Audit Insider | June/July 2024

Welcome back, Audit Insiders. With the passage of the 4th of July holiday, summer is more than underway, and I hope everyone is getting time to enjoy summer vacations (and staying in the air conditioning).

It certainly has been an active summer for regulators and standard-setters, with the Public Company Accounting Oversight Board (PCAOB) particularly busy with standard-setting activities. At the CAQ, my colleagues have been equally active, writing comment letters, sharing publications on restatement trends, conducting institutional investor surveys, and developing resources to support the ongoing fight against fraud in the capital markets.

In June, we commemorated Pride Month and Juneteenth and celebrated how the profession has grown with Kecia Williams Smith and Lauryn Johnson. And to continue the pride celebrations from June into July, I interview someone I admire for the work he has done for the LGBTQ+ community, the CAQ’s Senior Director of Communications, Brad Jacklin, on the importance of diversity and representation within the 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.

We’re closely monitoring these proposals and others from audit regulators and standard setters:

We’re closely monitoring these proposals and others from audit regulators and standard setters:

PCAOB and SEC​​​

PCAOB Adopts Standards and Rules
Since our last edition of Audit Insider, the Public Company Accounting Oversight Board (PCAOB) has adopted a slew of standards and rules. Let’s take a look:

•  On May 13, the PCAOB adopted a new standard to lead registered public accounting firms to significantly improve their quality control (QC) systems. Among the key provisions:
  • The new standard strikes a balance between a risk-based approach to QC and a set of mandates.
  • All PCAOB-registered firms would be required to design a QC system that complies with the new standard.
  • Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on Form QC.
  • Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system.
  • Effective date: Subject to approval by the SEC, the new standard and related amendments will take effect on December 15, 2025.
    • Our take: We have consistently stated that a firm’s quality control system is foundational to audit quality and that an effective quality control system is important to strengthening auditing practices and continuously improving audit quality. We support the Board’s efforts to modernize existing auditing standards, and in particular quality control standards. We have supported this effort since responding to the PCAOB’s Concept Release on QC 1000 in 2019 and Proposed Standard in 2022. In our comment letter to the SEC, we share specific concerns and questions about the Final Standard, particularly the new External Quality Control Function (EQCF), that we believe requires further consideration by the PCAOB before a final quality control standard can be approved by the SEC. Our comment letter focuses specifically on our concerns related to this new EQCF requirement.
    • What’s next: On July 1, 2024, the SEC extended the date by which they should approve, disapprove, or institute proceedings to determine whether to disapprove, the new QC standard to August 25, 2024.
• Also on May 13, the PCAOB adopted a new standard on general responsibilities of the auditor. AS 1000: General Responsibilities of the Auditor in Conducting an Audit addresses the general principles and responsibilities of the auditor, including due professional care, professional skepticism, competence, and professional judgment. AS 1000 and the related amendments will:
  • Modernize, clarify, and streamline the general principles and responsibilities of auditors and provide a more logical presentation, which should enhance the useability of the standards by making them easier to read, understand, and apply.
  • Clarify the auditor’s responsibility to evaluate whether the financial statements are “presented fairly.”
  • Clarify the engagement partner’s due professional care responsibilities by adding specificity to certain audit performance principles set out in the standards.
  • Accelerate the documentation completion date by reducing the maximum period for the auditor to assemble a complete and final set of audit documentation from 45 days to 14 days.
  • Clarify an auditor’s professional skepticism extends to other information that is obtained to comply with PCAOB standards and rules.
  • Effective date: Subject to approval by the SEC, the new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2024. For certain firms, the amendment relating to the documentation completion date will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
    • Our take: In our comment letter to the SEC, we acknowledge and thank the PCAOB for their efforts to understand the feedback provided and concerns raised by stakeholders through the comment letter process, and to thoughtfully address that feedback in the Final Standard. We are supportive of the SEC approving the Final Standard.
    • What’s next: On July 1, 2024, the SEC extended the date by which they should approve, disapprove, or institute proceedings to determine whether to disapprove, the new QC standard by August 25, 2024.
• On June 12, the PCAOB updated its standard to clarify auditor responsibilities when using technology-assisted analysis. The Board adopted two amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. The amendments were designed to provide additional detail and clarity around the responsibilities auditors have when performing procedures using technology-assisted analysis.
  • Effective date: Subject to SEC approval, the new standard will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
    • Our take: The CAQ supports the Board’s objective to provide greater guidance and clarity for auditors when using technology-assisted analysis within the audit.
    • What’s next: Comment letters are due to the SEC by July 23, 2024. The SEC has until August 16, 2024, to approve, disapprove, or institute proceedings to determine whether to disapprove the amendments.
• Also on June 12, PCAOB updated Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, to strengthen accountability for contributing to firm violations. The updated rule requires that an associated person must have contributed to the firm’s violation directly, substantially, and negligently in order to be held liable.
  • The updated rule changes Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. The amendment to Rule 3502 is subject to approval by the SEC.
  • Effective date: If approved by the SEC, the amended rule will become effective 60 days after such approval.
    • Our take: In November, we submitted a comment letter in response to the proposal. One of the concerns we expressed was the impact this updated rule could have in exacerbating the accounting talent crisis. We appreciate Chair Williams’ statement, “This change is not intended to ensnare junior professionals or other auditors who are responsibly executing their duties.” It will be important to study the impact of this update to determine if there is any impact on the accounting talent crisis.
    • What’s next: Comment letters are due to the SEC by July 23, 2024. The SEC has until August 16, 2024, to approve, disapprove, or institute proceedings to determine whether to disapprove the amendments.

