Welcome back to the Capital Markets Pulse, a monthly newsletter from the Center for Audit Quality designed to bring you insights, resources, and tools on the latest issues impacting capital markets.
As we head into the second half of 2023, key economic, regulatory, and financial reporting trends are emerging. We see disclosure and assurance trends shifting in the S&P 500 when it comes to their ESG reporting. Inflation and cybersecurity remain areas of focus, particularly with the SEC finalizing its new rules relating to cybersecurity disclosures and incident reporting. And amid the accountant shortage, new research sheds light on barriers students face to entering the accounting pipeline.
This newsletter is designed to help all members of the financial reporting ecosystem understand how these developments and others impact public company auditing. Keep reading for what’s on my radar.
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.
CAQ Updates
Key Financial Reporting Trends in 2023
The financial reporting ecosystem is continually evolving and revealing new trends that impact our profession. Investors have vocalized their interests in emerging reporting landscapes, regulators have established rules and regulations, and auditors remain prepared to adapt and maintain the highest level of audit quality.
At the CAQ, we’re committed to helping all members of the public company audit profession understand and navigate the latest trends. In my latest Audit in Action blog post, I explore learnings so far in 2023 that may impact financial reporting trends for the rest of the year, including:
- Economic Issues: The Spring 2023 Audit Partner Pulse Survey asked audit partners from around the country about the main economic risks facing companies and how they’re adapting. Our survey found that 69% of audit partners see inflation as the largest economic risk to companies in their primary industry sector, followed by cybersecurity (39%); however, our Spring survey discovered a slightly more positive outlook over the next 12 months compared to the Fall 2022 survey.
- Cybersecurity: As public companies increasingly face cybersecurity threats, the SEC this week finalized rules on how these organizations should disclose material cybersecurity incidents. Among other provisions, the rule requires that companies hit with cybersecurity attacks must disclose these attacks and their impact publicly within four days.
- Emerging Financial Reporting Landscapes: Our Spring 2023 Audit Partner Pulse Survey uncovered that 47% of respondents reported that companies in their industry are enhancing climate-related disclosures in response to growing stakeholder demand.
Read the blog for more insights.
CAQ Publishes Annual S&P 500 Analysis
Investors and other stakeholders seek company-prepared information outside financial statements, including ESG information which continues to be a top priority for companies.
The CAQ recently published our annual S&P 500 report, which analyzed ESG reports, company websites, completed CDP Climate Questionnaires, and third-party assurance or verification reports of S&P 500 companies in 2021 to deepen our understanding of the trends in how top companies are disclosing ESG information.
The latest analysis finds that the majority of S&P 500 companies (494 companies total) disclosed some level of ESG-related information for periods ending in 2021, an increase of 30 companies from 2020.
Reporting Standards and Frameworks
Most S&P 500 companies referenced at least one ESG reporting framework or standard, but they used them to varying extents. The majority of companies that used a standard or framework also reported using three or more. It will be important to watch this space now that the International Sustainability Standards Board (ISSB) has adopted its inaugural sustainability reporting standards, including on climate.
Assurance by Public Company Auditors
65% of S&P 500 companies obtained assurance over some ESG information. Of these, 60 obtained assurance from public company auditors, and 268 obtained assurance from other providers. When using a public company auditor, 90% of companies utilized the same firm that performed their financial statement audit.
ESG remains a topic of focus for our profession and as we prepare for the SEC’s upcoming climate-related disclosures rule. The CAQ is committed to developing resources that enable public company auditors to best meet investor needs for these disclosures and maintain audit quality. Take a look at our full analysis.
Talent Updates
The CAQ is working to enhance diversity across the accounting profession, focusing on the talent pipeline. Each month, I’ll spotlight our efforts on this critical issue.
Accounting+
CAQ Report Shows Significant Barriers Deter Students from Pursuing a Degree in Accounting
Amid a shortage of accountants, a recent CAQ report sheds light on obstacles undergraduate business students and graduates encounter in pursuing a degree in accounting and CPA licensure.
