As part of the Center for Audit Quality’s (CAQ) ongoing effort to keep members and stakeholders informed on significant public policy and accounting matters, we are pleased to offer the Public Policy and Technical Alert (PPTA). Each month, the PPTA highlights and examines the regulatory, standard-setting, legislative, and broader financial reporting developments impacting the public company audit profession. Please note that the PPTA is intended as general information and should not be relied upon as being definitive or all-inclusive. The CAQ encourages member firms to refer to the rules, standards, guidance, and other resources in their entirety at the hyperlinks provided below. All entities should carefully evaluate which requirements apply to their respective organizations.
In This Issue
PCAOB Issues Proposal to Increase Auditor Vigilance Against Fraud and Other Forms of Noncompliance With Laws and Regulations
The PCAOB issued for public comment a proposal that would amend PCAOB auditing standards related to the auditor’s responsibility for considering a company’s noncompliance with laws and regulations, including fraud. If adopted, the proposal would change auditor requirements to identify, evaluate, and communicate possible or actual noncompliance with laws and regulations.
The deadline for public comment on the proposal is August 7, 2023.
PCAOB Staff Report: Auditors Must Respond to Unique Risks of Crypto Assets, Including Fraud
The PCAOB published a report, Spotlight: Inspection Observations Related to Public Company Audits Involving Crypto Assets. This Spotlight highlights certain responsibilities under PCAOB standards for auditors of public companies and brokers and dealers transacting in or holding crypto assets, PCAOB inspection observations related to crypto assets, and important reminders for auditors when performing audits of public companies or broker-dealers, where activities associated with crypto assets are material to the financial statements.
PCAOB Issues Proposal to Bring Greater Clarity to Certain Auditor Responsibilities When Using Technology-Assisted Analysis
The PCAOB issued for public comment a proposal addressing aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. The proposal includes changes to update aspects of AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement.
The deadline for public comment on the proposal is August 28, 2023.
FASB Issues New Chapter of Its Conceptual Framework: The Reporting Entity
The FASB issued a new chapter of its Conceptual Framework that describes a reporting entity. The new chapter becomes Chapter 2 of FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting. The new chapter describes a reporting entity as “a circumscribed area of economic activities that can be represented by general purpose financial reports that are useful to existing and potential investors, lenders, and other resource providers in making decisions about providing resources to the entity.” It also describes the three features of a reporting entity:
- Economic activities have been conducted.
- Those economic activities can be distinguished from those of other entities.
- The financial information in general purpose financial reporting faithfully represents the economic activities conducted within the circumscribed area and is useful in making decisions about providing resources to the reporting entity.
Emerging Issues Task Force Meeting Recap: June 15, 2023
The FASB announced its Emerging Issues Task Force held an educational meeting to discuss Issue No. 23-A, “Induced Conversions of Convertible Debt Instruments.” No decisions were made. The Task Force identified areas that require additional staff research to be discussed at a future meeting. The next meeting is scheduled for September 14, 2023.
FASB Seeks Public Comment on Proposal to Improve the Accounting for Purchased Financial Assets
The FASB published a proposed ASU intended to improve the accounting for purchased financial assets. Investors and preparers provided feedback that having two accounting models for purchased financial assets is unnecessarily complex and they would prefer to apply a single accounting model to recognize credit losses for all purchased financial assets. The proposed ASU would require that all acquired financial assets, with certain limited exceptions, follow the existing gross-up approach. Stakeholders are encouraged to review and provide input on the proposed ASU by August 28, 2023.
FRC Publish Review of Fair Value Measurement
The Financial Reporting Council published its thematic review of fair value measurement. The review highlights:
- Fair value measurements should use market participants’ rather than the company’s own assumptions.
- There is scope for improvement of the disclosures provided by many companies.
- Companies should consider using specialist third party advice when valuing a material item and where there is no internal expertise.
The review includes two case studies to highlight measurement issues the FRC found in its routine monitoring of corporate reporting, as well as examples of good practice, each of which demonstrates a particular characteristic of a better disclosure.
FRC Publishes Research on Impact of Proxy Advisers and ESG Ratings Agencies on Companies and Investors
The FRC published detailed research into the impact of proxy voting advisors and ESG ratings agencies on actions and reporting by FTSE350 companies and investor voting decisions. The research was commissioned to help progress the conversation on this complex and challenging topic. The FRC was pleased to see the number of its stakeholders who agreed to participate in this research, which it believes will be a valuable tool for the various consultations underway about the impact of proxy voting agencies’ activities on corporates, particularly on key issues such as remuneration policies.
IFIAR Releases Report on 2022 Survey of Audit Regulators’ Enforcement Regimes
The International Forum of Independent Audit Regulators (IFIAR) released a Report on its third Survey of Audit Regulators’ Enforcement Regimes. The report details the investigative and disciplinary powers of IFIAR Members, and the ways in which Members exercised those powers during the years 2018-2022. The results of the 2022 Survey underscore the important role that enforcement plays in audit oversight and IFIAR Members’ dedication to investigating and addressing potential violations of auditing standards.
Audit Committee Chairs Show Keen Interest and Understanding of ESG Activities
The FRC published a research report about Audit Committee Chairs’ views on, and approach to Environmental, Social, and Corporate Governance (ESG) activities and reporting. ACCs showed a strong interest and understanding of ESG activities within their organizations. Some interviewees also expressed concerns about the broad and evolving nature of ESG, making consistent measurement and reporting challenging across sectors and markets. They called for practical, sector-specific guidance to measure environmental and social activities and welcome best practice examples to ensure meaningful ESG reporting without excessive reporting requirements.
