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Senior Director, Professional Practice

Desiré Carroll, CPA, CA(SA) is a Senior Director, Professional Practice at the Center for Audit Quality. Her role involves advancing technical and policy-oriented projects to identify, develop, and seek consensus on issues affecting the public company auditing profession. This includes engaging with senior leaders across the financial reporting ecosystem, drafting comment letter responses to regulators, and developing thought leadership publications.

Before joining the CAQ, Desiré served as Associate Director – Sustainability Assurance at the American Institute of Certified Public Accountants (AICPA). Prior to that, she spent over 11 years at Deloitte primarily in their New York M&amp;A Transaction Services group and initially in their Audit practice. Desiré is a CPA and a South African Chartered Accountant.

Desiré Carroll, CPA, CA(SA)

More than ever, sustainability and climate-related risks are top of mind for companies, investors, and everyday Americans. For many investors, the importance of this issue is directly related to a company's public persona. In a new survey from the CAQ...

More than ever, sustainability and climate-related risks are top of mind for companies, investors, and everyday Americans. For many investors, the importance of this issue is directly related to a company's public persona. In a new <a href="https://www.thecaq.org/institutional-investor-survey-q2-2024">survey</a> from the CAQ and KRC Research, 60% of institutional investors reported that reliable climate-related disclosures enhance the reputation and trustworthiness of a company. As investors and other stakeholders look to rely on sustainability-related information disclosed by companies, public company auditors are uniquely qualified and prepared to enhance the reliability of such company-prepared information. In fact, according to one study, accountancy firms already perform 58% of global assurance engagements.1

As Senior Director of Professional Practice at the Center for Audit Quality (CAQ), I proudly lead advanced technical and policy-oriented projects to identify, develop, and seek consensus on issues affecting the public company auditing profession, on the topics of ESG reporting and assurance.

While we’re still in the first half of 2024, the Securities and Exchange Commission’s new climate-related disclosure rules have thrown climate reporting into the spotlight. In honor of Earth Day, join me in taking a closer look at the environmental reporting landscape.

Understanding the New SEC Climate Disclosure Rules

In March, the U.S. Securities and Exchange Commission (SEC) <a href="https://www.sec.gov/news/press-release/2024-31">voted to adopt</a> its long-awaited climate-related disclosure rules. Here at the CAQ, <a href="https://www.thecaq.org/statement-of-support-for-the-secs-final-rule-on-climate-related-disclosures">we support this decision</a> as it will bring more clarity, consistency, and comparability to company-reported climate information and require assurance over certain aspects of the disclosure.

[custom_quote text="Whether greenhouse gas emissions or the impact of climate issues in company financial statements, audit firms – with their deep understanding of company financial records, operations, business strategies, and internal controls – stand ready to bring their independence and objectivity in providing assurance on this information." attribution='Julie Bell Lindsay, Chief Executive Officer of the CAQ']

The SEC's rule is on the minds of investors across the country. According to our recent survey with KRC Research, 83% of institutional 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. We collaborated with the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) to develop a <a href="https://www.thecaq.org/wp-content/uploads/2024/03/AICPA-CAQ-SEC-Climate-Rule-Summary.pdf">high-level summary</a> of the rules . A few key changes from the proposal that we observed included:
<ul>
 	<li>Less prescriptive Regulation S-K requirements which provide for certain disclosures based on materiality.</li>
 	<li>Regarding Greenhouse gas (GHG) emissions, elimination of Scope 3 GHG emissions disclosure requirements and the exemption of small reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers from the disclosure and attestation requirements.</li>
 	<li>Regulation S-X requirements that are narrower in scope. The final rule removed the requirement to evaluate financial statement impacts on a line-item-by-line-item basis for positive and negative impacts of severe weather events, other natural conditions, and transition activities.</li>
 	<li>A lengthening of the adoption timeline.</li>
</ul>
While Scope 3 emissions disclosures were excluded from the final rule, our recent survey with KRC Research suggests that the relevance and importance of Scope 3 will be an ongoing debate. Ninety-one out of 100 institutional investors said that public companies should be required to report their Scope 3 emissions.

I encourage you to check out <a href="https://www.thecaq.org/aia-sec-climate-rule-part-2-what-we-were-looking-for-in-the-final-rule-versus-what-we-found">my in-depth analysis</a> of what we were looking for in the final rules versus what we found as the profession continues to understand its impact. Additionally, Anita Chan, Partner at KPMG US, who played an active role in the development of the proposed rule, also sat down with me to break down the rule. You can watch a replay of that event <a href="https://www.thecaq.org/breaking-down-the-new-sec-climate-related-disclosure-rules">here</a>.

