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
Fostering a Healthy ‘Tone at the Top’ at Audit Firms
The SEC posted a statement by SEC Chief Accountant Paul Munter, “Fostering a Healthy ‘Tone at the Top’ at Audit Firms.” In the statement, Munter discusses why the tone at the top matters for public accounting firms and emphasizes the importance of firm leaders leading by example and by prioritizing integrity and professionalism over profit and growth.
Statement on the Application of IFRS 19, Subsidiaries Without Public Accountability: Disclosures, in Filings with the SEC
The SEC posted a statement by Erik Gerding, Director, Division of Corporation Finance, and Paul Munter, Chief Accountant, on the application of International Financial Reporting Standard (IFRS) 19, Subsidiaries without Public Accountability: Disclosures, in filings with the SEC. Although the scope of IFRS 19 is limited to entities that do not have public accountability at the end of their financial statement reporting period, there may be situations when financial statements that apply IFRS 19 are included in filings with the SEC. In these situations, the staff of the Division of Corporation Finance and the Office of the Chief Accountant believe that the requirements of IFRS 19 are likely to necessitate additional disclosures in financial statements filed with the SEC because such financial statements are intended for use by investors in the public capital markets for making investment and voting decisions.
Disclosure of Cybersecurity Incidents Determined to Be Material and Other Cybersecurity Incidents
The SEC posted a statement by Erik Gerding, Director, Division of Corporation Finance, regarding the disclosure of cybersecurity incidents. The cybersecurity rules that the Commission adopted on July 26, 2023, require public companies to disclose material cybersecurity incidents under Item 1.05 of Form 8-K. If a company chooses to disclose a cybersecurity incident for which it has not yet made a materiality determination, or a cybersecurity incident that the company determined was not material, the Division of Corporation Finance encourages the company to disclose that cybersecurity incident under a different item of Form 8-K (for example, Item 8.01). This statement is intended to encourage the filing of such voluntary disclosures in a manner that does not result in investor confusion or dilute the value of Item 1.05 disclosures regarding material cybersecurity incidents.
SEC Investor Advisory Committee to Examine the New Frontier for Investment Advice and Discuss AI Regulation at June 6 Meeting
The SEC announced its Investor Advisory Committee will hold a virtual public meeting on June 6, 2024, at 10 a.m. ET. The meeting will be webcast on the SEC website. The committee will host two panels:
- Examining the New Frontier for Investment Advice; and
- AI Regulation: Embracing the Future
The committee will also discuss potential recommendations regarding the Protection of Self-Directed Investors when Trading Complex Products and Utilizing Complex Strategies and Financial Literacy and Investor Education. The full agenda is available here.
Board Member Botic to Host Second 2024 PCAOB Forum for Auditors of Small Businesses and Broker-Dealers in Los Angeles, June 5
The PCAOB announced that the second of its in-person 2024 forums on auditing in the small business environment and on auditing broker-dealers will take place in Los Angeles on June 5, 2024. The one-day event will be hosted by Board Member George R. Botic at Loyola Marymount University.
PCAOB Agenda for May 9 Meeting of Its Standards and Emerging Issues Advisory Group
The PCAOB held a meeting of its Standards and Emerging Issues Advisory Group on May 9, 2024. The agenda included a standard-setting update, an emerging issues in auditing subcommittee presentation on fraud recommendations, a fraud panel presentation and discussion, breakout sessions on key fraud topics, a discussion on the consideration of the internal audit function, and the SEIAG Chair’s wrap-up. A recording of the SEIAG meeting is available on the PCAOB’s event page.
A New PCAOB Staff Report Highlights Important Auditing Considerations Related to Commercial Real Estate
The PCAOB posted a new staff report, Spotlight: Auditing Considerations Related to Commercial Real Estate. The publication provides an overview of the topic, and discusses the current industry environment, audit and interim review considerations, communications with audit committees, and evaluating the results of the audit.
