Audit Committee Insights | June 2021

It’s almost…summer! Beach weather, summer reading, BBQ’s, cold beer and Q2 quarterly reports. Read on to find the latest financial reporting news and insights for audit committees. We welcome input; please let us know what you think.

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What’s Hot? Climate.

The SEC requested input on climate change disclosures and the CAQ delivered. In our comment letter we:

• ​​​Emphasized the need for any climate-related or other ESG disclosure requirements to be focused on the information needs of investors.
• Voiced support for a globally-accepted ESG reporting system built from existing standards and frameworks that can be adapted to meet the needs of investors in different jurisdictions.
• Highlighted our view that a global standard setter is likely necessary for a globally-accepted ESG reporting system to be implemented and to operate effectively.
• Pointed out that scalability, industry specificity, and global coordination and collaboration will be important.
• Underscored our belief that the value of assurance over ESG-related reporting by an independent public company auditor offers increased investor protection compared with other forms of third-party assurance or verification.

What are we hearing from other stakeholders? The CAQ recently convened a roundtable on this topic bringing together board members, public company management, institutional investors, and public company auditors. Two key takeaways:

• 87% of participants are supportive of a system for ESG disclosure (including climate) that is built from existing standards and frameworks; and
• 90% of participants believe that climate-related and other ESG disclosures should be subject to assurance from public company auditors either currently or over time.

Why it matters. Trust and confidence in the information companies disclose are essential to the efficient functioning of markets. There is an intersection between the audit committee’s oversight of financial reporting and ESG reporting. This includes oversight of disclosures, internal controls and supporting accountability of management through internal audit or external assurance.

Read our comment letter and Roundtable Summary here.

In the News: Will Stronger ESG Standards Drive Corporate Action On Climate And Equity?

As reported by Forbes, “There is no company whose business model won’t be profoundly affected by the transition to a net zero economy—one that emits no more carbon dioxide than it removes from the atmosphere by 2050, the scientifically-established threshold necessary to keep global warming well below 2ºC,” Larry Fink, the CEO of the world’s largest asset manager, BlackRock wrote in his 2021 letter to shareholders. “As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders—with customers, policymakers, employees and shareholders—by inspiring confidence that they can navigate this global transformation. But companies that are not quickly preparing themselves will see their businesses and valuations suffer.”

Why does the Board oversee ESG? Some directors may not make the immediate connection to ESG issues when considering strategy and think of the ESG component as a “nice-to-have,” rather than a necessity, states PwC. But this ignores the point of ESG. It’s about the ways in which value could be created or destroyed. For example, a consumer company might look to sustainable packaging as an opportunity to be responsive to consumer concerns. Or a manufacturing company might emphasize product safety or quality as part of their social obligations, even if it sacrifices short-term profits. Companies that don’t think this way are risking their long-term value.

Role of the Audit Committee: Auditor Independence

Amendments to certain auditor independence requirements took effect June 9, 2021. In our view, the SEC’s changes to the auditor independence rules do not weaken auditor independence. The safeguards protecting auditor independence remain strong. Last week, the CAQ published an Alert to provide an overview of the changes with examples. This Alert is non-authoritative.

The key takeaway: Auditor independence is foundational to audit quality. The targeted amendments to the independence rules adopted by the SEC modernize and improve the application of the rules in practice. Compliance with these rules is a shared responsibility among management, auditors, and audit committees, and requires timely, accurate information to complete an informed analysis.

​​​​​Regulatory Developments: Changes to the SEC Reg Flex Agenda and PCAOB Board

Nothing is certain except for death, taxes…and regulatory change in Washington. On June 4, the SEC removed William D. Duhnke III from the Public Company Accounting Oversight Board (PCAOB). The Commission designated Duane M. DesParte to serve as Acting Chairperson. The SEC also announced that it intends to seek candidates to fill all five board positions on the PCAOB and is currently soliciting nominations.