The Value of Environmental, Social, and Governance (ESG) Information

Here at the CAQ, we know that ESG information is no longer an emerging trend, but a necessary disclosure expected by investors. Comparable and reliable ESG reporting can increase investors’ confidence in the reported information, allowing our capital markets to run smoothly.

The value of ESG reporting is tied to the value of assurance provided by a public company auditor. When it comes to the value of assurance, investors are clear where they stand. In our new survey with KRC, 94% of investors want a third-party to review and assess the climate-related disclosures that companies make. Assurance of climate-related and other company-prepared ESG information is critical, as auditors can enhance the reliability of this information and offer increased investor protection.

[custom_quote text="The auditing profession has acknowledged the value of ESG information to investors and other market stakeholders and has been working to help the market obtain reliable information on which to base decisions."]

When considering assurance needs for climate-related disclosures, investors have additional thoughts. Asked about what assurance provider characteristics enhance their confidence in assurance, institutional investors said that a public company audit firm's extensive experience diving into business processes and risks (68%) and regulatory oversight that requires them to maintain systems of quality control (60%) are two attributes that give them confidence in the veracity of climate-related disclosures when assured by an auditor. The auditing profession has acknowledged the value of ESG information to investors and other market stakeholders and has been working to help the market obtain reliable information on which to base decisions.

As auditors navigate this evolving landscape, especially after the SEC’s climate disclosure rule, it’s more important than ever that we  understand <a href="https://thecaqprod.wpengine.com/wp-content/uploads/2023/03/caq_rota-climate-related-financial-information_2023-03.pdf">the role of the auditor in climate-related information</a>.

The Rise of ESG 

Even before the SEC’s final climate disclosure rule, the CAQ found that growing numbers of public companies were reporting ESG information.

In our <a href="https://www.thecaq.org/sp-500-and-esg-reporting">2023 S&amp;P 500 ESG Reporting and Assurance Analysis</a> of the 2021 reporting period, we found that the number of companies reporting ESG information increased from 93% to 99% of S&amp;P 500 companies.

Additionally, most companies have a dedicated ESG page on their corporate investor relations website where the company often discloses ESG information in a standalone PDF report. We also discovered that the number of companies seeking assurance over certain ESG metrics increased by 13% from 2020, and the scope of information subject to assurance also increased.

<img class="wp-image-14808 alignright" src="https://www.thecaq.org/wp-content/uploads/2023/08/2024_04_AiA_Earth-Day.png" alt="" width="199" height="313" />Furthermore, we found that of the S&amp;P 500 companies that obtained assurance over their ESG information, 18% engaged public company auditors to perform their assurance engagements, including leading companies like Alphabet, Nike and Coca-Cola.

The conversation around climate-related reporting is ongoing. This Earth Day, as the ESG landscape continues to evolve and our profession responds and adapts, <a href="https://www.thecaq.org/esg">I strongly encourage you to explore the CAQ’s ESG resources to strengthen your understanding and skillset</a>.

The CAQ will continue to release resources to support implementation of the rule and other ESG-related corporate reporting matters over the coming months. <a href="https://go.thecaq.org/l/834983/2020-04-22/fskb">Subscribe</a> to stay updated on our latest resources.

&nbsp;

<hr />

Endnotes
<h6>1. <a href="https://www.ifac.org/news-events/2024-02/sustainability-reporting-and-assurance-practices-largest-global-companies-continue-mature-ifac-aicpa">Sustainability Reporting and Assurance Practices of Largest Global Companies Continue to Mature, IFAC, AICPA &amp; CIMA Study Shows | IFAC</a></h6>

Charting the Path to Sustainability: Elevating ESG Reporting this Earth Day

Auditors

Investors

Company Management

Blog Post

The Center for Audit Quality is pleased to release this research to further understand capital market stakeholder information needs. Capital markets operate on trust and transparency, and understanding investor information needs as they allocate capital is necessary to build and...

The Center for Audit Quality is pleased to release this research to further understand capital market stakeholder information needs. Capital markets operate on trust and transparency, and understanding investor information needs as they allocate capital is necessary to build and maintain both.

To reach a broad range of institutional investors, the CAQ has partnered with KRC Research, a global public opinion research consultancy, to conduct independent quantitative and qualitative field work involving a diverse group of investor community stakeholders.

This second survey in our 2024 series focuses on two matters related to climate-related disclosures. First, we wanted to understand the role of, and confidence in, climate-related disclosures when it comes to investment decision-making. Second, we wanted to gain early insights into investor reactions to the U.S. Securities and Exchange Commission’s final rule on climate-related disclosures.

