Welcome to another edition of Capital Markets Pulse, a monthly newsletter from the Center for Audit Quality that brings you insights, resources, and tools on the latest issues impacting the capital markets
It’s the season of giving, and while visions of sugar plums, gifts, and cozy fires may be dancing in your head, I interrupt those festive thoughts with some important updates from the profession.
Last month, the PCAOB approved two significant rules – one on firm and engagement metrics and another on firm reporting – set to have widespread implications for public company audit firms. They also decided to table NOCLAR until the New Year, giving us something to watch for in 2025.
On our end, we released this year’s Audit Committee Barometer publication, which highlighted some encouraging trends, like increased audit committee disclosures on cybersecurity, alongside opportunities for further improvement. Meanwhile, this month’s Capital Markets Pulse podcast explored how recent Supreme Court cases could shape the public company audit profession—a timely discussion in the wake of election season.
As we embrace this season of giving, I’d like to take a moment to give thanks for my exceptional CAQ team, whose hard work supports the public company audit profession and strengthens the capital markets.
Read on for the latest updates and insights from the profession.
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.
Implications of recent Supreme Court decisions with Mike Scanlon
In the latest episode of Capital Markets Pulse, I met with Mike Scanlon, partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, to discuss the potential impact of recent Supreme Court cases on SEC and PCAOB rulemaking, standard-setting and enforcement applicable to the public company audit profession.
The following are a few highlights from our conversation:
- On Loper Bright: The decision is not all together surprising in that it reflects a trend in the recent past of the courts narrowing agency authority…In essence, when an agency action is challenged under the Administrative Procedure Act, that Act requires the court decide all relevant questions of law without deferring – and deferring is the key word – to an agency’s interpretation.
- On the SEC vs. Jarkesy: This case really zeroes in on the scope of an agency’s ability to bring an adjudicated enforcement action in an administrative law tribunal – so an in house agency court – before an administrative law judge as opposed to a federal court. As the administrative state has grown in the U.S. over the past century, the notion of having in house courts at a federal agency has become part and parcel of the administrative state. And this case zeroes in on to what extent a respondent or an agency who brings an enforcement action against a respondent in that in house court – to what extent that respondent is entitled to hear that case before a federal jury in federal court as opposed to an in house court which do not have juries.
- On the implications of these decisions for the SEC and PCAOB: There’s two pieces to think about. One is generally the implications for agency rulemaking. And then what does it mean for the accounting profession. I think more broadly and certainly from a political perspective, the decision and the package of decisions from the Supreme Court on the adlaw side this year, adds arrows to the quiver of the anti-regulatory camps and will be bantered about in that context on Capitol Hill and beyond. we have already seen more than 40 federal lawsuits that have been filed citing Loper Bright in the wake of the decision saying that the various regulations plaintiffs are challenging should be overturned, including some fairly notable cases, the FTC’s noncompete ban and at the SEC for example, crypto firms have challenged the SEC’s dealer rule on the same basis. form a fairly significant package of administrative law basis to challenge rule-making.
Listen to the full podcast here: Implications of recent Supreme Court decisions feat. Mike Scanlon, Partner at Gibson, Dunn & Crutche
Be sure to subscribe to the latest episodes on Spotify, Apple Podcasts, or Amazon Music.
Profession Updates
Highlights from the Annual AICPA & CIMA Conference
Last week the CAQ was in full force at the AICPA & CIMA’s annual conference focused on SEC and PCAOB developments. The event featured many important discussions focused on the future of the profession with regulators, board members, auditors, and other stakeholders. Below are highlights from two events the CAQ participated in:
Q&A with SEC Commissioner Mark Uyeda: During this session, moderated by my colleague Dennis McGowan, Commissioner Uyeda discussed, among other things, his thoughts on overly theoretical regulatory methods and highlighted the importance of consulting practitioners before finalizing rules. On the PCAOB, Uyeda called for a comprehensive review to assess its effectiveness in meeting the objectives established by SOX. He suggested that all options should be considered regarding the PCAOB’s future. Uyeda also expressed concerns about the implementation of Staff Accounting Bulletin 121 and called for a reassessment of financial materiality in disclosures.