On June 11, the SEC released their Annual Regulatory Agenda. Targeted for October 2021 rulemaking is disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk oversight. Potential rule amendments related to special purpose acquisition companies (SPACs) is targeted for April 2022.

While evolving rules and regulations seem to be a constant in today’s environment, what remains unchanged is the trust and confidence auditors provide to investors and other stakeholders in the capital markets. The CAQ released a new whitepaper, Value of the Audit: A Brief History and the Path Forward, that  conveys in plain English that many factors lead to a quality audit. The paper stresses that it is the combination of auditor expertise and independence that bolsters the level of trust and confidence in company financial statements and forms the basis of audit quality—and, thus, value to capital markets.

ICYMI: CAQ Public Policy and Technical Alert (PPTA), May 2021

Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession.  Last month, the PPTA included these featured articles:

• SEC Commissioner Allison Herren Lee: Speech on the myths and misconceptions about ‘materiality’ 
  • SEC Commissioner Allison Herren Lee delivered keynote remarks at the 2021 ESG Disclosure Priorities Event hosted jointly by the CAQ, AICPA and the Chartered Institute of Management Accountants, and the Sustainability Accounting Standards Board (SASB). Herren Lee addressed four myths and misconceptions related to materiality as it pertains to climate and ESG disclosures.
    • Myth #1: ESG matters (indeed all matters) material to investors already are required to be disclosed under the securities laws.
    • Myth #2: Where there is a duty to disclose climate and ESG matters, such disclosures are being made.
    • Myth #3: SEC disclosure requirements must be strictly limited to material information. In contrast to this myth, Herren Lee believes that the idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in SEC rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG.
    • Myth #4: Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions. ​​​​​​​​​​
• IESBA: Five ethics challenges that will intensify as the pandemic wanes
  • The International Ethics Standards Board for Accountants (IESBA) published an examination of several ethics considerations that it believes will be tested during the period of recovery from the COVID-19 pandemic. The considerations include:
    • Pressures from an uneven economic recovery;
    • Demands for greater support and efficiency;
    • Risks regarding rapid digitalization;
    • Burnout and mental health of teams and talent; and
    • Predisposition to focus on the past.

In pursuit of excellence: Olympic moments we never forget

Olympic Trials are happening around the world in advance of the Tokyo Summer Olympics July 23 – August 8, 2021 (postponed from 2020). As excitement builds, it’s easy to recall unforgettable past Olympic moments (here’s a list of 25 greatest) such as Michael Phelps’s 8 gold medals, Torvill and Dean’s perfect score, Shaun White’s Double McTwist 1260, Dan Jansen’s hard fought gold medal after a 10-year pursuit, Kerri Strug’s epic landing, Tommie Smith and John Carlos’ Black Power Salute, and of course, the Miracle on Ice.

Do you know this story? When Canadian sailor Lawrence Lemieux began racing at the 1988 South Korea Olympics, he fully intended on playing to win. But when — amid dangerous winds — he noticed a competitor’s capsized boat, he disqualified himself, abandoning the race to help save the two injured sailors. After handing the competitors off to a rescue crew, he resumed the race and still beat out 11 of the other competitors (coming in 21st out of 32). While he didn’t win silver (which his original pace could have easily earned him), Lemieux was awarded an honorary medal for his heroic act.

It’s a reminder of the Olympic Charter which specifies that “The goal of Olympism is to place sport at the service of the harmonious development of humankind, with a view to promoting a peaceful society concerned with the preservation of human dignity.”

This newsletter is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages readers to refer to applicable rules, standards, guidance, and other resources in their entirety. All entities should carefully evaluate which requirements apply to their respective organizations.

About the Center for Audit Quality
The Center for Audit Quality (CAQ) is an autonomous public policy organization dedicated to enhancing investor confidence and public trust in the global capital markets. The CAQ fosters high-quality performance by public company auditors; convenes and collaborates with other stakeholders to advance the discussion of critical issues that require action and intervention; and advocates policies and standards that promote public company auditors’ objectivity, effectiveness, and responsiveness to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs.