As we await the SEC’s final climate proposal, the ISSB took the world one step closer to a global baseline by launching its first two standards. This is a much-welcomed milestone for ESG reporting.
While June’s developments in the ESG space brought about more certainty, those tracking crypto developments observed more uncertainty with the SEC suing major crypto exchanges.
And, the public company audit profession celebrated Pride Month, a recognition of progress made on LGBTQ+ human rights. Be sure to read on to see who we featured as This Month’s Audit Insider to celebrate and honor an inspiring LGBTQ+ leader in our profession.
Read on for the latest issues I’m tracking and resources from the profession to assist audit practitioners.
Please note that these perspectives are my own. If this email was forwarded to you, subscribe here so that you never miss a public company auditing update.
In June, the PCAOB continued to issue new proposals and staff spotlights at a steady clip. We’re closely monitoring these proposals and others from audit regulators and standard setters:
PCAOB
- NOCLAR: In June, the PCAOB issued a proposed new auditing standard, AS 2405, A Company’s Noncompliance with Laws and Regulations. The proposal aims to strengthen auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations, or as Chair Williams put it, “help companies course correct and better protect investors from risk.” But not all board members are aligned. Board member Duane DesParte cautioned that the proposal, “suggests the auditor would be expected and held accountable to identify any and all information that might indicate instances of noncompliance of any law or regulation across the company’s operations, without regard to materiality.” Board member Christina Ho took her comments a step further, stating the proposal “is not fully transparent about the significant additional responsibilities it would impose on all public company auditors by eliminating the distinction between noncompliance that has a direct versus indirect effect, on a public company’s financial statements.”
- Our take: The CAQ continues to be supportive of the PCAOB’s efforts to modernize existing standards to meaningfully improve audit quality and protect investors. We are currently reviewing the proposal to provide our input on those proposed amendments that improve audit quality and identify where the proposed requirements may expand the auditor’s role in a way that could create confusion and not improve audit quality. Have thoughts about the proposal you want to share with the CAQ? Send them to me at dmcgowan@thecaq.org.
- Digital Analysis: The PCAOB also issued a proposal designed to improve audit quality and enhance investor protection by addressing aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. The proposal includes changes to update aspects of AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. Comments are due August 28, 2023.
- Spotlights
- Crypto assets and fraud: The PCAOB in June issued a spotlight that highlights certain responsibilities under PCAOB standards for auditors of public companies and brokers and dealers transacting in or holding crypto assets, their inspection observations related to crypto assets, and important reminders for auditors when performing audits of public companies or broker-dealers, where activities associated with crypto assets are material to the financial statements. The spotlight comes as the SEC opened two lawsuits against crypto exchanges Binance and Coinbase for failing to register with the SEC.
- Our take: We found it helpful that the PCAOB described good practices they observed through their inspections of crypto assets, and audit practitioners who audit crypto assets should make sure to review these. Regulators are cracking down on crypto organizations and public companies that engage with digital assets could be caught in the middle. Organizations engaged in digital assets can minimize their risks by better understanding the legal and regulatory environment, performing risk assessments, and engaging with third-party service providers. Review the CAQ’s publications, Jumpstart Your Digital Assets Journey: A Tool for Audit Committees and Continuing Your Digital Assets Journey, A Tool for Audit Committees.
- Fraud-risk spotlight: The PCAOB also published a resource for audit committees to help them facilitate dialogue on the risk of fraud, digital assets, critical audit matters (CAMs) and more.
- Crypto assets and fraud: The PCAOB in June issued a spotlight that highlights certain responsibilities under PCAOB standards for auditors of public companies and brokers and dealers transacting in or holding crypto assets, their inspection observations related to crypto assets, and important reminders for auditors when performing audits of public companies or broker-dealers, where activities associated with crypto assets are material to the financial statements. The spotlight comes as the SEC opened two lawsuits against crypto exchanges Binance and Coinbase for failing to register with the SEC.
ISSB
- Global standards: The International Sustainability Standards Board (ISSB) launched its first two sustainability disclosure standards, an important milestone in the development of a global baseline built from existing standards and frameworks that can be adapted to the market needs in different jurisdictions to help support companies in presenting ESG information that is comparable.
- Our take: We were especially pleased that the standards are designed to provide a basis for assurance, which can enhance the quality of ESG and other information, and will provide a basis for auditors to deliver credible and reliable assurance prepared in accordance with these standards. Read our statement here.
Audit Quality
Audit quality in the U.S. has never been higher, but in light of economic uncertainty, emerging developments, and demands on talent, audit practitioners should remain up to speed on the latest developments impacting audit quality. Read on for recent news, tools, and resources.
CAQ Updates Audit Quality Disclosure Framework
While we wait for the PCAOB’s proposal on firm and engagement performance metrics, the CAQ has published a resource that can assist firms in their ongoing efforts to determine, assess, and communicate information that may be useful to stakeholders in understanding how audit quality is supported and monitored at the firm level.