PCAOB Panel: The CAQ also facilitated a panel with the PCAOB. Chair Williams opened the session with prepared remarks, including the PCAOB’s inspection process, noting that inspectors are “seeing significant improvements in the aggregate Part I.A deficiency rate from the largest firms.” She also focused on the PCAOB’s achievements during her tenure, including the modernization of several standards, saying, “When I was sworn-in as chair of the PCAOB, 54 standards were largely untouched from when they were originally written in the 1980’s and 90’s, and frankly, many were unresponsive to what investors need to participate confidently in the markets today.” On the shelved standard NOCLAR, she said “public feedback is absolutely vital to our work. We read each and every comment letter we receive, and by listening to and learning from this feedback, our expert staff are considering adjustments. Based on the staff’s evaluation of the feedback, we decided we need more time before moving this project forward.”
The panel also included audience Q&A, where questions from the audience focused on the future of the PCAOB and some concerns with the recent standards. On the future of the Board, Chair member Ho said, “I do welcome a more moderate measure and moderate approach, so I am looking forward to working with the new SEC.”
Other events: Speaking of Board member Ho, she followed up on Chair Williams’ remarks on the PCAOB’s inspections with her own comments at the Investment Company Institute’s Accounting Treasurer’s Committee Meeting. She expressed concern about the PCAOB’s tone, saying, “With regard to inspections, the PCAOB seems to want to instill fear instead of confidence in our capital market system. Two days ago, the PCAOB Chair gave remarks in which she accurately stated that there has been in recent years an increase in Part I.A deficiencies identified by PCAOB inspectors. But she lost all sense of proportionality by engaging in fear mongering, when she stated that “Part I.A findings are serious,” and provided examples such as the auditor “failing to perform any procedures at all to test revenue . . . .” Her statement and stark examples seem designed to inspire fear about the state of public company audits, by suggesting that a PCAOB inspection report identifying even a single Part I.A deficiency is an ominous indicator of audit quality.”
During the same meeting, Board member Ho likened recent enforcement actions to “jay walking” tickets, stating, “The focus should be on violations that are most likely put investors at risk, rather than what I colloquially refer to as parking or jay walking violations… approximately 25% of the PCAOB’s enforcement orders consisted of parking or jay walking tickets; specifically, failures by firms to comply with PCAOB reporting requirements.”
PCAOB Approves Rules on Firm Engagements Metrics and Firm Reporting; Postpones NOCLAR
Last month, by a 4 to 1 vote (with Board Member Ho dissenting), the PCAOB voted to approve two of its rules, Firm and Engagement Metrics and Firm Reporting. While the CAQ supports the Board’s efforts to modernize existing standards, we expressed concerns about the proposals.
On the firm and engagement metrics proposal, we were concerned that the metrics could be misinterpreted by investors, add to costs, and were not scalable for smaller firms. Further, a survey we conducted with audit committees and investors found that they wanted more evidence to support the need for and benefit of the proposed metrics. During the hearing, Board member Ho said, “The standard adopts burdensome metrics that have an unproven correlation with audit quality.”
On the firm reporting rule, the CAQ expressed a number of comments and concerns regarding the reporting requirements included in the proposal. Specifically, we are concerned that this rule will provide limited and uncertain benefits to stakeholders while exposing registered firms to significant costs and risks.
The rules now have 45 days to be approved by the SEC (until January 17, 2025). It’s a busy holiday season, but if you have feedback, don’t forget to submit a comment. See the initial comment letter we have submitted to the SEC here. We plan to file comment letters on the individual rules on their comment due dates: December 26th and January 2nd, respectively.
These were not the only major updates to the PCAOB’s agenda last month. As mentioned earlier, the Board also announced that they will no longer consider finalizing their rule on NOCLAR, which was strongly opposed by stakeholders, by the end of 2024. Instead, action on the project has been delayed until next year, with Chief Auditor Barbara Vanich saying during a November 21st meeting, “we want to get it right.”
