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
While temperatures have certainly cooled down here in Washington D.C., the audit profession’s regulatory environment has not. We’re tracking several recent rules and proposals from the PCAOB, SEC, and other policymakers that will significantly impact the profession.
Speaking of rules, I had the opportunity to discuss the SEC’s final climate rule with the SEC’s Chief Accountant Paul Munter in the latest episode of our Capital Markets Pulse podcast. Mainly – what will this rule mean for assurance providers should the rule go forward?
Lastly, as students return to school for the 2024 – 2025 school year, we’re looking back at what Accounting+ accomplished over the previous school year through our strategic partnership with EVERFI in our annual Impact report.
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 2 with SEC Chief Accountant Paul Munter
Almost every company listed on the S&P 500 now voluntarily reports some form of environmental, social or governance-related information, and that includes information related to climate risks and opportunities and their impact on the company’s strategy and results. Given the proliferation of this form of reporting, the SEC’s adoption of its climate-related disclosure rules in March was an important step that was designed to bring more clarity and consistency to company-reported climate information. Among other things, the rule requires that public companies obtain independent assurance over certain aspects of their climate disclosures.
In this episode, I met with Paul Munter, SEC Chief Accountant, to break down the key elements of the SEC’s final climate rule and implications for auditors and investors.
The following are a few highlights from Paul during our discussion:
- On why the SEC included an assurance component: We think that audits are a really important aspect of the financial reporting process. When there are high-quality audits provided around financial statement information, it improves the quality of information and improves investors’ confidence in the quality of information. Academic research supports this as well. As the Commission explained in the adopting release, obtaining assurance over the GHG emissions disclosures would also provide investors with an additional degree of reliability.
- On the most impactful elements of the rule for assurance providers: For assurance providers, I think it’s providing clarity in terms of what are acceptable assurance frameworks that could be used in providing assurance over Scope 1 or Scope 2 information. The Commission did provide for alternatives – AICPA has attestation standards, IAASB has attestation standards, both are working on assurance specific to GHG emissions. The PCAOB has attestation standards that can be used. Thinking about tradeoffs, if you look at the voluntary assurance landscape, a lot of that is being done by other service providers and a lot of that is being done subject to the ISO framework. So, we’re trying to provide sufficient flexibility to allow issuers to make an informed decision as to who would be an appropriate service provider and what kind of framework would be appropriate for their circumstance.
- On standardization and different jurisdictions: It’s really important to look at this through the lens of our remit, which is different than the remit and policy objectives in other jurisdictions. We are a disclosure agency; we are not an agency that tells management what they should or shouldn’t do. Rather, we tell management to disclose what they are doing or planning to do, and we are merit-neutral…While we certainly were informed by what’s going on elsewhere, given a number of our issuers are likely to be subject to requirements in Europe, California, and jurisdictions around the world…we are focused on the investor population, which are those investors in our markets…we are trying to achieve our remit and our policy objectives, not those of others.
Listen to the podcast here.
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Profession Updates
PCAOB Releases Results of 2023 Audit Inspections
The PCAOB recently released the results of inspections of all 2023 annually inspected firms, including the six U.S. global network firms.
- The not-so-good news: The latest round of inspection reports showed that deficiencies remain high and trended up slightly overall.
- Digging deeper: Despite the rise in overall deficiencies, Chair Wiliams said the results “point to some small signs of movement in the right direction.” Some of these signs include stabilization in deficiency rates among larger firms. Moreover, actual restatements remain incredibly low year over year (just three of 405 audits (0.74%) inspected in 2023 resulted in a restatement compared with two of 386 audits (0.52%) inspected in 2022).
What this means for audit quality: Audit quality is a continuous journey, and without question firms must do more to improve the deficiency rate. However, the results of these inspections and other indicators suggest that audit quality remains high. In a recent piece for Forbes, I expand on the indicators I use to understand the state of audit quality.
SEC Votes to Approve New and Updated PCAOB Audit Standards and an Amendment to the PCAOB’s Contributory Liability Rule
The SEC recently voted to approve a new standard, the PCAOB’s AS 1000, General Responsibilities of the Auditor in Conducting an Audit, aimed at addressing the general principles and responsibilities of the auditor, including due professional care, professional skepticism, competence, and professional judgment. Based on our initial reviews of the Final Standard, implementation resources will be necessary to promote consistent implementation and application of the new standard and amendments.
