Public Policy and Technical Alert, October 2020
Friday, November 6, 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:
- SEC Division of Corporate Finance updates CD&Is
- SEC appoints Megan Zietsman to succeed James G. Kaiser on the board of the PCAOB
- SEC updates auditor independence rules
- SEC and CFTC approve a final rule on security futures margin and a request for comment on portfolio margining
- SEC Division of Corporation Finance Director Bill Hinman announces intention to conclude his tenure later this year
- PCAOB issues a staff update and preview of 2019 inspection observations
- PCAOB posts new resources for auditors of small businesses and broker-dealers
- PCAOB issues an interim analysis report on initial impact of critical audit matter requirements
- FASB proposes three targeted improvements to the leases standard
- FASB proposes clarifications to the issuer’s accounting for certain modifications of freestanding equity-classified forwards and options
- FASB issues a proposal to clarify scope of recent reference rate reform guidance
- IAASB issues a staff audit practice alert on climate-related risks
- IAASB: James R. Dalkin reappointed as the chair of the consultative advisory group to IAASB
- IESBA elevates the importance of accountants’ societal role and adapts mindset expectations
- AICPA, IESBA, and IAASB staff jointly issue guidance on important considerations regarding the use of specialists in the COVID-19 environment
- FRC publishes future of corporate reporting discussion paper
- IAASB: Deadline extended for the Auditor Reporting Post-Implementation Review Stakeholder Survey
- IAASB and IESBA announce new board member appointments and deputy chairs for 2021
- FRC: Keith Skeoch appointed interim chair of the FRC
- IESBA seeks stakeholder input on key ethical questions arising from technological developments
- FRC: Consultation on revised auditing standard for the auditor’s responsibilities relating to fraud
- FRC publishes its annual review of corporate reporting
- IAASB’s implementation plans published for the quality management standards
- IFRS: Applying IFRS standards in 2020 – Impact of COVID-19
- Stablecoins and fair value measurement feature in updated guidance from the AICPA Digital Assets Working Group
- Profession in focus: A conversation with SEC Division of Corporation Finance Director during COVID-19
- CAQ posts SEC Regulations Committee highlights – July 29, 2020
- CAQ issues the 2020 Audit Committee Transparency Barometer
- CAQ releases a new publication, “The role of auditors in company-prepared cybersecurity information: Present and future”
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
- Regulation S-K
SEC appoints Megan Zietsman to succeed James G. Kaiser on the board of the PCAOB
The SEC announced the appointment of Megan Zietsman to the PCAOB board for a term ending in October 2025 following James G. Kaiser’s retirement this year. Kaiser was appointed to the board in December 2017 and his term was scheduled to end in late October. Ms. Zietsman has been the Chief Auditor and Director of Professional Standards of the PCAOB since February 2019.
SEC updates auditor independence rules
The SEC announced that it adopted final amendments to certain auditor independence requirements in Rule 2-01 of Regulation S-X. The final amendments are intended to modernize the rules and focus the analysis on relationships and services that may pose threats to an auditor’s objectivity and impartiality. Among other certain miscellaneous updates, the final amendments:
- Amend the definitions of “affiliate of the audit client,” in Rule 2-01(f)(4), and “investment company complex,” in Rule 2-01(f)(14), to address certain affiliate relationships, including entities under common control;
- Amend the definition of “audit and professional engagement period,” specifically Rule 2-01(f)(5)(iii), to shorten the look-back period, for domestic first-time filers in assessing compliance with the independence requirements;
- Amend Rule 2-01(c)(1)(ii)(A)(1) and (E) to add certain student loans and de minimis consumer loans to the categorical exclusions from independence-impairing lending relationships;
- Amend Rule 2-01(c)(3) to replace the reference to “substantial stockholders” in the business relationships rule with the concept of beneficial owners with significant influence; and
- Replace the transition provision in Rule 2-01(e) with a new Rule 2-01(e) to introduce a transition framework to address inadvertent independence violations that only arise as a result of a merger or acquisition transactions.
