposed to amend IFRS 16, “Leases,” by specifying how a company measures the lease liability in a sale and leaseback transaction. IFRS 16 includes requirements for how to account for sale and leaseback transactions at the time the transaction takes place, but it does not specify how to measure the lease liability when reporting after that date. The proposed amendment seeks to provide greater clarity for the company selling and leasing back an asset both at the date of transaction and subsequently. The proposed amendment would not change the accounting for leases other than those arising in a sale and leaseback transaction.
Fraud and emerging tech: Cybercrime on the rise during COVID-19
In conjunction with the Anti-Fraud Collaboration, the CAQ published its latest resource that examines the implications of cybercrime during the COVID-19 pandemic. Cybersecurity remained top of mind for many businesses this year, especially as several factors, like remote work, virtual crime, and persistent threats, elevated the risk of cybercrime during the pandemic.
Anti-fraud in action: The fraud risk landscape of COVID-19
The CAQ’s Julie Bell Lindsay, Executive Director, interviewed Grant Thornton’s CEO, Brad Preber, to explore the impact of COVID-19 on fraud. The topics covered included emerging fraud and cyber risks, the CAREs Act, fraud schemes, and how members of the financial reporting supply chain each have a responsibility in mitigating fraud risk.
RAB request for proposals for 2021
Topics of interest:
The CAQ posted a request for proposals on key topics of interest in 2021. The CAQ’s Research Advisory Board (RAB) is interested in research questions that can substantively inform audit practice or address policy and regulatory issues that impact audit quality and the profession. Potential topics include:
- Multinational group audits;
- Auditing in a virtual environment;
- Non-GAAP measures; and
- Innovative technologies used in the audit.
Academic research in auditing:
- Additionally, the CAQ posted a request for proposals on academic research in auditing.
Profession in focus: Auditor risk assessment, scoping, and COVID-19
In this video, the CAQ’s Professional Practice Fellow, Yuri Zwick, sat down with Christine Davine, National Managing Partner of Audit Quality, Risk and Regulatory at Deloitte & Touche LLP and Yulia Gurman, Executive Director of Internal Audit, Packaging Corporation of America and Institute of Internal Auditors Member, to discuss auditor risk assessment and scoping in the COVID-19 environment.
Perspectives on management review controls: Challenges and solutions
The CAQ, along with the Financial Education & Research Foundation of Financial Executives International, commissioned an independent qualitative research study on internal control over financial reporting management review controls. The results of that study were published in a report issued on November 18, 2020. The report focuses on management review controls that involve a significant degree of subjective management judgement and aims to provide a useful window into current practices and areas of concern, as well as challenges that might constructively be addressed by preparers, auditors, and regulators.
IAASB Board Meeting, Virtual
Enhancing Skepticism to Fight Fraud, Virtual
MARCH 8-10, 2021
CII Spring 2021 Conference, 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 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: firstname.lastname@example.org.