Public Policy and Technical Alert | November 2023

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 Announces Enforcement Results for Fiscal Year 2023
The SEC announced that it filed 784 total enforcement actions in fiscal year 2023, a 3% increase over fiscal year 2022, including 501 original, or “stand-alone,” enforcement actions, an 8% increase over the prior fiscal year. The SEC also filed 162 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders and 121 actions against issuers that were allegedly delinquent in making required filings with the SEC. The stand-alone enforcement actions spanned the securities industry. The SEC also brought numerous enforcement actions addressing conduct that undermines oversight of the securities industry, including actions to protect whistleblowers and actions to enforce recordkeeping requirements and other investor protection requirements applicable to industry participants, including broker-dealers.

SEC Division of Corporation Finance Updates CD&Is
The SEC’s Division of Corporation Finance updated the following Compliance and Disclosure Interpretations (CD&Is): Regulation S-K. Section 128D. Item 402(v) — Pay Versus Performance

• Question 128D.07
• Question 128D.18
• Question 128D.23
• Question 128D.24
• Question 128D.25
• Question 128D.26
• Question 128D.27
• Question 128D.28
• Question 128D.29
• Question 128D.30

Interactive Data. Inline XBRL

• Question 101.10

Regulation S-K

• Question 146.18

Securities Act Rules. Section 239. Rule 456 — Date of Filing; Timing of Fee Payment.

• Question 239.02

Section 240. Rule 457 — Computation of Fee

• Question 240.17

Proxy Rules and Schedules 14A/14C. Section 126. Rule 14a-6

• Question 126.03

Section 132. Rule 14a-12

• Question 132.03

Section 139. Rule 14a-19

• Question 139.07
• Question 139.08
• Question 139.09

Sections 151 to 164. Schedule 14A: Information Required in Proxy Statement. Section 151. General

• Question 151.02

Financial Accounting Foundation Appoints Hillary H. Salo to the Financial Accounting Standards Board
The Board of Trustees of the Financial Accounting Foundation announced the appointment of Hillary H. Salo to a five-year term on the FASB. Her term will begin on July 1, 2024, and conclude on June 30, 2029, when she will be eligible for consideration for reappointment. Hillary joined the FASB in 2020 as technical director and chair of its Emerging Issues Task Force from the New York City office of KPMG LLP where she was an engagement partner in the audit practice. Salo will succeed James L. Kroeker, whose second and final term on the Board concludes on June 30, 2024.

Financial Accounting Foundation Reappoints Susan M. Cosper to the Financial Accounting Standards Board
The Board of Trustees of the Financial Accounting Foundation announced the reappointment of Susan M. Cosper to a second five-year term on the FASB effective July 1, 2024, and concluding on June 30, 2029. Cosper joined the FASB on May 1, 2019, having previously served eight years as its technical director and chair of the Emerging Issues Task Force. Prior to joining the FASB, Cosper was a partner with PricewaterhouseCoopers LLP in New York City.

FASB Issues New Segment Reporting Guidance
The FASB issued a final ASU that improves disclosures about a public entity’s reportable segments and addresses requests from investors and other allocators of capital for additional, more detailed information about a reportable segment’s expenses. The key amendments:

• Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss.
• Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition.

The ASU applies to all public entities that are required to report segment information in accordance with FASB Accounting Standards Codification Topic 280, Segment Reporting. All public entities will be required to report segment information in accordance with the new guidance starting in annual periods beginning after December 15, 2023.

AICPA Tax Executive Committee Approves Revised Tax Standards Following Comment Period
The AICPA’s Tax Executive Committee reviewed and adopted the updates to the Statements on Standards for Tax Services on May 18, 2023; the updated standards will be effective on January 1, 2024. The standards were updated to keep pace with the evolving tax profession. The goals of the revisions to the SSTSs were to ensure that the standards are better aligned to reflect the current state of the tax profession and to address the emerging needs of today’s members. The revised tax standards include:

• A new structure to organize the SSTSs by type of work performed
• Three new standards on data protection, reliance on tools, and representation of clients before taxing authorities

Additionally, the existing Interpretations and FAQs have been updated to reflect the reorganization of the revised tax standards with updated citations.

IFIAR Releases 2023 Report on Use of Technology in Audits: Observations, Risks, and Further Evolution
The International Forum of Independent Audit Regulators released a report presenting perspectives on the use of technology in audits – outlining observations, risks, and further evolution.

Proposed ISSA 5000: IAASB’s Global Outreach Campaign
The International Auditing and Assurance Standards Board posted an update of its public consultation on its landmark proposed global sustainability assurance standard, International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements. The IAASB launched the public consultation on August 2. It also committed to an extensive, high-level outreach plan to ensure broad stakeholder input to improve both the quality of and trust in the final standard. This plan included in-person roundtables around the world, virtual webinars for global audiences, and regional and national meetings with regulators and oversight bodies. The IAASB shared the results of this unprecedented outreach campaign.

IFRS Foundation Proposes Changes to the IFRS Accounting Taxonomy 2023
The International Financial Reporting Standards Foundation published IFRS Accounting Taxonomy 2023—Proposed Update 2 Common Practice for Financial Instruments, General Improvements and Technology Update. The proposed update aims to support high-quality digital tagging of information and includes proposed changes to the IFRS Accounting Taxonomy to reflect:

• common reporting practice relating to the presentation of financial instruments in digital financial statements prepared by banking institutions using IFRS Accounting Standards;
• general improvements; and
• updates to the IFRS Accounting Taxonomy’s technology.