SEC and CFTC approve a final rule on security futures margin and a request for comment on portfolio margining
The SEC and the Commodity Futures Trading Commission (CFTC) approved a joint final rule to harmonize the minimum margin level for security futures held in a futures account with the minimum margin level for security futures held in a securities portfolio margin account. They also approved the issuance of a joint request for comment on the portfolio margining of uncleared swaps and non-cleared security-based swaps.
SEC Division of Corporation Finance Director Bill Hinman announces intention to conclude his tenure later this year
The SEC announced that William H. Hinman, Director of the SEC’s Division of Corporation Finance, plans to leave the agency later this year. Upon Mr. Hinman’s departure, Shelley Parratt will serve as Acting Director of the Division of Corporation Finance. She currently serves as Deputy Director of the Division. Michele Anderson, currently Associate Director in the Division, will serve as Acting Deputy Director.
PCAOB issues a staff update and preview of 2019 inspection observations
The PCAOB shared certain observations from the 2019 inspections of audits of issuers. The update includes information on the PCAOB’s continued efforts to transform its inspection process, its most recent inspection observations, and perspectives from its target team work related to multi-location audits. The report highlights best practices, recurring deficiencies, and more.
PCAOB posts new resources for auditors of small businesses and broker-dealers
The PCAOB posted new video presentations to provide educational resources for auditors of small businesses and broker-dealers. The presentations cover the following topics:
- Board member perspectives, as well as updates from the Chief Auditor and Division of Enforcement and Investigations for auditors of both small businesses and broker-dealers;
- Division of Registration and Inspections update, as well as illustrative examples for auditors of small businesses; and
- Division of Registration and Inspections and Financial Industry Regulatory Authority updates, as well as illustrative examples for auditors of broker-dealers.
PCAOB issues an interim analysis report on initial impact of critical audit matter requirements
The PCAOB released an interim analysis report and two accompanying white papers analyzing the initial impact of the critical audit matter (CAM) requirements. The report and white papers summarize the findings from the PCAOB’s analyses in the following areas:
- Audit firm and audit engagement team responses to the CAM requirements;
- Investor use of CAM communications; and
- Audit committee and preparer experiences related to CAM implementation.
FASB proposes three targeted improvements to the leases standard
The FASB issued a proposed Accounting Standards Update (ASU) intended to improve three areas of the leases guidance. The amendments in the proposed ASU address issues for lessors and lessees. Stakeholders are encouraged to review and provide comments on the proposed changes by December 4, 2020.
FASB proposes clarifications to the issuer’s accounting for certain modifications of freestanding equity-classified forwards and options
The FASB issued a proposed ASU that would clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified forwards and options, like warrants, that remain equity classified after modification. The proposed ASU would provide guidance on how an issuer would measure and recognize the effect of these transactions, providing a principles-based framework to determine whether an issuer would recognize the modification or exchange as an adjustment to equity or an expense. Stakeholders are asked to review and provide input on the proposed ASU by December 28, 2020.
FASB issues a proposal to clarify scope of recent reference rate reform guidance
The FASB issued a proposed ASU that would clarify the scope of the FASB’s recent reference rate reform guidance, ASU 2020-04-Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Stakeholders are asked to review and provide input on the proposed ASU by November 13, 2020.
IAASB issues a Staff Audit Practice Alert on climate-related risks
The International Auditing and Assurance Standards Board (IAASB) issued a Staff Audit Practice Alert on considering climate risks in audits of financial statements. The Staff Audit Practice Alert is intended to assist auditors in understanding what already exists in the International Standards on Auditing (ISA) today and how it relates to auditors’ considerations of climate-related risks in an audit of financial statements.
IAASB: James R. Dalkin reappointed as the chair of the consultative advisory group to IAASB
James R. Dalkin was reappointed as the chair of the Consultative Advisory Group (CAG) to the IAASB. His appointment, approved by the Public Interest Oversight Board, follows his election by IAASB CAG members at its September 2020 meeting.