The Audit Quality Disclosure Framework adheres to three key principles:
- It is voluntary and illustrative, as opposed to prescriptive or all-inclusive.
- The Framework is flexible, giving firms the ability to tailor the information that is most relevant and meaningful to audit quality.
- The Framework relates to disclosure of a system of quality control at a firm level, rather than at an engagement level.
Under these overarching principles, the Framework provides “Points of Focus” for seven Components of audit quality and certain examples of Firm-Level performance metrics:
- Governance and Leadership
- Relevant Ethical Requirements, Including Independence
- Acceptance and Continuance of Client Relationships and Specific Engagements
- Engagement Performance
- Resources
- Information and Communication
- Monitoring and Remediation Process
CAQ Responds to Washington Post Opinion: “How to fix the global audit industry? Get rid of it.”
In his June 1 Thursday Opinion column, “How to fix the global audit industry? Get rid of it.,” Duncan Mavin acknowledged that the audit profession is composed of “people who are well-qualified, well-trained, and mostly good corporate citizens.” In the same column, he called for abandoning the mandatory audit and leaving only the most well-funded investors with the opportunity to seek an audit of a company’s finances.
The CAQ disagrees with this position. Read our response in this letter to the Washington Post’s editor.
The Evolving Role of the Auditor
As investor demand evolves, so does the role of public company auditors. The CAQ is dedicated to providing resources to keep you up-to-date on trending topics in corporate reporting.
Analysis of S&P 500 Finds Nearly All Public Companies Report ESG Information
As we wait for the SEC’s anticipated final climate proposal (now expected in October) and states plow ahead with their own ESG rules, the CAQ published its annual S&P 500 ESG Reporting and Assurance Analysis.
Our analysis suggests that this form of reporting remains a priority for public companies, with the number of companies reporting ESG information jumping from 93% to 99% of S&P 500 companies. More organizations are also using public company auditors to assure some of this information (an increase from 15% in 2020 to 18% in 2021). In 2021, the scope of information being subject to assurance increased – this was most pronounced when public company audit firms provided the assurance.
While we wait for U.S. rules to be finalized, what is clear is that ESG information is increasingly used by the capital markets and the information needs to be credible and reliable. Public company auditors can – and already are – playing a role by enhancing the reliability of ESG information presented by companies to investors and other stakeholders. Visit our ESG hub to learn more about the role of the auditor in climate assurance.
CAQ Launches Capital Markets Pulse Podcast
The CAQ has launched the Capital Markets Pulse podcast, a series exploring all things related to the capital markets from the public company audit profession’s perspective.
This month, hear from Janet Malzone, Grant Thornton’s national managing partner of Audit Services and Amanda Iacone, financial services reporter at Bloomberg Tax, on their thoughts on the CAQ’s recent Audit Partner Pulse Survey results.
Listen to the episode, “Economic pessimism, labor challenges & technology shifts,” on Spotify, Amazon Music or Apple Podcasts.
Talent Spotlight
The CAQ is committed to working with audit firms to address issues related to talent, including the pipeline and gaps in diverse representation. Each month, I’ll spotlight our efforts on this critical issue.
CAQ Receives DEI Leader of the Year President’s Award from NABA
The CAQ recently attended NABA’s Insight: Elevate convention and was honored to receive the Presidents DEI Leader of the Year award. We’re proud of the work we are doing through our continued partnership with NABA to encourage more black students to enter the accounting pipeline but, in light of AICPA’s recently published data showing that the number of candidates taking the CPA exam has dropped to a 17-year low, know we have more work to do. We look forward to continuing to share our progress via Bold Ambition.
Every year in June we celebrate Pride Month, a time when we recognize the influence of LGBTQ+ people around the world. This month we are featuring Audit Insider, Christopher Tower, Managing Partner, Sustainability & ESG, BDO. In his role as a member of BDO’s Executive Team, Christopher has been a key advocate of strategic initiatives that help advance BDO’s sustainable business practices, such as BDO’s diversity, equity and inclusion strategy. I had the privilege of working with Christopher when he served as BDO’s representative on the CAQ’s Advisory Council and Professional Practice Executive Committee. As an out leader in the profession, I am personally inspired by Christopher’s leadership and example as an LGBTQ+ leader in the public company audit profession.
Question: How has being a gay professional influenced your career journey and what challenges have you encountered along the way?
Christopher: Being a gay professional has had a profound impact on my career, providing me with many opportunities to lead strategic cultural initiatives, and positively influencing how I manage and mentor my teams and frame my relationships with my colleagues and clients. However, it has not been without significant challenges over the years. I have had coworkers express their disapproval of or disdain for my sexual orientation. I have had a client cease using our firm when they found out that I – their audit partner – am gay. And the list goes on. However, for me, these adversities have served as a catalyst to action. For every difficult moment I faced, I strove harder to succeed in what was seen as a highly conservative profession at the time I began my career.
