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.
As we enter the summer months, thoughts turn to family vacations, baseball games and enjoying more time outdoors – unless you have been in Washington DC recently where June has felt like August. It also used to be said that Washington “shuts down” during the summer. That has been a myth generally for some time, but certainly not in an election year.
The CAQ has been quite busy in May and June as the PCAOB continues its work to update and modernize a slew of audit standards and rules. We also published a report signaling overall good news for the state of financial reporting.
And, in the latest episode of my Capital Markets Pulse podcast series, I spoke with Peggy Smyth, Audit Committee Chair at Etsy, about the implications of the SEC’s final climate rule for public companies.
I am incredibly proud of the work the CAQ team does on behalf of public company audit firms and the capital markets. Read on 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.
Discussing the SEC’s Final Climate Rule: Part 1 with Etsy’s Peggy Smyth
In the latest episode of Capital Markets Pulse, this month I met with Peggy Smyth, Audit Committee Chair at Etsy, to discuss the implications of the SEC’s final climate rule for public companies, audit committee responsibilities, and how public companies can navigate different standards and requirements.
A few highlights from our discussion:
- On her key learnings for audit committees: Etsy has leveraged its SEC reporting practices to strengthen internal controls for ESG reporting. Embedding ESG roles into traditional business functions, rather than siloing them, drives greater alignment and accountability, enhancing the adoption of sustainability practices.
- On the final rule’s impact on Etsy’s reporting practices: Etsy’s disclosures already include many elements the SEC will require, such as assurance of Scope 1 and 2 emissions by a public company audit firm. The company also voluntarily discloses Scope 3 emissions, even though they are not generally required under the new rule.
- On assurance provided: Since Etsy includes all ESG data in the Form 10-K, it made sense to have the same third party that audits Etsy’s financial statements also assure this data. Etsy has robust systems and processes for data collection, reporting, and assurance, both internally and externally.
- On different requirements: As a global company, Etsy supports the alignment of sustainability disclosure standards, both mandatory and voluntary. This provides clarity to public companies and their boards, drives greater accountability in managing sustainability and climate impacts, and ensures consistent, reliable, and comparable data for stakeholders and regulators.
Listen to the full podcast here. And stay tuned for part two of this discussion with the SEC’s Chief Accountant Paul Munter.
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CAQ Updates
Report Finds Financial Restatements Trending Down
One measure that investors and other capital markets stakeholders rely on to understand the state of financial reporting is restatements. Therefore, the CAQ set out to better understand restatement trends by studying them for the past decade (2013 – 2022).
The good news: Restatements continue to decline – both in number and severity. The decline in overall restatements was significant – over half (58%) – including both “Big R” (or Item 4.02 of Form 8-K restatements) and “Little r” restatements. With respect to “Big R” restatements, the decline was most significant (from 28% to 18%) over the first seven years of the sample period.
Other trends were observed, including that smaller organizations, and organizations in industries with higher financial reporting risk such as healthcare, finance, and technology, were more likely to issue a restatement. It is also worth noting that fraud did not often contribute to a restatement, with approximately 3% of restatements attributable to fraud. However, fraud was consistently higher for 4.02 restatements than the rest of the sample.
My colleague Vanessa Teitelbaum breaks down more key takeaways in this blog. View the full report: Financial Restatement Trends in the United States: 2013 – 2022.
CAQ Teams Up with WilmerHale to Discuss Recent Developments in Accounting
This month, I joined a panel of profession stakeholders, including a board member and investor, former regulators at the PCAOB and legal experts to discuss PCAOB 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 of my takeaways:
- Inspections: By and large, inspection results continue to demonstrate that audit quality remains high. Restatements as a result of inspections remain scant, and while the PCAOB has found more deficiencies in recent years, they are still down by 47% since the PCAOB began inspections.
- 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 most 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, lack of cost/benefit analyses, and not enough stakeholder engagement.
If you’re interested in hearing the full discussion, an on-demand webinar can be accessed here: Recent Developments in Accounting, Auditing and the Law Series.
Accounting+ Updates
Accounting+ Hosts Student Events
The CAQ continues to host “Accounting for your Future” events with EVERFI, one of our key strategic partners in the initiative, allowing Accounting+ partners to volunteer their time to interact directly with students in cities across the country.
Our most recent event took place in Newark, New Jersey, where more than 70 students learned about the diverse career opportunities in accounting. Students heard from professionals from Northfield Bank, EisnerAmper LLP and Withum and attendees included Newark Mayor Ras Barak, the CEO of NJCPA and Dhani Jones, former NFL linebacker.
CAQ Commemorates Pride Month and Juneteenth with Lauryn Johnson
June is Pride Month, a month that celebrates and commemorates the LGBTQ+ community while calling for equal justice and opportunities. During June, we also observed Juneteenth. Celebrated on June 19, this important day commemorates the emancipation of enslaved people in the U.S.
To mark these important milestones, the CAQ was honored to feature Lauryn Johnson, Digital Assurance & Transparency (DAT) Experienced Associate at PWC, for an in-depth conversation. In a Q&A, Lauryn shared unique perspectives and guidance for accounting students and professionals from diverse and underrepresented backgrounds looking to make a change. Read the blog: Commemorating Juneteenth & Pride Month: Lauryn Johnson.
Profession Updates
PCAOB Adopts Several Standards and Issues New Proposals
This summer may be the busiest yet for the PCAOB. In May, they adopted QC 1000 and AS 1000, two standards aimed at improving firms’ quality control systems and general responsibilities respectively. In June, they adopted their standard to clarify auditor responsibilities when using technology-assisted analysis and updated their rule regarding auditor contributory liability.
And they aren’t slowing down. This month, the Board issued a proposal to replace the PCAOB’s 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.
I encourage investors, issuers and audit committees to familiarize themselves with these new rules and proposals and to continue to share their views with the PCAOB as any input could help the PCAOB evaluate the benefits and costs of these proposals. For the CAQ’s perspective on several outstanding proposals, please review our recent comment letters.
Julie Bell Lindsay
Chief Executive Officer, CAQ