IESBA elevates the importance of accountants’ societal role and adapts mindset expectations
The International Ethics Standards Board for Accountants (IESBA) released revisions to the International Code of Ethics for Professional Accountants. The revisions explicitly recognize that the accountancy profession is entrusted with public confidence in the wide-ranging roles it plays in society and that such confidence is based on the skills and values it brings to its professional activities. Among other matters, the revisions:
- Reinforce aspects of the principles of integrity, objectivity, and professional behavior;
- Raise behavioral expectations of all professional accountants through requiring them to have an inquiring mind as they undertake their professional activities;
- Emphasize the importance of accountants being aware of the potential influence of bias in their judgments and decisions; and
- Highlight the supportive role the right organizational culture can play in promoting ethical conduct and business.
AICPA, IESBA, and IAASB staff jointly issue guidance on important considerations regarding the use of specialists in the COVID-19 environment
The staff of the AICPA, IESBA, and IAASB jointly published a report on the use of specialists in the COVID-19 environment. The report provides guidance to assist professional accountants with determining when there might be a need to use the services of a specialist to assist in performing specific tasks and other professional activities within their employing organizations, and in serving their clients in the COVID-19 environment. The publication also highlights relevant ethical considerations for accountants when thinking about using a specialist, as well as circumstances that indicate a need for a specialist during an audit of financial statements.
FRC publishes future of corporate reporting discussion paper
The Financial Reporting Council (FRC) released a discussion paper proposing a future for corporate reporting based on a principles-based framework. The paper outlines a blueprint for an approach to corporate reporting which is intended to challenge existing thinking about how companies can more effectively meet the information needs of investors and other stakeholders. Proposals include:
- Unbundling the existing purpose, content, and intended audiences of the current annual report by moving to a network of interconnected reports;
- A new common set of principles that apply to all types of corporate reporting;
- Objective-driven reports that accommodate the interests of a wider group of stakeholders;
- Embracing the opportunities available through technology to improve the accessibility of corporate reporting; and
- A model that enables flexible reporting that is responsive to changing demands and circumstances.
IAASB: Deadline extended for the Auditor Reporting Post-Implementation Review Stakeholder Survey
The IAASB extended its deadline to respond to the Auditor Reporting Stakeholder Survey to November 23, 2020. The survey invites interested stakeholders to share their experience with, and provide feedback relating to, the Auditor Reporting Standards that were issued in 2015.
IAASB and IESBA announce new board member appointments and deputy chairs for 2021
The IAASB announced a number of appointments and reappointments to its board, as well as a new deputy chair. Len Jui will serve as the IAASB’s deputy chair in 2021. Other new board members include Edo Kienhuis, Diane Larsen, and Wendy Stevens. Reappointed board members include Chun Wee Chiew, Kai-Uwe Marten, Fernando Ruiz Monroy, and Isabelle Tracq-Sengeissen.
The IESBA also announced several appointments and reappointments to its board, as well as a new deputy chair for 2021. Caroline Lee will serve as the IESBA’s deputy chair in 2021. New board appointments include Saadiya Adam, Vania Borgerth, Sung-Nam Kim, and Yaoshu Wu. Reappointed board members include Brian Friedrich, Winifred Kiryabwire, and Jens Poll.
FRC: Keith Skeoch appointed interim chair of the FRC
The FRC announced the appointment of Keith Skeoch as its interim Chair. Mr. Skeoch was previously a non-executive director at the FRC and will serve as interim Chair from October 12, 2020 for a period of up to 6 months.
IESBA seeks stakeholder input on key ethical questions arising from technological developments
The IESBA launched two online surveys with questions seeking stakeholder feedback to inform its consideration of issues related to two key recommendations in the February 2020 Phase 1 report of its Technology work stream, Technology Working Group Phase 1 Final Report. The topics addressed by these two recommendations are:
- Technology and complexity in the professional environment; and
- The impact of technology on auditor independence.
The IESBA is seeking feedback until November 10, 2020.
FRC: Consultation on revised auditing standard for the auditor’s responsibilities relating to fraud
The FRC launched a consultation on the proposed revision of its UK auditing standard ISA (UK) 240 (Updated January 2020) – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The FRC is proposing revisions that include providing increased clarity as to the auditor’s obligations together with enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks, among other proposed changes.
The comment period closes on January 29, 2021.
