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Newsletter

Snapshot | December 2022

Wednesday, December 21, 2022

The holidays are a time filled with white elephants, secret Santa’s, traveling home for the holidays or getting away, and of course, year-end deadlines. Our Snapshot this month is likely as jam-packed as your December schedule. Read on for the latest news, events and issues impacting the public company audit profession.

Audit Committee Responsibilities and Disclosures Continue to Expand

Audit committees are increasingly including disclosures about several key areas of oversight within public company proxy statements according to the CAQ and Audit Analytics – an Ideagen solution’s  9th annual Audit Committee Transparency Barometer.

The results reflect a long-term positive trend of increased transparency in several areas by audit committee members, including cybersecurity and environmental, social and governance (ESG) expertise and oversight. The report also identified several areas where audit committees can provide more tailored disclosures, including how the audit committee considers the length of auditor tenure and what their involvement in the selection of the audit engagement partner entails.

In a separate report developed by the CAQ and academic researchers at the University of Tennessee Knoxville’s Neel Corporate Governance Center and the Pamplin College of Business at Virginia Tech, 2,200 minutes of interviews were conducted with audit committee chairs or members as well as other stakeholders to better understand how audit committees manage and disclose their increasing responsibilities. The report takes these interviews and provides a step-by-step guide for audit committee members to manage their evolving workload and enhance their disclosures. Read Audit Committee: The Kitchen Sink of the Board, here.

Interested in hearing more from the CAQ on audit committee topics? This month, the CAQ and National Association of Corporate Directors (NACD) partnered to launch a new webinar series: Audit Committee Effectiveness. Audit committee members and public company board members won’t want to miss this series exploring insights from leaders in the financial reporting ecosystem on audit committee disclosures, the evolving role of the audit committee and resources and tips that will aid audit committees and public company board members.

The first episode features a discussion of the Barometer and Kitchen Sink reports with:

  • James Andrus, Interim Managing Investment Director, Board Governance & Sustainability, CalPERS
  • David Herzog, Audit Committee Chair, MetLife Inc. and AMBAC Financial Group
  • Lauren Cunningham, Keith Stanga Professor of Accounting, University of Tennessee, Knoxville
  • Vanessa Teitelbaum, Senior Director, Professional Practice, CAQ

Watch the first episode here and read a recap here

 

Audit Partners See US Businesses Adjust Cost Management and Labor Strategies in Response to Economic Challenges

Rising inflation, labor shortages and ongoing disruptions to the supply chain are causing the leaders of US public companies to adjust their strategic priorities, according to a survey of audit partners conducted by the CAQ. According to the survey:

  • Audit partners’ outlook for the economy remains pessimistic, though a growing number expect inflation to ease:
    • 57% of auditor partners are pessimistic to very pessimistic on the outlook for the US economy, a 13-point increase since public company auditors were surveyed in the spring.
    • Concerns over increasing costs have grown, with 75% of audit partners identifying inflation as the largest economic risk to public companies in their industry sector, followed by labor shortages and supply chain issues.
    • However, there is a silver lining. More audit partners reported that they were optimistic about the 12-month outlook for the economy than they were in the spring. While 75% expected inflation to persist in the spring, this dropped by seven points in the fall. And nearly 30% of the partners reported that they only expect inflation to last for six to twelve months.
  • Public companies are shifting strategies to mitigate negative impact  
    • While public companies were focused on mergers and acquisitions (M&A) in the spring, M&A activity has declined according to audit partners.
    • Rather, audit partners indicated that re-evaluating or decreasing spend, focusing on cash flow and liquidity and decreasing revenue and growth forecasts are the top mitigation strategies public company management is taking in response to economic challenges.
    • Overwhelmingly, audit partners reported that public companies’ growth strategies are focused on the US (88%) vs. abroad (12%).
  • Human capital actions are also shifting
    • While labor shortages are still a large risk for public companies, business leaders have migrated to focusing more on investing in existing talent than attracting new talent.
    • Increasing flexibility in the workplace, increasing compensation and upskilling workers are the top actions audit partners surveyed have observed business leaders taking to retain their employees.
    • Reducing headcount was another trend observed by survey respondents as an action taken by or being considered more frequently by public companies with a 14-percentage point increase since the spring survey (22% up from 8%).
  • Emerging risks:
    • Audit partners observed that business leaders at US public companies are taking several other factors into account when developing their corporate strategies:
      • Resource scarcity (86% of audit partners)
      • Emerging technology (63% of audit partners)
      • Climate change (59% of audit partners)