Some of the interesting findings from the research include:
- While openness to accounting exists at the undergraduate business school level, the most significant reasons for not choosing accounting as a major included a lack of interest or passion for the major (driven in part by negative experiences with introductory accounting classes), higher starting salaries in other majors and students not wanting to pursue the 150 academic credit hours required for CPA licensure. The 150 credit hour requirement was more pronounced for Black and Hispanic accounting majors.
- The CPA license is highly regarded by both accounting majors and graduates. However, a variety of structural supports are correlated with plans to pursue the license, including encouragement of a professor/mentor and whether a student’s college offered a 150 credit hour program (i.e., an accelerated undergraduate program covering 150 credit hours or a 5-year Masters in Accounting program). Black and Hispanic majors and graduates reported less access to such structural supports.
- The research further shows that for majors and graduates who are planning to pursue CPA licensure and have already met the 150 credit hour requirement, the time required to study for the CPA exam and the difficulty of the exam content were the top obstacles. For those majors and graduates that have not yet completed the 150 hour requirement, the additional cost and time needed to reach it were the biggest obstacles to CPA licensure.
- For recent accounting graduates, overall work satisfaction shows room for improvement, with higher income earners, those in public accounting firms (including the Big 4) and those with the CPA license most satisfied, and those not pursuing the CPA license and lower income earners least satisfied. Black recent graduates were significantly less satisfied with organizational culture.
Download the report, Increasing Diversity in the Accounting Profession Pipeline: Challenges and Opportunities, July 2023, for more of the results.
CAQ Receives DEI Leader of the Year President’s Award
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 the findings from our recent report, which show students encounter multiple barriers to entering the accounting profession, we know that we have more work to do. We look forward to continuing to share our progress via Bold Ambition.
A few updates on our progress:
In the year since our launch, this initiative has been highly successful at reaching students:
- 1.1B online engagements with the Accounting+ website
- 4.1M students visited the website
- 32K students provided their email address for information on Accounting+
- 21% measured increase in accounting consideration among students exposed to Accounting+
In addition, Accounting+ now has 40 partners and supporters, with Financial Executives International (FEI) recently joining. Operating under the belief that you can’t be what you can’t see, Accounting+ is introducing the next generation of students to the limitless possibilities a career in accounting holds. Take a look at the list of partners who support the Accounting+ campaign and are committed to enhancing diversity, equity and inclusion in the accounting workplace.
Profession Updates
Non-compliance with Laws and Regulations (NOCLAR)
The CAQ has been following developments on a recent PCAOB proposal, AS 2405, A Company’s Noncompliance with Laws and Regulations, “NOCLAR” for short.
The proposal, which focuses on the auditor’s responsibility to identify, evaluate, and communicate noncompliance with laws and regulations, has raised concerns among numerous stakeholders. In what was a first for the PCAOB in the standard setting arena, PCAOB Board Members Duane DesParte and Christina Ho dissented from the proposal. And we are hearing that audit committee members are very concerned about this proposal.
In our view, this is the most significant PCAOB proposal since their concept release on mandatory firm rotation (MFR) which received nearly 700 comment letters, including more than 200 letters directly from audit committee members or chairs.
Audit committee members should speak out on this topic to let the PCAOB know:
- Any change should keep the auditor focused on NOCLAR that could materially impact the financial statements, such as material penalties or loss contingencies.
- Any requirement of the auditor should be risk-based and consider the role the company’s compliance program plays in detecting NOCLAR that could be material to the audited financial statements.
If you’re an audit committee member, the PCAOB should hear from you. Learn more about how you can comment here.
ICYMI: My new podcast, Capital Markets Pulse dives into the latest key matters related to the capital markets featuring experts from across the corporate reporting world.
Listen episode 1, “Economic pessimism, labor challenges & technology shifts,” on Spotify, Amazon Music or Apple Podcasts, and 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.
We have a couple of exciting new episodes in the works for the fall – stay tuned!
Thank you for reading and see you next month.
Julie Bell Lindsay
Chief Executive Officer, CAQ