FRC publishes its annual review of corporate reporting
The FRC published its Annual Review of Corporate Reporting, which reveals the FRC’s top ten areas where they believe improvements to reporting quality are needed so users of accounts have a clearer understanding of company performance and position. In the last year, the FRC reviewed 216 accounts and wrote to 96 companies with substantive questions about their reports.
IAASB’s implementation plans published for the quality management standards
The IAASB published implementation plans for each of its three new quality management standards. The suite of quality management standards is expected to be approved by the Public Interest Oversight Board and subsequently released later this year. The implementation plans explain what implementation materials stakeholders can anticipate, topics covered, and expected timing.
IFRS: Applying IFRS standards in 2020 – Impact of COVID-19
The International Financial Reporting Standards (IFRS) Foundation posted an article providing an overview of the key financial reporting considerations that may be on the minds of preparers, auditors, investors, and regulators as they tackle the complexities associated with COVID-19. The article, written by Mary Tokar, a member of the International Accounting Standards Board, and Technical Staff Member Sid Kumar, draws on views shared during a panel discussion at the IFRS Foundation Virtual Conference in September.
Stablecoins and fair value measurement feature in updated guidance from AICPA Digital Assets Working Group
The AICPA added 13 questions and answers to its Practice Aid, Accounting for and Auditing of Digital Assets. The nonauthoritative guidance focuses on how investment companies and broker-dealers should account for digital assets, as well as provides answers on topics such as fair value and stablecoins. The guidance is divided into five sections:
- Meeting the definition of an investment company when engaging in digital asset activities;
- Accounting by an investment company for digital assets it holds as an investment;
- Recognition, measurement, and presentation of digital assets specific to broker-dealers;
- Considerations for crypto assets that require fair value measurement; and
- Accounting for stablecoin holdings.
Profession in focus: A conversation with SEC Division of Corporation Finance Director during COVID-19
In this webisode, the Director of the SEC’s Division of Corporation Finance, Bill Hinman, joins CAQ Executive Director Julie Bell Lindsay to discuss critical reporting and disclosure issues facing public companies during the COVID-19 pandemic. They touched on topics including forward-looking disclosures, non-GAAP financial measures, the quality of disclosures made by registrants during COVID-19, the staff’s plans to respond to the SEC Investor Advisory Committee’s recommendations regarding ESG disclosures, and the SEC’s recent Roundtable on Emerging Markets.
CAQ posts highlights from its SEC Regulations Committee’s meeting – July 29, 2020
The CAQ posted highlights from its SEC Regulations Committee’s virtual meeting with the SEC’s Division of Corporation Finance staff on July 29, 2020. Topics discussed included:
- Updating the Financial Reporting Manual
- Topic 842 adoption date for a non-emerging growth company in an initial registration statement
- Financial statement requirements in an S-4 and/or merger proxy for a non-reporting target merging with a public operating company, shell company or SPAC in a reverse merger
- Extension of FASB deferral dates due to COVID-19
- Accounting standards adoption dates for a company upon becoming an “SEC filer”
- Implementation questions regarding final Rule 3-05 Amendments
CAQ issues the 2020 Audit Committee Transparency Barometer
The CAQ published its 2020 Audit Committee Transparency Barometer, a report analyzing disclosures of audit committee oversight in proxy statements of companies in the S&P Composite 1500. The report shows encouraging long-term trends across topics such as Audit Firm Evaluation and Supervision. The report also highlights positive trends in disclosure of risk oversight in emerging areas such as cybersecurity, COVID-19, and the discussion of Critical Audit Matters.
CAQ issues a new publication, “The role of auditors in company-prepared cybersecurity information: Present and future”
The CAQ published a resource pertaining to cybersecurity and company reporting. The publication provides an overview of the types of company-prepared information, both required and voluntary, that describe to stakeholders how companies are addressing cybersecurity risks. The resource also discusses the role auditors play in cybersecurity as it relates to the audit of the financial statements and how the auditor’s role in cybersecurity could evolve beyond the financial statements to better meet the evolving needs of investors, senior management, boards of directors, and other pertinent stakeholders.
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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.
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