Download the report, Fall 2022 Audit Partner Survey, to access the full survey results.

 

Blockchain and Digital Assets in Latest Audit in Action Video

Blockchain has been heralded as a disruptive technology with the potential to transform regular financial processes into transparent transactions built on a secure and efficient distributed ledger. Naturally, public companies are increasingly engaging with digital assets and the blockchain in a variety of ways, innovating in transacting and investing opportunities, as well as other areas of their operations.

This is an exciting time but in light of high-profile collapses, including the crash of “stablecoin” TerraUSD, FTX’s collapse and high-profile celebrity lawsuits, it’s important for financial markets stakeholders, including public company management, audit committees and external auditors, to understand the digital assets landscape and their financial reporting, oversight, and audit responsibilities. Hear from assurance and cryptocurrency experts from Crowe, Deloitte, KPMG, PwC and the CAQ discuss their takes on blockchain and digital assets, the regulatory landscape and what that means for public company accounting firms.

For more information, also check out the CAQ’s latest resource, Jumpstart Your Digital Assets Journey: A Tool for Audit Committees.

 

CAQ’s Second Annual Analysis of S&P 500 Finds Majority of Public Companies Issue an ESG Report

Increasingly, in the U.S. and around the globe, investors, motivated to manage their investment risk are looking to understand how companies manage climate and other ESG-related risks and opportunities. As such, investors are seeking actionable information on public companies’ ESG matters.

Since 2021, the Center for Audit Quality (CAQ) has sought to gain a better understanding of public companies and their reporting of climate-related and other ESG information. We are pleased to provide you with our updated analysis of the S&P 500, a look at publicly available ESG data for companies listed on the S&P 500 for periods ending in 2020.
Our most recent analysis identified a few noteworthy trends:

  • First, most S&P 500 companies publish annual sustainability or ESG reports. These companies continue to reference commonly used standards and frameworks for their reporting, with the Sustainability Accounting Standards Board (SASB) Standard utilized most often, followed by the Global Reporting Initiative (GRI) Standards and the Task Force on Climate-Related Financial Disclosures (TCFD) Recommendations.
  • There was an increase in the number of companies receiving assurance over this information with over 60% of S&P 500 companies that issued an ESG report disclosing the data received some form of assurance or verification from a third party. As demand for assurance from regulators and others continues to grow, we expect this number to continue to increase.
  • The analysis also found that 15% of the assurance providers engaged were accounting firms, a slight uptick from previous data. We expect the type of assurance provider companies engage could evolve as more companies disclose ESG information and decide to seek assurance over that information.

Read the full results of our 2022 S&P 500 analysis here.

 

Year in Review: Recapping Discussions Around SOX at 20

This year marked the 20th anniversary of the Sarbanes-Oxley Act (SOX), landmark legislation that has become the gold standard for regulation of global capital markets, protecting workers, businesses, and investors. Two decades after Congress passed SOX, the corporate disclosure system is dependable and audit quality remains high.

This year, the CAQ reflected on what SOX has done for the public company audit profession and how it will meet evolving stakeholder needs on public company disclosures related to such matters as climate change, ESG, and cyber security.

Explore several resources we published, here:

With the 20th anniversary of the landmark Sarbanes Oxley Act, spotlight on the impact to auditor independence

 

ICYMI: Leading the Headlines