Public Policy and Technical Alert | October 2022
Wednesday, November 9, 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 reopens comment periods for several rulemaking releases due to technological error in receiving certain comments
The SEC reopened the public comment periods for 11 Commission rulemaking releases and one request for comment due to a technological error that resulted in a number of public comments submitted through the Commission’s Internet comment form not being received by the Commission. The SEC is reopening the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register. Affected releases include, but are not limited to:
- Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure, Release Nos. 33-11038, 34-94382, IC-34529 (Mar. 23, 2022)
- The Enhancement and Standardization of Climate-Related Disclosures for Investors Release Nos. 33-11042, 34-94478 (Apr. 11, 2022)
- Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, Release Nos. 33-11068, 34-94985, IA-6034, IC-34594 (June 17, 2022)
The auditor’s responsibility for fraud detection
The SEC posted a statement by acting chief accountant Paul Munter on the auditor’s responsibility for fraud detection. Munter reminded auditors to fulfill their professional responsibilities by applying an appropriate fraud lens throughout the audit, including understanding the relationship between PCAOB AS 2401 and other auditing standards as it relates to identifying and responding to the risk of fraud in the audit so that the auditor has obtained reasonable assurance that there is not a material misstatement to the financial statements caused either by fraud or error.
SEC adopts rule amendments to modernize how broker-dealers preserve electronic records and enhance the electronic recordkeeping requirements for security-based swap entities
The SEC voted to adopt amendments to the electronic recordkeeping, prompt production of records, and third-party recordkeeping service requirements applicable to broker-dealers, security-based swap dealers (SBSDs), and major security-based swap participants (MSBSPs). The amendments are designed to modernize recordkeeping requirements given technological changes over the last two decades and to make the rule adaptable to new technologies in electronic recordkeeping. The amendments will also facilitate examinations of broker-dealers, SBSDs, and MSBSPs. Among other things, to facilitate examinations and make them more efficient, the amendments also require broker-dealers and all types of SBSDs and MSBSPs to produce electronic records to securities regulators in a reasonably usable electronic format.
SEC adopts listing standards for recovery of erroneously awarded compensation
The SEC adopted a new rule and rule amendments that direct the national securities exchanges and associations that list securities to establish listing standards that require each issuer to develop and implement a policy providing for the recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information. The listing standards must also require the disclosure of the policy.
PCAOB Investor Advisory Group (IAG) Meeting
The PCAOB IAG met to discuss in a public forum the following topics: recent PCAOB developments, the PCAOB standard-setting update, firm and engagement performance metrics, an IAG briefing to the PCAOB on data and technology, and emerging issues.
The PCAOB updates its standard-setting and research agendas to reflect progress on a key strategic goal of modernizing standards
The PCAOB updated its standard-setting and research agendas to reflect progress on a key strategic goal of modernizing standards. The standard-setting agenda is primarily focused on enhancing investor protection by prioritizing the areas where improvements to PCAOB standards could have the most significant impact on audit quality and the public interest. The standard-setting projects are divided into short-term and mid-term categories and are presented in no particular order within such categories.
Barbara Vanich named PCAOB Chief Auditor
The PCAOB announced the appointment of Barbara Vanich as Chief Auditor. Vanich has led the Office of the Chief Auditor in an acting capacity since November 2020.
FASB seeks input on proposal to improve segment reporting
The FASB issued a proposed Accounting Standards Update (ASU) that would improve the disclosures about a public entity’s reportable segments and address requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. Stakeholders are encouraged to review and provide comments on the proposed ASU by December 20, 2022. Key amendments in the proposed ASU would:
- Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (CODM) and included within each reported measure of segment profit or loss.
- Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition.
- Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by Topic 280, Segment Reporting, in interim periods.
FASB seeks input on proposed new chapter of its Conceptual Framework: The reporting entity
The FASB issued a proposed new chapter of its Conceptual Framework that describes a reporting entity. The proposed chapter would become Chapter 2 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. Stakeholders are asked to provide input on the characteristics of a reporting entity described in the proposed chapter. This includes a description of a reporting entity as “a circumscribed area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity.” It also describes the three features of a reporting entity:
- Economic activities of the entity have been conducted.
- Those economic activities can be distinguished from those of other entities.
- The financial information in general purpose financial reporting faithfully represents the economic activities of the entity in the circumscribed area and is useful in making decisions about providing resources to the entity.
FASB seeks input on proposed improvements to accounting for joint venture formations
The FASB issued a proposed Accounting Standards Update (ASU) that is intended to provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements, and reduce diversity in practice in this area of financial reporting. Stakeholders are encouraged to review and provide comments on the proposed ASU by December 27, 2022. The proposed ASU would apply to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary.
