Public Policy and Technical Alert, September 2020
Wednesday, October 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:
- SEC modernizes disclosures for banking registrants
- SEC adopts amendments to update retail investor protections and modernize the rule governing quotations for over-the-counter securities
- SEC FinHub staff statement on OCC interpretation
- SEC adopts amendments to modernize shareholder proposal rule
- PCAOB updates research and standard-setting agendas
- PCAOB announces 2020 forums on auditing in the small business environment and on auditing broker-dealers
- Emerging Issues Task Force meeting recap
- IAASB issues new Project Update for ISA 500, Audit Evidence
- FRC: Pre-Emption Group extends additional flexibility for equity placings to November 30
- FRC calls for comments on draft UK Endorsement Criteria Assessment: IBOR Phase 2 amendments
- IFAC calls for a new Sustainability Standards Board alongside the IASB
- IFIAR publishes Information Paper: Facilitating Oversight of Global Audit Firm Networks
- IAASB seeks feedback on fraud, going concern in financial statement audits
- FRC requires improvements in the reporting of revenue and leases in company reports
- IFRS: September 2020 IASB update available and work plan updated
- IAASB approves quality management standards
- IAASB: New support materials released for using automated tools and techniques in audit procedures
- FRC: Consultation on governance changes to Enforcement and Operating Procedures
- IFRS Foundation Trustees consult on global approach to sustainability reporting and on possible Foundation role
- Anti-fraud in action: Skepticism in focus on mitigating fraud risk
- The role of auditors in non-GAAP financial measures and key performance indicators: Present and future
SEC Modernizes Disclosures for Banking Registrants
The SEC announced that it has adopted rules to update and expand the statistical disclosures that bank and savings and loan registrants provide to investors. The rules also eliminate certain disclosure items that are duplicative of other SEC rules and requirements of U.S. GAAP or IFRS. The rules replace Industry Guide 3, Statistical Disclosure by Bank Holding Companies, with updated disclosure requirements in a new subpart of Regulation S-K.
SEC adopts amendments to update retail investor protections and modernize the rule governing quotations for over-the-counter securities
The SEC adopted amendments to Exchange Act Rule 15c2-11, an important component of the over-the-counter (OTC) market regulatory structure. The amendments are intended to enhance disclosure and investor protection in the OTC market by ensuring that broker-dealers, in their role as professional gatekeepers to this market, do not publish quotations for an issuer’s security when current issuer information is not publicly available, subject to certain exceptions. Rule 15c2-11 requires broker-dealers to review key, basic issuer information before initiating or resuming quotations for the issuer’s security in the OTC market.
SEC FinHub staff statement on OCC interpretation
The staff of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) issued a statement following an interpretation by the Office of the Comptroller of the Currency (OCC) addressing the authority of national banks and federal savings associations to hold stablecoin reserves. The FinHub staff asserted that whether a particular digital asset, including one labeled a stablecoin, is a security under federal securities laws is inherently a facts and circumstances determination requiring a careful analysis of the nature of the instrument, including the rights it purports to convey, and how it is offered and sold.
SEC adopts amendments to modernize shareholder proposal rule
The SEC adopted amendments to modernize its shareholder proposal rule, which governs the process for a shareholder to have its proposal included in a company’s proxy statement for consideration by all of the company’s shareholders. Under the rules, any shareholder may submit an initial proposal after having held $2,000 of company stock for at least three years, or higher amounts for shorter periods of time. The rules also provide for a transition period so that shareholders who are currently eligible at the $2,000 threshold will remain eligible to submit a proposal for inclusion in the company’s proxy statement so long as they continue to maintain at least their current holdings through the date of submission (and through the date of the relevant meeting). The amendments also update the levels of shareholder support a proposal must receive to be eligible for resubmission at future shareholder meetings
PCAOB updates research and standard-setting agendas
The PCAOB updated its research and standard-setting agendas. The PCAOB made the following key changes:
- Added auditor independence to the standard-setting agenda to make targeted amendments to existing PCAOB independence rules to conform to changes the SEC is considering to its independence rules;
- Added a project to the research agenda on audit evidence to consider whether standard-setting or staff guidance is needed, given (1) the increasing prevalence of technology-based tools and (2) use of information from sources external to the company, both in the financial reporting process and as audit evidence;
- Removed going concern from the standard-setting agenda; and
- Removed other information and noncompliance with laws and regulations from the research agenda.
