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
SEC Appoints Erica Y. Williams to a Second Term as PCAOB Chairperson
The SEC announced the appointment of Erica Y. Williams to a second term as Chairperson of the PCAOB beginning on October 25, 2024, and running through October 24, 2029. Prior to joining the PCAOB in January 2022, Erica Y. Williams was a litigation partner with Kirkland & Ellis LLP. She previously spent more than a decade in various roles at the SEC, including as Deputy Chief of Staff to three former SEC Chairs and Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement trial unit.
Selective Disclosure of Information Regarding Cybersecurity Incidents
The SEC posted a statement by Erik Gerding, Director, Division of Corporation Finance, ‘Selective Disclosure of Information Regarding Cybersecurity Incidents.’ Gerding reiterates the scope of Regulation FD. Last year, the Commission adopted rules requiring public companies to disclose material cybersecurity incidents under Item 1.05 of Form 8-K. Since then, staff in the Division of Corporation Finance have heard assertions that those rules may preclude a company from sharing additional information about a material cybersecurity incident with others, including their commercial counterparties.
SEC Updates Questions and Answers for Compliance and Disclosure Interpretations of Exchange Act Form 8-K
The SEC updated the following Compliance and Disclosure Interpretations (C&DIs) for Section 104B. Item 1.05 Material Cybersecurity Incidents:
The State of Disclosure Review
The SEC posted a statement by Erik Gerding, Director, Division of Corporation Finance, on the State of Disclosure Review. This statement describes, among other things, Gerding’s opening remarks and other matters discussed during a Division of Corporation Finance panel discussion at the 2024 SEC Speaks Conference held on April 2 in Washington, D.C. The statement covers disclosure priorities and recently adopted rules.
SEC Office of the Investor Advocate Delivers Report to Congress on Objectives for Fiscal Year 2025
The SEC’s Office of the Investor Advocate delivered its Report to Congress on the Office’s objectives for fiscal year 2025. As detailed in the Report, the Investor Advocate’s priorities for fiscal year 2025 include:
- Assisting investors victimized by fraud and monitoring the measurable surge in investment fraud schemes;
- Enhancing Ombuds services to resolve questions, complaints, and concerns about the SEC and self-regulatory organizations subject to SEC oversight;
- Evaluating ways in which broker and adviser standards of conduct might be impacted by technological changes in the market;
- Exploring means to increase transparency in and maintain investor access to the private markets;
- Encouraging innovative and effective disclosure through investor testing of existing and proposed disclosures, especially those associated with complex products and private markets;
- Increasing investor engagement and input on matters of significance to retail investors.
Why Critical Audit Matters Are So Critical
The PCAOB posted the remarks on critical audit matters that Board Member George R. Botic prepared for delivery for the 42nd Annual SEC and Financial Reporting Conference at USC Leventhal School of Accounting in Los Angeles on June 6, 2024. The prepared remarks provide an overview of the rulemaking agenda and address the state of critical audit matters.
A New Spotlight Provides High-Level Observations and Takeaways from PCAOB Staff Conversations with more than 200 Audit Committee Chairs
The PCAOB posted a new report, Spotlight: 2023 Conversations With Audit Committee Chairs. In 2023, the PCAOB staff spoke with more than 200 audit committee chairs. Following these conversations, PCAOB staff prepared this publication to present high-level observations and takeaways from those conversations.
PCAOB Continues Its Modernization Drive with Proposal to Replace Outdated Standard on Substantive Analytical Procedures
The PCAOB issued for public comment a proposal to replace its 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. Along with proposed AS 2305, the proposal also includes amendments to 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 12, 2024.
PCAOB Modernizes Its Rules by Strengthening Accountability for Contributing to Firm Violations
The PCAOB approved the adoption of an amendment to PCAOB Rule 3502, previously titled Responsibility Not to Knowingly or Recklessly Contribute to Violations. The updated rule requires that an associated person must have contributed to the firm’s violation directly, substantially and negligently in order to be held liable. As adopted, the updated rule changes Rule 3502’s liability standard from recklessness to negligence, aligning it with the same standard of reasonable care auditors are already required to exercise anytime they are executing their professional duties. The amendment to Rule 3502 is subject to approval by the SEC. If approved by the SEC, the amended rule will become effective 60 days after such approval.