PCAOB Adopts New Quality Control Standard With a Risk-Based Approach Designed to Drive Continuous Improvement in Audit Quality
The PCAOB adopted a new standard designed to lead registered public accounting firms to significantly improve their quality control (QC) systems. The new standard would require all PCAOB registered firms to identify their specific risks and design a QC system that includes policies and procedures to guard against those risks. Among the key provisions:
- The new standard strikes a balance between a risk-based approach to QC and a set of mandates
- All PCAOB-registered firms would be required to design a QC system that complies with the new standard
- Those firms would be required to annually evaluate their QC system and report the results of their evaluation to the PCAOB on new Form QC
- Firms that audit more than 100 issuers annually would be required to establish an external oversight function for the QC system
Subject to approval by the SEC, the new standard and related amendments will take effect on December 15, 2025.
PCAOB Solidifies Foundation of Every Audit with Adoption of New Standard on General Responsibilities of the Auditor
The PCAOB adopted a new auditing standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, along with related amendments to other PCAOB standards. AS 1000 and the related amendments will:
- Modernize, clarify, and streamline the general principles and responsibilities of auditors and provide a more logical presentation, which should enhance the useability of the standards by making them easier to read, understand, and apply.
- Clarify the auditor’s responsibility to evaluate whether the financial statements are “presented fairly.”
- Clarify the engagement partner’s due professional care responsibilities by adding specificity to certain audit performance principles set out in the standards.
- Accelerate the documentation completion date by reducing the maximum period for the auditor to assemble a complete and final set of audit documentation from 45 days to 14 days.
- Clarify an auditor’s professional skepticism extends to other information that is obtained to comply with PCAOB standards and rules.
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, 2024. For certain firms, the amendment relating to the documentation completion date will take effect for audits of financial statements for fiscal years beginning on or after December 15, 2025.
Investor Advisory Committee Meeting Recap: May 16, 2024
The Financial Accounting Standards Board posted a recap of its Investor Advisory Committee meeting held on May 16, 2024. Topics discussed at the meeting include:
- Emerging Issues and Trends
- FASB Project Updates
- Disaggregation—Income Statement Expenses
- Accounting for and Disclosure of Software Costs
- Accounting for and Disclosure of Intangibles
The next IAC meeting will be held in the fourth quarter of 2024.
Financial Accounting Foundation Appoints Hillary H. Salo Vice Chair of the FASB
The Board of Trustees of the Financial Accounting Foundation announced that Hillary H. Salo, whose five-year term on the FASB begins July 1, 2024, will serve as the Board’s vice chair upon the start of her term. In this capacity, she will succeed current FASB Vice Chair James L. Kroeker, whose final term on the FASB concludes June 30, 2024. Salo’s term on the FASB concludes on June 30, 2029, when she will be eligible for consideration for reappointment. Salo rejoined the FASB in 2020 from the New York City office of KPMG LLP, where she was a partner in the audit practice and engagement partner for a large global financial services organization. Salo also served as a professional accounting fellow in the Office of the Chief Accountant at the SEC in Washington, D.C.
The AICPA Auditing Standards Board Approves Revisions to Attestation Standards
The AICPA Auditing Standards Board voted to approve revisions to the standards pertaining to attestation engagements (SSAEs). The changes are intended to align them with the AICPA standards pertaining to quality management, and related financial statement audit and non-audit standards. The standards amended by SSAE No. 23 are:
- SSAE No. 18, Attestation Standards: Clarification and Recodification
- SSAE No. 19, Agreed-Upon Procedures Engagements
- SSAE No. 21, Direct Examination Engagements
- SSAE No. 22, Review Engagements
SSAE No. 23, along with the quality management standards, is effective for engagements performed in accordance with the SSAEs beginning on or after December 15, 2025.
AICPA & CIMA CEO Announces Retirement
The AICPA announced Barry Melancon, CPA, CGMA, plans to retire on December 31, 2024, from his role as President and CEO of the AICPA and CEO of the Association of International Certified Professional Accountants. The details of his successor are expected to be announced before the end of the year, and Melancon will be assisting with the transition and handover to the new CEO.
New AICPA Chair to Prioritize the Value, Innovation, and Opportunity for Future Accounting Professionals
The AICPA announced Carla McCall, CPA, CGMA, Managing Partner of AAFCPAs, is the new Chair of the AICPA. She also will serve as Co-Chair of the AICPA, which combines the strengths of the AICPA and the Chartered Institute of Management Accountants. McCall was elected to the one-year AICPA volunteer post by the organization’s governing Council. Lexy Kessler, CPA, CGMA, Mid-Atlantic Regional Leader for Aprio, was elected as the AICPA’s Vice Chair. This marks the first time in AICPA’s history that two women have held the Chair and Co-Chair positions in the same year. McCall will focus on three areas during her term:
- Prioritize value and sustainable businesses.
- Drive innovation and transformation.
- Power, inclusion, and opportunity.
IFRS Foundation and EFRAG Publish Interoperability Guidance
The IFRS Foundation and the European Financial Reporting Advisory Group published guidance material to illustrate the high level of alignment achieved between the International Sustainability Standards Board’s IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards and how a company can apply both sets of standards, including detailed analysis of the alignment in climate-related disclosures. The guidance:
- describes the alignment of general requirements including on key concepts such as materiality, presentation, and disclosures for sustainability topics other than climate; and
- provides information about the alignment of climate disclosures and what a company starting with either set of standards needs to know to enable compliance with both sets of standards.
IASB Proposes Amendments for Renewable Electricity Contracts
The International Accounting Standards Board (IASB) published an Exposure Draft proposing narrow-scope amendments to ensure that financial statements more faithfully reflect the effects that renewable electricity contracts have on a company. The proposals amend IFRS 9 Financial Instruments and IFRS 7 Financial Instruments: Disclosures. The IASB is proposing some targeted changes to the accounting for contracts with specified characteristics. The proposals would:
- address how the ‘own-use’ requirements would apply;
- permit hedge accounting if these contracts are used as hedging instruments; and
- add disclosure requirements to enable investors to understand the effects of these contracts on a company’s financial performance and future cash flows.
The IASB is inviting feedback on the proposed amendments until August 7, 2024.
IASB Simplifies Financial Reporting for Eligible Subsidiary Companies with New IFRS Accounting Standard
The IASB issued a new IFRS Accounting Standard for subsidiaries. IFRS 19 Subsidiaries without Public Accountability: Disclosures permits eligible subsidiaries to use IFRS Accounting Standards with reduced disclosures. Applying IFRS 19 will reduce the costs of preparing subsidiaries’ financial statements while maintaining the usefulness of the information for users of their financial statements. Subsidiaries using IFRS Accounting Standards for their own financial statements provide disclosures that may be disproportionate to the information needs of their users. IFRS 19 will resolve these challenges by:
- enabling subsidiaries to keep only one set of accounting records—to meet the needs of both their parent company and the users of their financial statements; and
- reducing disclosure requirements—IFRS 19 permits reduced disclosures better suited to the needs of the users of their financial statements.
IFRS 19 is available to use immediately, subject to jurisdictional endorsement.
May 2024 IASB Agenda and Meeting Papers Now Available
The IASB posted the agenda and papers for the its May 2024 meeting. Agenda items include:
- Financial Instruments with Characteristics of Equity
- Post-implementation Review of IFRS 15 Revenue from Contracts with Customers
- Rate-regulated Activities
- Post-implementation Review of IFRS 9—Impairment
- Second Comprehensive Review of the IFRS for SMEs Accounting Standard
IASB Proposes IFRS Accounting Taxonomy Update for IFRS 18
The IASB published proposals to amend the IFRS Accounting Taxonomy to reflect the new presentation and disclosure requirements introduced in IFRS 18 Presentation and Disclosure in Financial Statements. The proposed update intends to facilitate comparability of information about companies’ financial performance and analysis of tagged information. The proposed changes include:
- line-item modelling for conveying category information (such as, operating, investing, financing) for the statement of profit or loss; and
- dimensional modelling for tagging disclosures on management-defined performance measures and specified expenses by nature, as these link to information in the statement of profit or loss.
The IASB is inviting feedback on these proposals. The deadline for submitting comments is September 3, 2024.