PCAOB Continues Its Modernization Drive with Proposal to Replace Outdated Standard on Substantive Analytical Procedures
The PCAOB issued for public comment a proposal to replace its existing auditing standard related to an auditor’s use of substantive analytical procedures with a new standard: AS 2305, Designing and Performing Substantive Analytical Procedures. Along with proposed AS 2305, the proposal also includes amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. The deadline for public comment on the proposal is August 12, 2024.

PCAOB Updates Its Standard-Setting, Research, and Rulemaking Agendas to Reflect 2024 Progress
Since our last edition of Audit Insider, the PCAOB has updated their standard setting agenda. Two projects added to their short-term standard setting agenda were Inventory and Other Reporting. One project added to the mid-term agenda was Internal Audit. The anticipated timeline for the Attestation Standards Update is now 2025 (from 2024). The project Follow-On Disciplinary Proceedings was removed from the PCAOB’s rulemaking agenda. As a reminder, short-term standard setting projects are those where a Board action is anticipated in fewer than 12 months. Projects on the mid-term standard setting agenda are those where Board action is NOT anticipated in the next 12 months. For more details, check out the PCAOB’s standard setting agenda at this link.

• Our take: The CAQ has long been supportive of the PCAOB’s standard-setting agenda and believe it is of the utmost importance to be focused on those projects and standards with a real opportunity to improve audit quality. Stakeholder engagement throughout the standard-setting process (i.e., notice and comment period) as well as through the standard’s entire lifecycle (i.e., pre-implementation, implementation, post-implementation) is critically important for audit quality. For the first ever, the CAQ’s Smaller Firm Task Force submitted a comment letter to the PCAOB expressing concerns with the cumulative impact of the PCAOB’s standard setting activities on smaller and medium sized firms. While the NOCLAR proposal remains on the short-term agenda for adoption in 2024, we would like to see more stakeholder engagement and input before a final standard is adopted.

SEC Appoints Erica Y. Williams to a Second Term as PCAOB Chairperson
The SEC announced the appointment of Erica Y. Williams to a second term as Chairperson of the PCAOB beginning on October 25, 2024, and running through October 24, 2029. Prior to joining the PCAOB in January 2022, Erica Y. Williams was a litigation partner with Kirkland & Ellis LLP. She previously spent more than a decade in various roles at the SEC, including as Deputy Chief of Staff to three former SEC Chairs and Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement trial unit.​​​​​​

SEC Crypto Accounting Rule Killed in the Senate
On May 16, the Senate voted 60-38 to strike down the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 121. The rule, which went into effect on April 11, 2022, states that crypto assets under custody should be accounted for as a liability on the custodians’ balance sheets, asserting that they posed a significantly increased risk. The resolution to strike down SAB 121 also passed the House with bipartisan support earlier in the month.

However, on May 31, President Biden vetoed the resolution, citing that the White House would not support “support measures that jeopardize the well-being of consumers and investors.” Last week, the U.S. House of Representatives held a vote on whether to override President Biden’s veto, but were unsuccessful, leaving SAB 121 intact.

As this issue continues to develop, audit committees and other stakeholders should familiarize themselves with the ways public companies are engaging with digital assets and oversight. The CAQ offers a few resources: Jumpstart Your Digital Assets Journey and Continuing Your Digital Assets Journey.

PSA: Small Business Capital Raising Hub 

Did you know the SEC has a Small Business Advocacy Office? Check out their Roadmap to Funding a Small Business and explore other resources available on the SEC’s Capital Raising Hub to help equip small businesses and their investors with the tools needed to navigate capital raising! There is even a glossary that helps cut through the jargon. Sign-up to receive their small business updates

Supreme Court Rulings

Supreme Court Overrules Chevron, Sharply Limiting Judicial Deference To Agencies’ Statutory Interpretation
In June the Supreme Court ruled to overturn Chevron doctrine. Judicial deference to administrative agencies’ statutory interpretation is contrary to the Administrative Procedure Act (“APA”) and traditional principles of judicial review.  Judges must independently interpret statutes without deference to an agency’s reading of the law. Read what this ruling means in this brief from Gibson Dunn.

Supreme Court Holds the Seventh Amendment Entitles A Defendant To A Jury Trial When The SEC Seeks Civil Penalties For Securities Fraud
In June the Supreme Court ruled that defendants are entitled to a jury trial in federal court for SEC fraud actions seeking civil penalties. Read what this ruling means in this brief from Gibson Dunn.

Audit Quality

Audit quality in the U.S. remains high, 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 Publishes Financial Restatement Trends in the United States
To better understand the trends of the last decade amidst regulatory changes and economic events, the CAQ analyzed restatements announced from 2013 – 2022. In our research, we found that restatements have declined in the reported years with the biggest decline observed in 4.02 (known as the most severe) restatements. We also discovered that expenses, specifically the misapplication of reporting rules for accruals, reserves, and estimates, were cited most frequently in restatement announcements. This was followed by financing activities and revenue-related accounting errors. For an in-depth analysis, check out this breakdown from my colleague, Vanessa Teitelbaum.

Former PCAOB Board Discusses Audit Quality with Julie Bell Lindsay
Episode 6 of Julie Bell Lindsay’s Capital Markets Pulse podcast features Duane DesParte, former PCAOB Board member. In the discussion, Duane shares his insights and perspectives about the PCAOB’s standard-setting agenda, the current state of audit quality, and current PCAOB’s efforts to engage with stakeholders and what the future of the profession looks like. Listen to their conversation here.

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.

CAQ Survey Finds Investors in Support of the SEC’s Climate Rule
The environmental reporting landscape is in the spotlight with the SEC’s climate rule. Our Q2 Institutional Investor Survey reaffirms this trend as 83% of investors in the U.S. support the SEC’s efforts to require climate-related disclosures because of the role such information plays in evaluating investment opportunities. For investors, it seems the issue comes down to trust, with 60% reporting that reliable climate-related disclosures enhance the reputation and trustworthiness of a company. The survey also found that found that 94% of investors are clear that they want third parties to review and assess the climate-related disclosures that companies make. Take a deep dive for additional insights on the survey’s findings.

Speaking of the climate rule, be sure to listen to the latest episode of our Capital Markets Pulse podcast with Peggy Smyth, Audit Committee Chair at Etsy, for insights and key learnings for audit committees as they continue on their climate reporting journey.

Annual Analysis of S&P 500 Finds More Companies Assure ESG Information
In June, the CAQ released our annual analysis of S&P 500 companies and ESG information. This effort, which we have undergone since 2022, seeks to better understand how public companies are reporting ESG information in light of existing reporting standards, frameworks and rules.

The results, which look back at reporting in 2022, show that the majority of companies (98%) on the S&P 500 reported some form of ESG information. This is unsurprising given that public companies have not only been referencing the most common ESG reporting standards and frameworks – such as the SASB, GRI, TCFD and IR for years – but also because in the U.S. they were preparing for the SEC’s final climate rule passed, this March (though recently stayed).

As many anticipated, the SEC’s final rule did include an assurance component, which may explain why we also continue to observe an increase in the number of organizations obtaining assurance over ESG information (70% in 2022, up 5% from the previous year). More organizations also used a public company auditor to provide this assurance.

View the full report and compare trends year over year: S&P 500 ESG Reporting and Assurance Analysis.

And in this Audit in Action blog, my colleague Desire Carroll shares what her key takeaways are after several years of examining the S&P 500 and ESG reporting trends. Be sure to read it.

Deterring and Detecting Fraud

To elevate the profession’s understanding of fraud and the vital role that auditors play in this landscape, the CAQ collaborates with the Anti-Fraud Collaboration (AFC) to produce insights and actionable recommendations to strengthen the profession against fraud risk.

CAQ Attends Global Conference on Fraud
In June, the CAQ brought the AFC to the Association of Certified Fraud Examiner’s Global Conference. We raised awareness with the 5,000 plus attendees about the AFC resources available to aid in the fight against fraud. I also had a chance to participate in a panel discussion (it was so popular it was standing room only) on closing the expectation gap on the auditor’s role in combatting fraud. A key takeaway was better communication of what the auditor does related to fraud. There were a couple auditors in the audience who commented on finding fraud and that often it was through their fraud inquiries that fraud was identified.

Andi McNeal Shares Insights in the Fight Against Fraud
In March 2024, the Association of Certified Fraud Examiners (ACFE) released Occupational Fraud 2024: A Report to the Nations. I recently had the opportunity to collaborate with Andi McNeal, CFE, CPA and Chief Training Officer for the ACFE on a blog post exploring what this report means for all stakeholders in the financial reporting supply chain.

Here are a few of our takeaways:

• Fraud detection trends: The most common way a fraud came to light was through a tip from a whistleblower (43% of cases), followed by through the internal audit (14%) and management (13%). External auditors detected fraud in 3% of the cases in the ACFE’s study, which makes sense, given external auditors are the last line of defense in many cases, due to the timing and scope of their engagements.
• Fraud detection methods: Programs that support internal parties detecting fraud — whether through employee tips, management review, or internal audit — increase the likelihood that the fraud will be detected sooner and minimize the losses incurred.
• The external auditor: More than half (58%) of the respondents where the fraud case was identified by the external auditor (N. 52) noted that the fraud was detected though standard audit procedures. The next most common way external auditors discovered frauds was through fraud inquiries (33%).

All stakeholders can benefit from understanding the findings in the ACFE’s report and what it means for their role in fighting fraud. Read our blog for more insights.

CAQ Submits Comment to IAASB’s Fraud Proposal
On June 6, the CAQ submitted a comment letter in response to the International Auditing and Assurance Standards Board (IAASB)’s Proposed International Standard on Auditing 240 (Revised): The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.

• Our take: We are supportive of the IAASB’s efforts to clarify and enhance the auditor’s responsibilities relating to fraud in an audit of financial statements, including highlighting the importance of professional skepticism in the audit, as a means of enhancing public trust in financial reporting. For more information, read our comment letter.

Talent Spotlight

Inclusivity: A Conversation with Lauryn Johnson
The value of diverse voices and backgrounds within the financial reporting profession can not be overstated. At the CAQ, we advocate for the advancement of people of color, promote diverse opportunities, and encourage a diversity of thought within our organization and the profession at large. To celebrate diversity, we are honored to spotlight Lauryn Johnson, Digital Assurance & Transparency (DAT) Experienced Associate at PWC. In an in-depth conversation, Lauryn shares unique perspectives and guidance for accounting students and professionals from diverse and underrepresented backgrounds looking to make a change. Take a look.

Accounting Milestones: The Importance of HBCUs
To celebrate the class of 2024 and to commemorate the importance of Historically Black Colleges and Universities (HBCUs), Kecia Williams Smith is back with another blog. With new graduates joining the workforce, it is important to remember the valuable role of HBCUs in breaking down barriers for Black students interested in an accounting career. I encourage you to take a look at the historical trailblazers who played a role in adopting accounting programs across HBCUs.

In each edition, we feature leaders in the audit profession. This month we are featuring Brad Jacklin, Senior Director, Research and Communications at the CAQ.

 

In June we celebrated Pride Month, a time when we recognize the influence of LGBTQ+ people around the world. How has being a gay professional influenced your career journey and what challenges have you encountered along the way?

• For me, before being a “gay professional” I was just gay. More than half my life and my entire professional career have been influenced in part by popular social and cultural perceptions of gay people because I came out in my early 20s while in college. Identifying as gay and being out haven’t limited my career, but the combination certainly influenced the direction and the opportunities I pursue even today.I spend nearly as many waking hours with my coworkers as I do with my partner…and I fully expect my coworkers to listen to my boring weekend stories with him if I am listening to theirs. More seriously, I recognize that at this time in my career I have the luxury of being able to prioritize finding an inclusive culture when it comes to work. I appreciate that I found that in CAQ and the world of public company audits.

How have you seen the work environment change over time for LGBTQ+ professionals?