PCAOB Updates Its Standards to Clarify Auditor Responsibilities when using Technology-Assisted Analysis
The PCAOB adopted amendments to two PCAOB auditing standards, AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement, addressing aspects of audit procedures that involve technology-assisted analysis of information in electronic form. These changes are designed to provide additional detail and clarity around the responsibilities auditors have when performing procedures using technology-assisted analysis. The new standard will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the new standard and related amendments will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
AICPA Updates Practice Aid for Digital Assets
The AICPA updated its practice aid for the accounting and auditing of digital assets. The practice aid, Accounting for and Auditing of Digital Assets, is intended to provide nonauthoritative guidance on how to account for and audit digital assets under U.S. generally accepted accounting principles for nongovernmental entities and generally accepted auditing standards, respectively. The practice aid is free and regularly updated. The specific updates are:
- Chapter 5, containing considerations for auditing the existence, rights, and obligations of digital assets
- Chapter 6, containing considerations for auditing the valuation of digital assets
- An updated appendix B, which includes an auditing Q&A specific to the SEC’s Staff Accounting Bulletin No. 121 (SAB No. 121).
‘The World Is Ripe with Opportunities for the Accounting and Finance Profession,’ Says New CIMA President and Chair of the Association of International Certified Professional Accountants
The Chartered Institute of Management Accountants (CIMA) announced that it has appointed finance transformation business leader, Simon Bittlestone, FCMA, CGMA, as 91st President of the Institute. He will also serve as 9th Chair of the Association of International Certified Professional Accountants. During his year in office, the focus of the profession will be on three critical areas:
- Innovation & Transformation
- Value & Sustainability
- Inclusion & Opportunity
International Ethics Standards Board for Accountants (IESBA) Marks a Year of Transformation with Publication of 2023 Annual Report
The IESBA released its 2023 Annual Report, Respecting the Past, Planning for the Future. This interactive review of 2023 features comprehensive accounts of the Board’s projects and insights from its leaders, illustrating a period of significant achievement. The 2023 IESBA Report also includes an interactive map showcasing the 140+ countries where the IESBA International Code of Ethics for Professional Accountants (including International Independence Standards) is in use and an overview of the Board’s extensive stakeholder outreach efforts and initiatives to promote global adoption and effective implementation of the Code. The 2024 agenda will focus on final approvals of sustainability-related standards, new workstreams addressing accountancy firm culture and governance, and independence considerations for audits of collective investment vehicles, pension fund arrangements, and investment company complexes.
June 2024 Financial Accounting Standards Board (FASB)-International Accounting Standards Board (IASB) Education Meeting Agenda and Papers Now Available
The IASB posted the agenda and papers for the June FASB-IASB education meeting. Agenda items include:
- Post-implementation Review of IFRS 15 Revenue from Contracts with Customers (IASB) / Post-implementation Review of Topic 606 (FASB)
- Post-implementation Review of IFRS 16 Leases (IASB) / Post-Implementation Review of Topic 842 (FASB)
June 2024 IASB Agenda and Meeting Papers Now Available
The IASB posted the agenda and papers for its June 2024 meeting. Agenda items include:
- Dynamic Risk Management
- Post-implementation Review of IFRS 16 Leases
- Work Plan
- Digital financial reporting
- Pollutant Pricing Mechanisms
- Equity Method
- Management Commentary
- Provisions—Targeted Improvements
Monitoring Group Invites Applicants Interested in Joining the Public Interest Oversight Board (PIOB)
The Monitoring Group issued an open call for applications for a board member to serve on the PIOB for an initial three-year term commencing January 1, 2025. The Call for Applications: Public Interest Oversight Board Member outlines the requirements and job description of a PIOB Member and invites highly-qualified individuals to apply. The deadline for submitting applications is September 13, 2024. The PIOB provides oversight of the International Auditing and Assurance Standards Board (IAASB)’s and the IESBA’s standard-setting process. The PIOB is also responsible for appointing members to the IAASB and the IESBA.