AICPA & CIMA offer resources for organizations requiring an audit of Covid relief funding
AICPA & CIMA announced that they are offering several resources to help organizations subject to “single audits” or similar compliance engagements, including a list of tips, an on-demand webinar, and a primer on procuring audit services, in an effort to help demystify the process. Thousands of state and local governmental agencies, nonprofits, and businesses that received funding from federal pandemic relief programs are subject to audits that focus on their compliance with laws and regulations governing that money. Before the pandemic, some 34,000 to 38,000 single audit engagements were performed each year, but the trillions of dollars authorized for Covid relief funding are expected to significantly increase that number.
Exposure draft, criteria for quality control materials (QCM) content
The AICPA Assurance Services Executive Committee (ASEC) issued an Exposure Draft titled, Proposed Criteria for a Description of the Content of Quality Control Materials (QCM) and the Content of QCM Related to the Relevant Standards and Interpretive Guidance. Interested parties may submit comments by Dec.15. The proposed criteria will be used to evaluate QCM content in a new assertion-based examination to be performed under the Statements on Standards for Attestation Engagements (SSAEs). Although not required, a QCM provider may engage a practitioner to examine its QCM content (examination) as it relates to the relevant standards and interpretive guidance. The examination will help CPA firms that use QCM, and their peer reviewers, address the risks associated with the use of QCM and monitor their practices.
System of quality management call to action: Strengthening audit quality
The Canadian Public Accountability Board released a publication that highlights the importance of culture to a firm’s system of quality management, provides the Board’s preliminary observations on the implementation of the new quality management standards, and offers an illustrative example to demonstrate the identification of quality risks and iterative nature of a firm’s system of quality management. The Board has observed that firms frequently underestimate the amount of time and effort necessary to design, implement, and operate an effective system of quality management. This publication is intended to assist audit firms as they implement their system of quality management to comply with the new quality management standards.
IESBA staff issues alert highlighting key ethics and independence considerations for professional accountants in relation to the military conflict in Ukraine
The International Ethics Standards Board for Accountants released the Staff Alert, The Ukraine Conflict: Key Ethics and Independence Considerations, which draws the attention of professional accountants in business (PAIBs) and professional accountants in public practice (PAPPs) to important provisions in the International Code of Ethics for Professional Accountants (including International Independence Standards) as they navigate the challenges and risks arising from the Russia-Ukraine war. The Staff Alert highlights the ethical implications arising from the various economic sanctions that have been imposed on Russia and certain Russian entities and individuals as well as Belarus, and the related ethical responsibilities of PAIBs and PAPPs under the Code. It also highlights:
- Key ethics considerations for PAIBs in relation to the preparation and presentation of information, especially as regards accounting for and disclosing the impact of the Ukraine conflict on their employing organizations’ business; and
- Key ethics considerations for PAPPs in relation to client and engagement acceptance, and in the context of audits of financial statements, key independence considerations relating to overdue fees and the Code’s prohibition against assuming management responsibility.
G7 reiterates commitment to mandatory climate disclosures and welcomes the ISSB’s work on global baseline
The International Sustainability Standards Board (ISSB) posted a statement by the G7 Finance Ministers and Central Bank Governors that reiterates their commitment to move towards mandatory climate-related financial disclosures. The G7 Finance Ministers and Central Bank Governors welcome the ISSB’s work to develop a truly global baseline of sustainability disclosures to inform investment decisions. The ISSB is currently considering the feedback received to its consultation on its first two proposed IFRS Sustainability Disclosure Standards, one setting out general sustainability-related disclosure requirements and one setting out specific climate-related disclosure requirements.
IESBA issues staff publication highlighting the relevance and applicability of the IESBA Code in combating greenwashing
The staff of the IESBA released a Questions & Answers (Q&A) publication, Ethics Considerations in Sustainability Reporting, Including Guidance to Address Concerns about Greenwashing. The publication highlights the relevance and applicability of the International Code of Ethics for Professional Accountants (including International Independence Standards) (the Code) to ethics-related challenges in the context of sustainability reporting and assurance, especially circumstances involving misleading or false sustainability information (i.e., “greenwashing”). Among other matters, the publication spotlights key provisions in the Code that apply in preparing and presenting sustainability information. The publication is intended to assist professional accountants, especially those in business, but might also be of interest to other professionals involved in preparing sustainability reports or disclosures.
IAASB opens public consultation for Revised Audit Evidence Standard
The IAASB announced that it has opened the public consultation for proposed changes to one of its fundamental standards, International Standard on Auditing (ISA) 500, Audit Evidence. The proposed changes:
- Clarify ISA 500’s purpose and scope and explain its relationship with other standards;
- Provide a principles-based approach to considering and making judgments about information intended to be used as audit evidence and evaluating whether sufficient appropriate audit evidence has been obtained;
- Modernize ISA 500 to be adaptable to the current business and audit environment, while considering scalability for different circumstances, including the entity and the auditor’s use of technology, such as automated tools and techniques; and
- Emphasize the role of professional skepticism when making judgments about information intended to be used as audit evidence and evaluating the audit evidence obtained.