GRI and IFRS Foundation Collaboration to Deliver Full Interoperability That Enables Seamless Sustainability Reporting
The International Financial Reporting Standards Foundation and the Global Reporting Initiative announced they are deepening their working relationship, building upon the Memorandum of Understanding signed in 2022. This collaboration seeks to provide a seamless, global, and comprehensive sustainability reporting system for companies looking to meet the information needs of both investors and a broader range of stakeholders. The increased collaboration will optimize how GRI and International Sustainability Standards Board Standards can be used together to facilitate reporting on an organization’s impacts, risks, and opportunities, including risks that arise from the organization’s impacts. An initial outcome of the collaboration will involve a methodology pilot building on the recently published GRI 101 Biodiversity Standard and the ISSB’s upcoming project on Biodiversity, Ecosystems, and Ecosystem Services.
U.K. Sustainability Disclosure TAC Public Meeting May 2024: Agenda Papers and Registration
The Financial Reporting Council posted the agenda and papers for the U.K. Sustainability Disclosure Technical Advisory Committee public meeting that was held on May 31, 2024. The agenda items for discussion included:
- Technical assessment of IFRS S1 and IFRS S2
- Assessment approach
- Work plan for technical assessment of IFRS S1 and IFRS S2x
- Project plan and target timeline
The meeting agenda and papers can be found on the FRC website. A recording of this meeting will be made available on the FRC website.
Jurisdictions Representing Over Half the Global Economy by GDP Take Steps Towards ISSB Standards
The International Financial Reporting Standards Foundation released a guide to help jurisdictions design and plan their journey to the adoption or other use of International Sustainability Standards Board’s Standards. The publication of the Inaugural Jurisdictional Guide for the adoption or other use of ISSB Standards at the IOSCO Annual Meeting in Athens comes at a time of increasing momentum towards the establishment of the global baseline of sustainability disclosures for capital markets. More than 20 jurisdictions have already decided to use or are taking steps to introduce ISSB Standards in their legal or regulatory frameworks. Together, these jurisdictions account for:
- nearly 55% of global GDP;
- more than 40% of global market capitalization; and
- more than half of global greenhouse gas emissions.
The Foundation has also outlined its Regulatory Implementation Program.
IASB Issues Narrow-Scope Amendments to Classification and Measurement Requirements for Financial Instruments
The International Accounting Standards Board issued amendments to the classification and measurement requirements in International Financial Reporting Standards 9 Financial Instruments. These amendments respond to feedback from the 2022 Post-implementation Review of the Accounting Standard and clarify the requirements in areas where stakeholders have raised concerns, or where new issues have emerged since IFRS 9 was issued. These include:
- Clarifying the classification of financial assets with environmental, social, and corporate governance and similar features
- Settlement of liabilities through electronic payment systems
With these amendments, the IASB has also introduced additional disclosure requirements to enhance transparency for investors regarding investments in equity instruments designated at fair value through other comprehensive income and financial instruments with contingent features, for example features tied to ESG-linked targets. The amendments are effective for annual reporting periods beginning on or after January 1, 2026.
Analysis of PCAOB Proposals on Public Disclosure of Firm and Engagement Metrics and Firm Reporting
The CAQ posted an analysis of two proposals issued by the PCAOB on April 9, 2024, Firm and Engagement Metrics and Firm Reporting, that would expand reporting requirements by requiring audit firms to make publicly available both firm-wide and individual client engagement information. This analysis is intended to:
- provide an overview of the proposed requirements,
- raise awareness of the proposals within stakeholder groups whose audit engagement data could be made public as a result of implementation, and
- encourage stakeholder groups the PCAOB believes will benefit from this information to share their perspectives with the PCAOB, whether through the comment letter process, requested meetings with PCAOB Board members and/or staff or otherwise, on the proposed requirements.
Comments on both proposals are due June 7, 2024.
Comment Letter Requesting Extension of Comment Periods: PCAOB Firm and Engagement Metrics and Firm Reporting Proposing Releases
The CAQ posted a comment letter regarding the PCAOB’s Proposing Releases, Firm and Engagement Metrics and Firm Reporting. In this comment letter, the CAQ formally requests that the PCAOB extend the comment period for both Proposing Releases. The CAQ also recommends that the PCAOB delay sending the 19b-4 filing to the SEC on QC 1000 and AS 1000 by at least 45 days or, if already filed, withdraw and resubmit in 45 days to allow ample time to review and consider the complex proposals and standards. The CAQ has the privilege of observing first-hand its member firms’ continued commitment to audit quality, and it is through that lens that the CAQ requests this extension.
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).