IASB Unanimously Agrees to Finalize the Revision of the Management Commentary Practice Statement
At its June 19 meeting, the IASB unanimously decided to move forward with finalizing the revision of IFRS Practice Statement 1 Management Commentary by making targeted refinements to its proposals set out in the Exposure Draft Management Commentary. The project codifies innovations in reporting, including concepts from the IFRS Foundation’s Integrated Reporting Framework, in a set of standard-like requirements for management commentary designed to support investor-focused best practice. In refining its proposals, the IASB will collaborate with the International Sustainability Standards Board (ISSB) and consult with the Integrated Reporting and Connectivity Council. With the project already at an advanced stage and the IASB’s proposals broadly supported, the IASB expects to issue the revised Practice Statement in the first half of 2025.
ISSB Delivers Further Harmonization of the Sustainability Disclosure Landscape as it Embarks on New Work Plan
ISSB Chair Emmanuel Faber announced further harmonization of the sustainability reporting landscape at the IFRS Foundation Conference coinciding with London Climate Action Week, as the ISSB embarks on its new two-year work plan and publishes the Feedback Statement on that work plan. During the next two years, the ISSB will deliver further harmonization and consolidation of the disclosure landscape in response to market demand. The ISSB’s effort will include:
- Harmonizing disclosures about transition plans to a lower-carbon economy
- Measuring greenhouse gas emissions effectively
- Partnering with CDP to deliver alignment
- Full interoperability with the Global Reporting Initiative
- Building upon the recommendations of the Taskforce on Nature-related Financial Disclosures
June 2024 IASB and Joint IASB-FASB Update Now Available
The IASB posted the June 2024 IASB and Joint IASB–FASB Update. This IASB Update highlights preliminary decisions of the IASB. The IASB met on June 19–20, 2024. In addition, the IASB held a joint meeting with the FASB on June 21, 2024.
Internal Finance Corporation (IFC) and IFRS Foundation Announce Partnership to Improve Sustainability Reporting in Emerging Markets
The IASB announced the IFC, a member of the World Bank Group, and the IFRS Foundation have signed a Memorandum of Understanding agreeing to a strategic partnership to strengthen sustainable capital markets by improving sustainability and climate reporting in emerging markets and developing economies. The partnership will focus on implementing programs to promote and build capacity for the consistent application of the IFRS Sustainability Disclosure Standards across EMDEs. This includes developing toolkits and research publications as well as conducting training programs to encourage sustainability reporting. Further, the partnership outlines plans to provide technical assistance and tailored support to help jurisdictions adopt and implement these Standards effectively.
Comment Letter on IAASB’s Proposed International Standard on Auditing 240 (Revised): The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
The CAQ shared its views related to the IAASB’s Proposed International Standard on Auditing 240 (Revised): The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The CAQ is supportive of the IAASB’s efforts to clarify and enhance the auditor’s responsibilities relating to fraud in an audit of financial statements. Among other matters, the CAQ’s comment letter:
- Highlights the potential unintended expansion (or perceived expansion) of the role and responsibilities of the auditor and the potential inadvertent expansion of the expectation gap, and provides related recommendations
- Recommends certain changes to enhance the Board’s efforts to build on the foundational requirements in ISA 315 (Revised 2019) and other ISAs
- Provides recommendations to enhance the scalability of the requirements of the auditor in ED-240 related to fraud or suspected fraud
Comment Letter on PCAOB Firm Reporting Proposal
The CAQ issued a comment letter that responds to the PCAOB’s Firm Reporting Proposal. The letter expresses a number of comments and concerns regarding the reporting requirements included in the proposal. Specifically, the CAQ is concerned that this proposal will provide limited and uncertain benefits to stakeholders while exposing registered firms to significant costs and risks. Consequently, the CAQ is unable to support it. The letter also provides the CAQ’s overall observations and recommendations as well as comments on specific aspects of firm reporting that the proposal would require.