IASB adds narrow-scope project to work plan on possible amendments to financial instruments Accounting Standard
The IASB expanded the scope of its maintenance project on the work plan for proposed narrow-scope amendments to IFRS 9 Financial Instruments. The aim of the proposed amendments is to respond to stakeholders’ feedback on the Request for Information published in September 2021 as part of the Post-implementation Review of IFRS 9-Classification and Measurement. The proposed amendments will cover three areas:
- Contractual cash flow characteristics
- Electronic cash transfers, and
- Equity instruments and other comprehensive income
FRC publishes Annual Review of Corporate Reporting
The FRC published its Annual Review of Corporate Reporting, which performed 252 reviews of companies’ accounts. While the overall quality of corporate reporting within the FTSE 350 had been maintained, 27 companies were required to restate aspects of their accounts. The FRC was disappointed to find errors in cash flow statements, an area where both companies and their auditors must improve. The review also identified scope for improvement in reporting on financial instruments and deferred tax assets. The review includes examples of key matters companies must consider during uncertain times such as the need to disclose significant judgements in relation to going concern assessments.
IASB amends accounting standard to improve information about long-term debt with covenants
The IASB issued amendments to IAS 1 Presentation of Financial Statements that aim to improve the information companies provide about long-term debt with covenants. IAS 1 requires a company to classify debt as non-current only if the company can avoid settling the debt in the 12 months after the reporting date. The amendments to IAS 1 specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. Instead, the amendments require a company to disclose information about these covenants in the notes to the financial statements. The amendments are effective for annual reporting periods beginning on or after January 1, 2024, with early adoption permitted.
S&P 500 ESG reporting
The CAQ posted an analysis of 2020 ESG reports and Carbon Disclosure Project (CDP) Climate Change Questionnaires for S&P 500 companies. The CAQ sought to understand what they disclosed about reporting standards and frameworks used, greenhouse gas (GHG) emissions, assurance or verification of ESG information, and net zero and carbon neutral commitments. Among the key takeaways:
- Of the S&P 500 companies, 464 issued a standalone ESG report and 313 responded to the CDP Climate Change Questionnaire for the 2020 period (i.e., periods ending in 2020).
- Of the 464 companies that issued a standalone ESG report, 43 obtained assurance from a public company auditor over some of their ESG information.
- CAQ found an uptick in companies receiving assurance over ESG metrics compared to the prior analysis.
How do auditors maintain independence?
The CAQ posted a report on how auditors maintain independence. The report discusses the three key elements of safeguards that incentivize audit firms and individual auditors to keep an independent mindset and perform high-quality audits:
- A robust regulatory regime
- Oversight of the external auditor, and
- Market-driven incentives
The report notes that amendments of certain rules by the SEC in 2021 to reflect changes in the business environment have strengthened the rules. There are many safeguards that protect auditor independence, with the robust U.S. regulatory regime being just one piece, the report concludes. Oversight of the external auditor coupled with market-driven incentives provide confidence to investors in the system that works to maintain auditor independence.
The CAQ posted a statement on auditor independence. The passage of the Sarbanes-Oxley Act of 2002 (SOX) implemented reforms that brought about undeniable improvements to financial reporting, the audit process, and audit quality. Since then, the auditing profession has also invested in innovative approaches and mechanisms to foster accountability and safeguard against potential conflicts, from the education of auditors to firms’ best practices and controls. Although there are detailed rules and extensive investments to comply, there are still criticisms of the current model of auditor independence. These criticisms fail to consider the vital components – both imposed by regulation and voluntarily enacted – that safeguard the independence of auditors.
PCAOB: The Application and Use of the PCAOB’s Interim Attestation Standards
The CAQ posted a PDF of its comment letter providing views to the PCAOB related to its request for information and comment on The Application and Use of the PCAOB’s Interim Attestation Standards. The CAQ provides insight into the limited use of the PCAOB Interim Attestation Standards and indicates that it does not believe the PCAOB needs to prioritize any updates to these standards. However, if the PCAOB were to decide to update these interim attestation standards, the CAQ believes that the public interest would be best served by the PCAOB considering many of the significant areas for which the equivalent AICPA attestation standards have been updated over the last 20 years, as such an approach could provide a timely and effective path forward for the PCAOB.
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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 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 Public Policy & Technical Alert can be addressed to Joseph Bailey, Manager, Professional Practice (firstname.lastname@example.org).