• Prior joining the CAQ I worked for more than a decade on federal LGBTQ+ policy at the beginning of my professional life. I was a “Professional Gay” before I was a gay professional. The work was fascinating and rewarding, and it exposed me to a range of experiences LGBTQ+ people have in the workplace. There I was, a recent grad in my first job and nearly all my colleagues identified as part of the LGBTQ+ community. It was amazing to be surrounded and supported by people with shared experiences, but it wasn’t the norm.In large portions of the country there were no state-level protections (still the case today) for LGBTQ+ people in the workplace or elsewhere. And most employers weren’t thinking about the needs of their LGBTQ+ employees – in 2002 only 13 companies received a 100% on the Human Rights Campaign’s Corporate Equality Index. The bar to score a 100% has been raised, but in 2023 there were 595 companies with top scores on the Corporate Equality Index.

  When I started looking for employment outside the LGBTQ+ movement I knew I was going to work in an industry and organization that would value me for me. Even if I wanted to be in the closet at work, my resume or an internet search are always going to out me. I’m grateful for the work that countless people – LGBTQ+ and allies – in the corporate world have pushed forward so that I could join the public company audit profession without worrying if it was safe to mention my boyfriend.

Can you share your perspective on the importance of LGBTQ+ representation in the audit profession?

• I think representation, not just of LGBTQ+ people, is critical in the workplace for a variety of reasons.  I could talk about the business case for representation, but honestly, I think it’s just the right thing to do. There are 300+ million people in the United States and the dimensions of diversity continually evolve. I frequently experience a new idea or a new cultural perspective through work and value those opportunities as they come. From my perspective, greater diversity and representation in the workplace means more opportunities to learn something new and interesting.

The results of last month’s snap poll are in: over half (66%) of those of you who responded are receiving questions from audit committee members and/or company management about the SEC’s final climate sometimes to often. While the fate of the rule remains to be determined, learn more about it and its implications for auditors here.

My snap poll question this month: How often do you find it difficult to identify at least one CAM on your audit?

1. Very often
2. Often
3. Sometimes
4. Never

I’ll include the answer to this question in next month’s Audit Insider. In the meantime, please continue to let me know what you would like to hear about next month.

• Audit quality
• Technology (AI, cybersecurity)
• ESG
• Talent
• Other

The CAQ will host a handful of CPE eligible events this summer. Read on for more information.

Audit Insider Webinar | July 2024
This hour-long webcast will showcase regulatory and practice developments of interest to public companies and their auditors. Panelists include staff from the SEC’s Division of Corporation Finance and the SEC’s Office of the Advocate for Small Business Capital Formation. Panelists will discuss comments issued on SEC filings and lessons learned from the 2023 reporting cycle. Panelists will also discuss the role of the Office of the Advocate for Small Business Capital Formation, including the resources they offer small businesses and the firms that serve them.

This event is eligible for 1 CPE credit and takes place on July 30th at 2 p.m. Register Now.

Enterprise Risk Management for Audit Committees
Enterprise Risk Management (ERM) is essential for audit committee members, offering insights into identifying, assessing, and mitigating risks that impact organizational objectives. Join the CAQ, NACD and our panel of experts for a discussion on how audit committees can fulfill their oversight responsibilities related to ERM through the lens of frameworks, regulatory expectations, and best practices for effective risk oversight. Participants will learn how to enhance risk reporting, improve decision-making, and ensure alignment with strategic goals.

This event is eligible for 1 CPE credit and takes place on August 8th at 1 p.m. Register Now.

CAQ Joins WilmerHale for Part Two Event on Recent Developments in Accounting
This month the CAQ participated in a second event with WilmerHale for a panel on the PCAOB’s standard-setting and inspections trends, as well as SEC and PCAOB enforcement trends, including the nature of underlying violations, SEC and PCAOB areas of focus, and connections between enforcement and recently adopted and proposed PCAOB standards.

Here are a few takeaways from the discussion:

• Inspections: Inspection results continue to indicate that audit quality remains high. Restatements remain at record lows, and while the PCAOB has found more deficiencies in recent years, they are still down by 47% since the PCAOB began inspections ten years ago.
• Enforcement actions: Enforcement actions from the PCAOB have also increased in recent years while SEC penalties have been declining. One analysis found that 50% of inspections led to enforcement actions. But a closer look shows that the majority of enforcements were minor and technical in nature, such as communications with audit committees or documentation. Enforcements are also higher for non-U.S. firms.
• Standard-Setting: While all panelists agreed that the PCAOB’s efforts to modernize existing auditing standards are important, concerns remain about comment letter timelines and not enough stakeholder engagement.

If you’re interested in hearing the full discussion, on on-demand webinar can be accessed here: Recent Developments in Accounting, Auditing and the Law Series.

See you next month Audit Insider.

Dennis McGowan

Vice President, Professional Practice and Anti-Fraud Initiatives