To meet these challenges head on, I realized that two things needed to happen to obtain acceptance and understanding in the workplace. First, I needed to “come out” to my colleagues, which I did as an audit manager in 1990. This allowed me to remove from the equation the constant questioning and ever-present uncertainty about my orientation. Through being transparent and open, I trusted that people would begin to understand me.
Second, I held firmly to the belief that I needed to change the narrative among those who had not accepted me yet. By striving for excellence in all that I did, I shifted the focus from my sexual orientation to the value I brought to the team and to our clients. Through my contribution and hard work, their views began to soften … to migrate, no longer viewing my orientation as an obstacle. I was no longer the gay member of the team, but a high performing member of the team who happened to be gay.
Question: Having been out in the profession since 1990, how have you seen the work environment change over time for LGBTQ+ professionals?
Christopher: I began my professional career in 1986, where the work environment was dramatically different than it is today. In broad terms, a gay professional could not be open about their personal life at work and had to be concerned about the potential negative impact of someone at work finding out. I can still remember my first business lunch where my audit manager pointed at a table where four men were eating their lunch and made extremely derogatory remarks about their assumed sexual orientation. Sadly, no one at our table challenged this brazen act. And this was in San Francisco, one of the most liberal work environments in the USA.
Over time, LGBTQ+ professionals have pushed forward in the workplace through action and perseverance. Thirty years ago, at the start of a meeting, no one would have thought to ask how my husband is doing or what my husband and I did over the weekend. Today, this is standard fare. At BDO, my relationship with my husband is seen no differently than any heterosexual professional and their spouse. My husband is routinely asked about, and he joins firm events and participates in business development activities when significant others are involved. The environment did not simply evolve to this point; rather it is the result of the courageous and deliberate actions of countless LGBTQ+ professionals being “out” at work, and striving for acceptance and understanding.
Question: Can you share your perspective on the importance of LGBTQ+ representation in the audit profession?
Christopher: Having LGBTQ+ professionals in the audit workplace has many benefits. Individuals from diverse backgrounds provide differing perspectives, which is advantageous when it comes to problem solving in the audit environment. Diversity also enhances the talent pool for the profession and strengthens a firm’s culture of teamwork. And…embracing diversity as a business imperative connects the profession to the many communities it serves.
As a gay professional, I have been sensitive to the many difficulties under-represented communities experience in the work environment. As result, my empathy runs deep, and I have a passion for helping others work through the day-to-day hurdles we all experience. The LGBTQ+ community’s interest in the welfare of others, which is rooted in the adversities the community has had to face, provides a uniquely supportive element to the workforce. It is reflected in everyday meetings, in career coaching and mentoring and in interactions with clients and prospects. The profession benefits greatly from this passion for helping others thrive.
Each month, I’ll answer questions from readers. I received the following question in June:
Question: The PCAOB has an active standard-setting agenda. What is the best way to provide input on their standard-setting projects?
Answer: Since Chair Williams took office in 2021, she has repeatedly made clear that she means business when it comes to updating auditor rules, and we’re seeing that now with several different proposals issued by the PCAOB this spring.
If you are an auditor, an audit committee member, an investor or another capital markets stakeholder, and you have feedback for the PCAOB, whether it be on a proposal, Board releases, consultation papers or other matters, I strongly encourage you to submit a comment letter.
The PCAOB takes feedback seriously and your perspective matters. More on how to submit comment to the PCAOB here.
Submit your questions for next month to jgermain@thecaq.org.
Audit Insider Webinar
Join the CAQ for a free CPE-eligible webinar focused on emerging issues facing public companies and their auditors. During the webinar, you will hear from leaders in public company auditing and its regulatory bodies, including keynote addresses from leaders at the U.S. Securities and Exchange Commission and the Public Company Accounting Oversight Board.
The discussion will provide preparer and public company auditor perspectives on issues impacting auditors in today’s regulatory environment. Join this session to learn about the key themes arising in comment letters on filings from the most recent reporting cycle, and overarching themes in recent PCOAB inspection findings, including areas of concern highlighted by the PCAOB staff and observations and best practices from public company auditors.
NACD Audit Committee Effectiveness Series
Public company boards are dealing with more than ever before. In an increasingly unpredictable future, this free CPE-eligible episode of the CAQ and NACD’s Audit Committee Effectiveness series discusses principles from the Audit Committee Blueprint, developed by the NACD in partnership with KPMG’s Board Leadership Center. The Audit Committee Blueprint centers on 10 key principles that boards can use and adapt to ensure they are prepared for the future, with a focus on audit quality, internal audit, and audit committee focus and effectiveness.
See you next month Audit Insider.
Dennis McGowan
Vice President, Professional Practice and Anti-Fraud Initiatives