The Q2 survey research was conducted online from April 2 – 8, 2024 among 100 U.S. institutional investors.

All qualified respondents were screened to ensure they are professional investors employed at companies with a minimum of $500M in assets under management, have appropriate job titles, and serve at the Director level or higher with at least 5 years of experience.

<a class="button" href="https://www.thecaq.org/wp-content/uploads/2024/04/caq_institutional-investor-survey-q2-2024_2024-04.pdf">Read the survey</a>

Institutional Investor Survey | Research Findings, Q2 Survey

Policymakers

Audit Committee

Publications

In part 1of this blog we explored what we’d be looking for once the SEC released its long-awaited climate rule. With the wait finally over, read on for what we found.

Attestation requirements. Given that assurance over climate-related reporting enhances the...

In <a href="https://www.thecaq.org/aia-sec-climate-rule-what-were-looking-for-in-the-final-rule">part 1</a>of this blog we explored what we’d be looking for once the SEC released its long-awaited climate rule. With the wait finally over, read on for what we found.

Attestation requirements. Given that assurance over climate-related reporting enhances the reliability of that information and offers increased investor protection, we were pleased to see that the final rule retained the requirement for attestation over greenhouse (GHG) emissions disclosures. In a modification from the proposal, the SEC will require only large accelerated filers (LAFs) to progress from limited assurance to reasonable assurance at a later date. Accelerated filers will only need to obtain limited assurance. Certain investors may be disappointed with this modification, given their calls for companies to replace the use of limited assurance with reasonable assurance.1 The final rule grants companies more time to obtain assurance than what was initially proposed, with the first assurance report required 3 years after the GHG emissions compliance date and the move to reasonable assurance by LAFs required after 7 years.

Regulation S-X requirements. The SEC had proposed disclosure of financial impact metrics which would have required a registrant to disclose the financial impacts from severe weather events and other natural conditions and transition activities on any relevant line item in the registrant’s consolidated financial statements during the fiscal years presented – applying a 1% disclosure threshold on a line-by-line basis. In response to feedback received (from numerous commentors, including the CAQ), the SEC modified its proposed regulation S-X requirements. The SEC removed the need to consider the impact of transition activities as part of this particular requirement. The final rule requires registrants to disclose the effects of severe weather events and other natural conditions. The SEC removed the requirement to disclose the impact on each line item of a registrant’s consolidated financial statements but retained the 1% disclosure threshold at the overall income statement and balance sheet level and also established de minimis thresholds. The SEC indicated that these revisions would help minimize costs and burdens on registrants while providing investors with decision-useful information.

[custom_quote text="The final rule requires registrants to disclose the effects of severe weather events and other natural conditions."]

Effective date. The SEC recognized it will take time for registrants, auditors, and others to prepare for implementing the requirements in the final rule in a way that will support the disclosure of high-quality information that is decision useful. Accordingly, the SEC made various accommodations. The final rules will be phased in for all registrants with the compliance date dependent upon the status of the registrant and the content of the disclosure. The final rules provide additional phase-in periods for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement, and the electronic tagging requirement if the registrant is an LAF. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis by a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates.2

Alternative reporting provision. The SEC did not adopt an alternative reporting provision structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB). The SEC acknowledged that some commenters (the CAQ being among them) had recommended that the Commission consider allowing the use of the ISSB’s climate-related disclosure standards as an alternative to the Commission’s climate disclosure rules. We were of the view that allowing the use of the ISSB Standards as alternative reporting to satisfy SEC registrant climate reporting obligations could have been a mechanism for enhancing global comparability for investors and reducing the need for registrants to report in accordance with multiple standards or requirements. While the Commission acknowledged that there are similarities between the ISSB’s climate-related disclosure standards and the final rules, and that registrants may operate in jurisdictions that will adopt the ISSB standards, the Commission indicated that those jurisdictions had not yet integrated the ISSB standards into their climate-related disclosure rules and accordingly declined to recognize the use of the ISSB standards as an alternative reporting provision at this time.

[custom_quote text=" The SEC did not adopt an alternative reporting provision structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB)."]

GHG emissions boundaries. Ultimately, the SEC allowed for flexibility in determining the organizational boundaries used when calculating GHG emissions. Unlike the rule proposal, which would have required a registrant to use the same scope of entities and other assets included in its consolidated financial statements when determining the organizational boundaries for its GHG emissions calculation, the final rule provides that the registrant must disclose the method used to determine the organizational boundaries, and if the organizational boundaries differ materially from the scope of entities and operations included in the registrant’s consolidated financial statements, the registrant must provide a brief explanation of the difference and describe the method used to determine those boundaries. This is a welcome revision given that many registrants have been voluntarily reporting under different organizational boundaries than what had been proposed. We expect this change to help address concerns about reporting challenges and compliance burden associated with the proposed requirement.