Trump Nominates Paul Atkins for SEC Chair Following Chair Gensler’s Departure Announcement
In SEC news, Chair Gensler last month announced his plans to step down as Chair of the SEC on January 20th. During his tenure, Chair Gensler ushered through several rules that could have significant impacts on the future of corporate reporting for decades to come, from major corporate disclosure rules (climate, cybersecurity) to approving several of the PCAOB’s amended standards and rules.
We thank Chair Gensler for his commitment to our capital markets. Following Gensler’s announcement, Commissioner Lizárraga also issued a statement detailing his intention to depart the SEC on January 17th.
Meanwhile, President-elect Donald Trump has nominated Paul Atkins, a former SEC Commissioner, to succeed Gensler. Atkins has signaled an interest in reducing regulatory burdens and fostering innovation, particularly in digital assets and cryptocurrency markets. We look forward to continuing to support the SEC as they fulfill their mission to facilitate capital formation, protect investors and maintain fair, efficient and orderly capital markets.
CAQ Updates
CAQ Publishes Annual Audit Committee Barometer
We continue to hear from investors that they would like more information – not boilerplate disclosures – around audit committees’ important responsibilities and processes. To that end, we recently published our Audit Committee Barometer, which we have conducted annually with Ideagen Audit Analytics since 2014.
Toplines from the report include:
- The majority of S&P 500 companies (85%) and S&P midcap companies (75%) disclosed the board of directors’ skills matrix.
- 64% of S&P 500 boards disclosed the audit committee is responsible for cybersecurity oversight while 34% of S&P 500 boards disclosed the audit committee is responsible for oversight of ESG information.
- 60% of S&P 500 boards disclosed they have a cybersecurity expert compared with 51% in 2023. ESG or sustainability expertise on the boards of S&P 500 companies also increased by five percentage points since 2023 to 59%.
- A plateau in disclosure rates was observed across several measures, including considerations in appointing or (re) appointing the external auditor, considerations of the length of tenure, and considerations around how the audit committee evaluates audit fees in relation to audit quality.
While we are pleased to see that audit committees are increasingly disclosing information about new oversight areas and their expertise, we hope they will take a fresh look and consider further enhancing their disclosures to ‘tell their story’ and the important work they do.
Download the report here.
CAQ Observes International Fraud Awareness Week
The CAQ and Anti-Fraud Collaboration (AFC) have conducted a handful of activities in observation of International Fraud Week. Recently, the CAQ and AFC held a forum on fraud moderated by Cynthia Cooper, an internationally recognized speaker, best-selling author, and one of Time Magazine’s Persons of the Year for her courage in unraveling the fraud at WorldCom. The forum convened stakeholders across the financial reporting landscape, including investors, external and internal auditors, board members and preparers, and focused on topics including the current landscape, investor expectations, effective reporting and strengthening fraud deterrence and detection. Across the discussions, similar themes emerged, including the need for more detection layers and the rise in international third-party risks. We will be publishing a summary of the key themes and discussion topics in the first quarter of 2025—more to come!
Additionally, amid the growing popularity and ease of use of generative artificial intelligence (genAI) among organizations, the AFC this month launched a resource exploring what genAI is and how the technology may be used to enhance the prevention or detection of fraud and monitor activities that may be indicative of fraud.
Download the report here.
Accounting + Publishes New Episode of “The Bottom Line,” A Podcast for Students
This fall, we launched a new podcast hosted by two college accounting students, Ti’Anna and Hunter, that features real-world accountants in conversation about everything students need to know to level up in their career journey. Tune in to the latest episode:
- Episode 3: Mastering Soft Skills: Communication and Leadership in Accounting
- In this episode, the hosts talk about why developing soft skills is just as important as technical accounting knowledge, when it comes to achieving professional success.
Listen to the podcast here.
Building a more diverse CPA pipeline
In the latest entry for the CAQ’s Audit in Action blog, Ken Boyer and Diana Kutz from Ernst & Young LLP highlight the Steelers Showcase, an event series powered by Accounting+, that aims to help educate high school students about accounting careers. The authors state, “Accounting, much like football, is a dynamic field centered around strategic problem solving and innovation.”
Read the article here.
Julie Bell Lindsay
Chief Executive Officer, CAQ