PCAOB announces 2020 forums on auditing in the small business environment and on auditing broker-dealers
The PCAOB announced information regarding its 2020 forums for auditors of small businesses and auditors of broker-dealers. This year’s forums will be recorded, and available for auditors to view on the PCAOB’s website beginning on October 19, 2020. The content will include perspectives from PCAOB Board Member Rebekah Goshorn Jurata, PCAOB staff, and representatives from the Financial Industry Regulatory Authority.
Emerging Issues Task Force meeting recap
The Emerging Issues Task Force (EITF) of the FASB discussed Issue No. 19-C, “Warrant Modifications: Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, Compensation—Stock Compensation, or Topic 815, Derivatives and Hedging.” The EITF reached a consensus to expand the scope of this Issue to include modifications of all freestanding equity-classified derivative instruments that remain equity classified after modification. The EITF also reached a consensus on other items, including transition (option for full retrospective or prospective transition), transition disclosures, and recurring disclosures.
IAASB issues new Project Update for ISA 500, Audit Evidence
The International Auditing and Assurance Standards Board’s (IAASB) Audit Evidence Working Group published a Project Update for International Standard on Auditing (ISA) 500, Audit Evidence. The Update includes details about its information gathering activities, issues identified to date, and the way forward for audit evidence. The working group developed an initial listing of possible issues and categorized the issues into three overarching topics:
- Changes in the source of information and how the information is processed, communicated, and used;
- Continual developments in technology; and
- Professional skepticism.
The Audit Evidence Working Group is in the process of developing a project proposal for the IAASB’s consideration at its December 2020 meeting.
FRC: Pre-Emption Group extends additional flexibility for equity placings to November 30
The Pre-Emption Group (PEG) of the Financial Reporting Council (FRC) extended its recommendation that investors, on a case-by-case basis, continue to consider supporting placings by companies of up to 20% of their issued share capital over a 12-month period, with a new end date of November 30, 2020. The group first recommended additional flexibility in April as a temporary measure amid the severe business implications of the COVID-19 pandemic. The PEG reiterated that companies looking to use the additional flexibility, among other considerations, should:
- Only do so if they are experiencing extreme circumstances, and issuance is required to fund an immediate concern;
- Fully explain their particular circumstances, including how they are supporting their stakeholders; and
- Effectively consult a representative sample of the company’s major shareholders and subsequently disclose information about that consultation.
FRC calls for comments on draft UK Endorsement Criteria Assessment: IBOR Phase 2 amendments
The FRC published a draft UK Endorsement Criteria Assessment on the International Accounting Standards Board’s (IASB) amendment Interest Rate Benchmark Reform—Phase 2. The objective of the invitation to comment is to obtain input from stakeholders on the endorsement and adoption of the IASB’s amendment Interest Rate Benchmark Reform—Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) in the UK.
The comment period closed on September 28, 2020.
IFAC calls for a new Sustainability Standards Board alongside the IASB
IFAC’s overview of the objectives, structure and building blocks of the proposed board can be found at The Way Forward. IFAC is recommending that the proposed board adopt a “building blocks” approach, working with and leveraging the expertise and disclosure requirements of the CDP, CDSB, GRI, IIRC and SASB. The “building blocks” approach was laid out in a joint paper, authored by those 5 organizations, issued on September 11, 2020. “Towards Comprehensive Corporate Reporting” [make link] aims to be a step forward toward developing a common language, common visuals, and common vision for the future of the sustainability disclosure.