Comment Letter on PCAOB Firm and Engagement Metrics Proposal
The CAQ issued a comment letter responding to the PCAOB Firm and Engagement Metrics Proposal. The letter details the CAQ’s views on the following:
- Support for an alternative approach to disclosure of certain firm-level metrics that is scalable;
- Support for an alternative approach that focuses on discussion related to certain engagement-level metrics with the audit committee;
- Overall concerns related to the PCAOB’s proposal, including certain of the proposed metrics will inevitably be misinterpreted and the economic analysis does not provide a sufficient basis for SEC approval;
- Other matters, including the importance of applying a materiality threshold to reporting requirements and the need for further outreach and exploration.
CAQ Analysis of PCAOB Rule 3502 Comment Letters
The CAQ posted a comment letter analysis of the PCAOB proposal to amend PCAOB Rule 3502, Responsibility Not to Knowingly or Recklessly Contribute to Violations. On September 19, 2023, the PCAOB proposed to amend the Board’s rule governing the liability of associated persons who contribute to a registered public accounting firm’s primary violation. The CAQ reviewed all 27 comment letters submitted in response to the proposed amendments (as of June 10, 2024) for purposes of the analysis.
CAQ Analysis of Financial Restatement Trends
The CAQ conducted an analysis of restatements announced from 2013–2022. Among the takeaways from that analysis and what they reveal about the state of financial reporting:
- Restatements continue to decline
- Certain accounting issues commonly triggered restatements, while restatements attributed to fraud were uncommon
- Companies that issued restatements tended to be smaller, and were more commonly in finance, healthcare, or technology
- Internal control over financial reporting reports did not predict restatements
- Critical audit matters may not provide information about restatement risk
The Age of Generative AI: How the Profession Can Respond
The CAQ shared a resource on generative artificial intelligence and what its accessibility and ease of use mean for the financial reporting profession. The CAQ discusses what is GenAI technology, what auditors should know about deploying GenAI, and additional auditor considerations.
RSM CEO Brian Becker Elected as New Vice Chair of CAQ Governing Board
The CAQ announced its Governing Board elected Brian Becker, Managing Partner and CEO, RSM US LLP, as the new Vice Chairman of the Governing Board, effective June 14, 2024. Becker oversees the firm’s strategy and operations across four countries — the United States, Canada, El Salvador, and India. . Becker succeeds Wayne Berson, Chief Executive Officer, BDO USA and Chairman, BDO International. The CAQ’s Governing Board is comprised of a variety of leaders representing the financial reporting ecosystem, including chief executive officers from some of the largest public company audit firms, the American Institute of CPAs, as well as independent board members from investor, board member and issuer communities.
Smaller Firm Task Force (SFTF) Comment Letter on PCAOB Firm and Engagement Metrics and Firm Reporting Proposals
The CAQ’s SFTF issued a comment letter that provides views regarding the totality of the PCAOB’s standard setting activities, including its recent Proposals, Firm and Engagement Metrics, and Firm Reporting. In this letter, the SFTF details its views on the following:
- Importance of smaller businesses to the overall capital markets
- Importance of smaller accounting firms to smaller companies
- More pronounced impact of PCAOB regulation overload on smaller firms and companies
- Overall recommendations
Fighting Fraud: A Shared Responsibility
The CAQ in a blog post explored what Occupational Fraud 2024: A Report to the Nations, released in March 2024 by the Association of Certified Fraud Examiners (ACFE) means for stakeholders with a responsibility for fighting fraud. This year’s ACFE report confirms that external auditors do identify fraud. It also confirms that companies with active and holistic programs to detect instances of fraud can minimize the duration and losses of fraud. All stakeholders can benefit from understanding the findings in the ACFE’s report and what it means for their role in fighting fraud.
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 Donnie Heinerichs, Manager, ESG Initiatives (dheinerichs@thecaq.org) or Annette Schumacher, Senior Director, Professional Practice (ashumacher@thecaq.org).