The SEC also approved amendments to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Response to the Risks of Material Misstatement, which address the use of technology-assisted data analysis in audit procedures. Finally, the SEC approved, by a 3-2 vote of the Commission, the PCAOB’s amendment to Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations, governing the liability of an associated person of a registered public accounting firm who directly and substantially contributes to that firm’s violations of the laws, rules, and standards that the PCAOB enforces. Commissioner Peirce, who dissented, said, “This change is neither consistent with the requirements of the securities laws, nor necessary or appropriate in the public interest or for the protection of investors. It could have the unintended consequence of lowering audit quality and could worsen the trend toward fewer talented individuals entering the auditing profession.”
A CAQ analysis of PCAOB comment letters found that many stakeholders support Commissioner Pierce’s view, agreeing that the amendments could have significant unintended consequences, including negative impacts on audit quality and impacts on the attractiveness of the profession.
SEC to Hold Open Meeting on PCAOB Quality Control Standard
The SEC recently announced an open meeting on September 9 to consider whether to approve the PCAOB’s new quality control standard, QC 1000, A Firm’s System of Quality Control, and related amendments, as adopted by the PCAOB. In our comment letter, the CAQ expressed support for the PCAOB’s effort to strengthen audit practices but expressed concerns and questions about the final standard. Our concerns relate to the new External Quality Control Function (EQCF), which we believe requires further consideration by the PCAOB before a final quality control standard can be approved by the SEC.
Senators Hickenlooper and Capito Introduce Bipartisan AI Assurance Bill
As AI increasingly plays a role in society, regulators are thinking about responsible use. On the Validation and Evaluation for Trustworthy Artificial Intelligence (VET AI) Act, Senator Hickenlooper said, “AI is moving faster than any of us thought it would two years ago. But we have to move just as fast to get sensible guardrails in place to develop AI responsibly before it’s too late. Otherwise, AI could bring more harm than good to our lives.”
The bill would require NIST to conduct a study examining various aspects of the ecosystem of AI assurance, including the current capabilities and methodologies used, facilities or resources needed, and overall market demand for internal and external AI assurance.
A CAQ survey found that one in three audit partners see companies in their primary industry sector deploying or planning to deploy AI in their financial reporting process. Learn more about the AI assurance landscape and how public company auditors can play a role:
- Auditing in the Age of Generative AI
- Capital Markets Pulse, Episode 8: The Opportunity of Generative AI and Responsible Governance with EY’s Richard Jackson
PCAOB Hosts Forum on Auditing in the Small Business Environment and on Auditing Broker-Dealers
On September 12, the PCAOB will host a forum aimed at providing information and resources to small firms or firms auditing broker-dealers.
The event comes at a time when smaller firms are reporting that they are struggling to keep up with the PCAOB’s standard-setting agenda. A recent academic study also finds that the PCAOB’s inspection process may disproportionately impact smaller audit firms. And the deficiency rate among broker-dealer audits was 70% in the PCAOB’s latest inspection reports, which may be driven by the complex nature of these audits and exacerbated by the current regulatory environment.
Small firms and broker-dealers interested in attending the event can register here.
CAQ Updates
Survey Finds Investor Support for Critical Audit Matters (CAMs)
Beginning in 2019, the PCAOB required the auditor’s report to include critical audit matters (CAMs). CAMs are those matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment. By expanding the audit report to include CAMs, the PCAOB hoped to increase its relevance to financial statement users.
A recent survey of investors finds that the PCAOB accomplished its objective. According to the survey, 92% of investors say they rely on CAMs when making investment decisions. Further, 93% say that CAMs play an important role in their analysis of a potential investment.
The research demonstrates that investors value the addition of CAMs to the audit report. See the full report to learn more and find out what additional information investors want when it comes to CAMs: Critical Audit Matters Survey.
Accounting+ Updates
CAQ and EVERFI Release IMPACT Report
Since 2023, Accounting+ has partnered with EVERFI, the nation’s leading social impact education innovator, on a first-of-its-kind digital education program, Accounting Careers: Limitless Opportunities. The program is designed to help high school students discover how accounting skills can help them achieve their career goals and to attract greater diversity and representation into the accounting profession.
Recently, Accounting+ and EVERFI released their 2023 – 2024 school year report with key results from the second year of the campaign. Highlights include:
- Widespread adoption of the program by educators, with 5,600 educators incorporating program materials into their instruction.
- During the 2023-2024 school year, Accounting Careers: Limitless Opportunities reached over 80,000 learners from all 50 states.
- After the course, 70% of students said accounting skills are very or extremely valuable compared to 57% of students before the course.
Read the full report: Accounting Careers: Limitless Opportunities 2023 – 2024 Impact Report.
Julie Bell Lindsay
Chief Executive Officer, CAQ