IFIAR publishes Information Paper: Facilitating Oversight of Global Audit Firm Networks
The International Forum of Independent Audit Regulators (IFIAR) published an Information Paper on “Facilitating Oversight of Global Audit Firm Networks.” The Information Paper focuses on the following areas:
- The role that reliable financial reporting, aided by audit and audit oversight, plays in the international financial ecosystem and how it is among the contributors to financial stability worldwide;
- How global audit firm networks operate, how the global entities interact with network member firms and how local audit regulators oversee the network member firms; and
- How IFIAR acts as a platform for its’ members to share knowledge and experiences and engage with global network firms to encourage attention to the ongoing pursuit of audit quality improvements.
IAASB seeks feedback on fraud, going concern in financial statement audits
The IAASB opened a public consultation, “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 consultation 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 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.
The comment period ends on January 12, 2021.
FRC requires improvements in the reporting of revenue and leases in company reports
The FRC published two reviews into the reporting of revenue and leases, identifying a number of critical areas where it believes companies need to improve their reporting. The reviews covered current reporting on IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases following the first year of its application.
IFRS: September 2020 IASB update available and work plan updated
The International Financial Reporting Standards Foundation published the September 2020 update for the IASB.
IAASB approves quality management standards
IAASB approved 3 new quality management standards which auditors will be required to comply with by December 15, 2022. The standards approved were International Standard on Quality Management (ISQM) 1, which relates to quality management at the firm level, ISQM 2, which relates to engagement quality reviews, and ISA 220 (Revised), Quality Management for an Audit of Financial Statements, which relates to quality management at the engagement level.
IAASB: New support materials released for using automated tools and techniques in audit procedures
The IAASB’s Technology Working Group released non-authoritative support for using automated tools and techniques when performing audit procedures. The publication is intended to assist auditors in understanding whether a procedure involving automated tools and techniques may be both a risk assessment procedure and a further audit procedure. It also provides specific considerations when using automated tools and techniques in performing substantive analytical procedures in accordance with ISA 520, Analytical Procedures.
FRC: Consultation on governance changes to Enforcement and Operating Procedures
The FRC opened a consultation on consequential changes to various aspects of its Enforcement and Operating Procedures arising out of changes to the governance structure and decision making intended to take effect on January 1, 2021. Among other changes, the decision to open an investigation under the Audit Enforcement Procedure (AEP) and the Accountancy and Actuarial Schemes will now be a decision of the Board, with delegation to the Conduct Committee in certain cases.
The comment periods ends on November 30, 2020.
IFRS Foundation Trustees consult on global approach to sustainability reporting and on possible Foundation role
The Trustees of the IFRS Foundation published a Consultation Paper to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards. Amid heightened focus on environmental, social, and governance matters, developments in sustainability reporting, and increased calls for standardization of such reporting, the Trustees are now seeking stakeholder input on the need for global sustainability standards and gauging support for the Foundation to play a role in the development of such standards.
The comment period ends on December 31, 2020.
Anti-fraud in action: Skepticism in focus on mitigating fraud risk
In this video, the CAQ’s Margot Cella, Vice President, Research and Anti-Fraud Initiatives, interviews the Institute of Internal Auditors’ President and CEO, Richard Chambers, to discuss the role of skepticism in deterring and detecting fraud, how to effectively exercise and enhance skepticism, and proactive steps to overcome challenges posed by the COVID-19 crisis.
The role of auditors in non-GAAP financial measures and key performance indicators: Present and future
The CAQ issued a new report, “The Role of Auditors in Company Prepared Information: Present and Future,” that provides a foundational understanding of the current role of auditors in various types of company-prepared and publicly disclosed information, and how auditors could enhance the reliability of such information. The report provides an overview of what non-GAAP financial measures and Key Performance Indicators are, how they are used, and how the auditor could play a greater role in this information.
The SEC Speaks in 2020, Virtual
October 12 – November 12
NACD Summit 2020, Virtual
SIFMA Annual Meeting, Virtual
ICGN Global Virtual Summit 2020, Virtual
45th IOSCO Annual Meeting, Virtual
November 30 – December 4
IESBA, New York, NY
IAASB Board Meeting, Virtual
March 3-5, 2021
NACD: From Battlefield to Boardroom, 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.
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