IOSCO Calls for Inputs on Goodwill
The Board of the International Organization of Securities Commissions (IOSCO) published a Consultation on Goodwill, seeking inputs from market participants to identify good practices for addressing the risk of unrecognized impairment on accumulated goodwill balances and related disclosures arising from business combinations. The feedback received will be used to formulate a set of recommendations for regulators, auditors, issuers, and those charged with governance. They will also underpin IOSCO’s engagement with standard setters, including the IASB, on improvements to accounting, reporting, and disclosure requirements related to goodwill. Responses to the consultation questions should be sent to IOSCO no later than September 20, 2023.
ISSB Issues Inaugural Global Sustainability Disclosure Standards
The International Sustainability Standards Board issued its inaugural standards—IFRS S1 and IFRS S2—ushering in a new era of sustainability-related disclosures in capital markets worldwide. IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium, and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.
Proposed International Standard on Sustainability Assurance 5000 Approved for Public Consultation by Unanimous Vote
The International Auditing and Assurance Standards Board announced that it has approved by unanimous vote the draft International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, for public consultation. Once finalized, ISSA 5000 will serve as a comprehensive, stand-alone standard suitable for limited and reasonable sustainability assurance engagements. The consultation will be open by early August until early December 2023.
IASB Seeks Input for Review of Accounting Standard on Revenue
The IASB announced a call for stakeholder feedback to inform its review of the IFRS Accounting Standard for revenue from contracts with customers, IFRS 15. As part of the IASB’s usual post-implementation review (PIR) process for Accounting Standards, it will assess whether the requirements are working as intended. After reviewing stakeholder feedback and evidence from outreach and research activities, the IASB will determine whether and when to undertake standard-setting. The Request for Information Post-implementation Review of IFRS 15 Revenue from Contracts with Customers is open for comment until October 27, 2023.
IESBA Establishes a Sustainability Reference Group
The IESBA announced that a Sustainability Reference Group has been established to support the work of its Sustainability Task Force. The members will act as a “sounding board” to the Sustainability Task Force, providing insights, expertise, or advice relating to the development of global ethics and independence standards for sustainability reporting and assurance.
Podcast: Capital Markets Pulse Episode 1
The CAQ announced a podcast series hosted by CEO Julie Bell Lindsay. Capital Markets Pulse dives into the latest key matters related to the capital markets, featuring experts from across the corporate reporting world. Episode 1 covers economic pessimism, labor challenges, technology shifts, and features Janet Malzone and Amanda Iacone.
Comment Letter File Reference No. 2023-ED200, Intangibles: Goodwill and Other: Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets
The CAQ posted a comment letter that provides views to the FASB related to its proposed accounting standard update, Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets. The CAQ supports the Proposed ASU as an initial step to improve the accounting for crypto assets that fall within the scope of the proposal (in-scope crypto assets). Specifically, the CAQ believes the Proposed ASU is an improvement over the current model for accounting for in-scope crypto assets and that it can provide additional decision-useful information and transparency to financial statement users.
Comment Letter NTIA-2023-005: AI Accountability Policy Request for Comment
The CAQ posted a comment letter that shares its views in response to the National Telecommunications and Information Association’s AI Accountability Policy Request for Comment. Given the rapid pace of evolution and deployment of AI technology, the CAQ thinks that this is a particularly important project for society at large. The CAQ believes that establishing sound AI safety standards and compliance monitoring practices around the development and application of AI is in the public interest.
Audit Quality Disclosure Framework (Update)
The CAQ published a revised Audit Quality Disclosure Framework that retains the intent and principles of the original 2019 Framework and reflects recent developments.
Discussion Document: Monitoring Inflation in Certain Countries, May 2023
In an effort to facilitate greater consistency, the CAQ International Practices Task Force developed a framework for compiling inflation data to assist registrants in monitoring inflation statistics in connection with their determination of the inflationary status of countries in which they have operations. The information herein may be helpful to management in applying ASC 830, in conjunction with its internal controls over financial reporting to reach a conclusion on whether a country’s economy should be considered highly-inflationary.
S&P 500 ESG Reporting and Assurance Analysis
The CAQ updated its analysis of ESG reporting and assurance by S&P 500 companies. Among the key takeaways:
- The number of companies reporting ESG information increased from 93% to 99% of S&P 500 companies (however some of the increase is due to a methodology change the CAQ made)
- The number of companies seeking assurance over certain ESG metrics increased by 13% from 2020
- In 2021, the scope of information being subject to assurance increased – this was most pronounced when public company audit firms provided the assurance
The Center for Audit Quality is a nonpartisan public policy organization serving as the voice of U.S. public company auditors and matters related to audits of public companies. The CAQ promotes high quality performance by U.S. public company auditors; convenes capital market stakeholders to advance the discussion of critical issues affecting audit quality, U.S. public company reporting, and investor trust in the capital markets; and using independent research and analyses, champions policies and standards that bolster and support the effectiveness and responsiveness of U.S. public company auditors and audits to dynamic market conditions. Based in Washington, DC, the CAQ is affiliated with the American Institute of CPAs. For more information, visit www.thecaq.org.
The CAQ Public Policy and Technical Alert (PPTA) is intended as general information and should not be relied upon as being definitive or all-inclusive. As with all other CAQ resources, this is not authoritative and readers are urged to refer to relevant rules and standards. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The CAQ makes no representations, warranties, or guarantees about, and assumes no responsibility for, the content or application of the material contained herein and expressly disclaims all liability for any damages arising out of the use of, reference to, or reliance on such material. This publication does not represent an official position of the CAQ, its board, or its members.
Questions and comments about the Public Policy & Technical Alert can be addressed to Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).