Framework to be used to support GHG emissions disclosures. The proposed rule concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions did not specify a framework such as the GHG Protocol. We recommended the SEC specify in the final rule that a widely used framework, such as the GHG Protocol, should be used to help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods. While the final rule does not specify use of the GHG Protocol, it requires a brief description of the protocol or standard used to report the GHG emissions, including the calculation approach, the type and source of any emission factors used, and any calculation tools used to calculate the GHG emissions. The SEC indicated that such disclosure should assist investors in understanding the emission disclosures and promote consistency and comparability over time.

If you have questions about the final rule, please send them our way to consider covering in future blogs. Also, be sure to <a href="https://go.thecaq.org/l/834983/2020-04-22/fskb">sign up</a> for our CAQ newsletters to stay up to date on the resources we are developing to support stakeholders in understanding the new requirements. Download a high-level summary of the SEC climate rule <a href="https://www.thecaq.org/wp-content/uploads/2024/03/AICPA-CAQ-SEC-Climate-Rule-Summary.pdf">here</a>.

&nbsp;

<hr />

Endnotes
<h6>1. <a href="https://www.ceres.org/resources/reports/closing-gap-investor-insights-decision-useful-climate-data-assurance">Closing the Gap: Investor Insights into Decision-Useful Climate Data Assurance | Ceres</a></h6>
<h6>2. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis as follows: 'If a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant;' and 'if filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.'</h6>

SEC Climate Rule Part 2: What We Were Looking For in the Final Rule versus What We Found

Preparers/Issuers

On March 6, 2024, the Securities and Exchange Commission adopted The Enhancement and Standardization of Climate-Related Disclosures for Investors. The final rule requires a registrant to disclose certain climate-related information in its registration statements and annual report. The rule aims to...

On March 6, 2024, the Securities and Exchange Commission adopted <a href="https://www.sec.gov/rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors" data-auth="NotApplicable" data-linkindex="6">The Enhancement and Standardization of Climate-Related Disclosures for Investors</a>. The final rule requires a registrant to disclose certain climate-related information in its registration statements and annual report. The rule aims to provide investors with consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business, and how the registrant manages those risks. This publication provides a high-level summary of the rule, including insight into:

<ul>
 	<li class="x_MsoListParagraph">Changes from the proposed rule</li>
 	<li class="x_MsoListParagraph">Content of the disclosures</li>
 	<li class="x_MsoListParagraph">Presentation and attestation of the disclosures</li>
 	<li class="x_MsoListParagraph">Phase-in periods and accommodations and</li>
 	<li class="x_MsoListParagraph">Compliance dates under the final rule</li>
</ul>

Summary of the Enhancement and Standardization of Climate-Related Disclosures for Investors

Emerging Reporting Areas

The SEC has adopted new climate-related disclosure rules. The Center for Audit Quality and Anita Chan, who played an active role in the development of the proposed rule, will be breaking down the new rules in this informative session and...

The SEC has adopted new climate-related disclosure rules. The Center for Audit Quality and Anita Chan, who played an active role in the development of the proposed rule, will be breaking down the new rules in this informative session and answering questions such as:
<ul>
 	<li>What will companies need to disclose?</li>
 	<li>What are the attestation requirements?</li>
 	<li>When will these rules take effect?</li>
</ul>

Breaking Down the New SEC Climate-Related Disclosure Rules

Event

The Center for Audit Quality (CAQ) supports the SEC’s vote to adopt a final rule that will bring clarity, consistency and comparability to company-reported climate information and will require assurance over certain aspects of this information. In adopting the final...

The Center for Audit Quality (CAQ) supports the SEC’s vote to adopt a final rule that will bring clarity, consistency and comparability to company-reported climate information and will require assurance over certain aspects of this information. In adopting the final rule, the SEC has recognized the valuable role that assurance plays in bringing accountability and objectivity to company-reported climate disclosures.

“While we are still digesting the final rules, the SEC took a step forward today in providing much needed clarity on the reporting of climate-related information by public companies,” said Julie Bell Lindsay, Chief Executive Officer of the CAQ. “Whether greenhouse gas emissions or the impact of climate issues in company financial statements, audit firms – with their deep understanding of company financial records, operations, business strategies and internal controls – stand ready to bring their independence and objectivity in providing assurance on this information.”

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