The deadline for submitting comments is January 5, 2024.

Have You Heard? ISA for LCE Is Coming Soon
The IAASB posted a new video on its new standard for audits of less complex entities—known as ISA for LCE—coming on December 6.

IOSCO Finalizes Its Policy Recommendations for Crypto and Digital Asset Markets
The International Organization of Securities Commissions published its Final Report with Policy Recommendations for Crypto and Digital Asset Markets. The CDA Recommendations set a clear and robust international regulatory baseline to ensure that centralized crypto-asset intermediaries called crypto asset service providers meet the standards of business conduct that apply in traditional financial markets. The recommendations cover six key areas, consistent with the IOSCO Objectives and Principles for Securities Regulation and relevant supporting IOSCO standards, recommendations, and good practices:

• Conflicts of interest arising from vertical integration of activities and functions,
• Market manipulation, insider trading and fraud,
• Custody and client asset protection,
• Cross-border risks and regulatory cooperation,
• Operational and technological risk, and
• Retail distribution

FRC Publishes Review of Companies’ IFRS 17 Disclosures
The FRC published its thematic review of companies’ first-time application of IFRS 17, a new and fundamental change in accounting for insurance contracts. The FRC reviewed the interim financial statements of 10 companies and overall was pleased with the quality of IFRS 17 disclosures. While the FRC identified examples of good practice, there is scope for improvement under IFRS 17 in the following key areas:

• Providing quantitative and qualitative disclosures, that are company-specific, enabling users to understand how insurance contracts are measured and presented in the financial statements.
• Ensuring that accounting policies are sufficiently granular and provide clear, consistent explanations of accounting policy choices, key judgements and methodologies, particularly where IFRS 17 is not prescriptive.
• Avoiding any boiler plate wording – narrative should always reflect the company’s particular circumstances.

Strides Made in Corporate Governance Reporting but More Work Needed to Meet Stakeholder Expectations
The FRC published its latest Annual Review of Corporate Governance Reporting, which finds ongoing improvements in the quality of reporting against the UK Corporate Governance Code, but also identifies areas where many companies are still falling short. The review showcased high-quality and insightful reporting by some companies, with the FRC continuing to see more transparent reporting of departures from the Code, rather than simply stating compliance. However, explanations were often found to lack sufficient clarity and few companies reported to a consistently high standard. The report also found many examples of boilerplate reporting using generic language that fail to meet stakeholder needs for meaningful explanations that demonstrate how alternative governance arrangements benefit the company and shareholders.

FRC Welcomes New Remit Letter
The FRC announced the Secretary of State for Business and Trade, Rt Hon Kemi Badenoch MP, issued it a new remit letter updating the government’s priorities for the FRC’s work. The new remit letter sets out the FRC’s core responsibility to enhance public trust and confidence in the quality of audit, corporate reporting and governance while supporting the UK’s economic growth and international competitiveness.

FRC Publishes Thematic Review of Audit Sampling
The FRC published its thematic review of audit sampling. The FRC reviewed the sampling methodologies of the largest audit firms to identify areas of good practice and to highlight any concerns that will drive improvements and support its monitoring of the firms’ systems of quality management. The review found all audit firms should:

• Ensure that they provide engagement teams with sufficient guidance and training to support their use of professional judgement in audit sampling; and
• Update their methodologies and guidance to drive better documentation of key professional judgements in this area.

IASB Consults on Improved Accounting Requirements for Financial Instruments With Both Debt and Equity Features
The IASB proposed amendments to address the challenges in companies’ financial reporting on instruments that have both debt and equity features. The proposals in the Exposure Draft would amend IAS 32 Financial Instruments: Presentation, IFRS 7 Financial Instruments: Disclosures, and IAS 1 Presentation of Financial Statements. The IASB proposes:

• to clarify the underlying classification principles of IAS 32 to help companies distinguish between debt and equity;
• to require companies to disclose information to further explain the complexities of instruments that have both debt and equity features; and
• to issue new presentation requirements for amounts—including profit and total comprehensive income—attributable to ordinary shareholders separate to the amounts attributable to other holders of equity instruments.

The deadline for comments to the Exposure Draft Financial Instruments with Characteristics of Equity—Proposed amendments to IAS 32, IFRS 7 and IAS 1 is March 29, 2024.

Comment Letter Analysis: NOCLAR, Proposed AS 2405
The CAQ posted a comment letter analysis of the PCAOB’s proposed amendments to its auditing standards related to a company’s noncompliance with laws and regulations. Compared to past proposals, the PCAOB received a higher volume of comment letters, and it has heard from more stakeholders than usual beyond auditors and investors. There was consistency in the viewpoints expressed in the comment letters. The majority (nearly 78%) of commenters opposed the NOCLAR proposal, while approximately 13% of commenters supported the NOCLAR proposal, and a smaller set of commenters did not state a clear position. While most comment letters advocated for changes to clarify and strengthen AS 2405, nearly 14% (19) called on the PCAOB to entirely withdraw the proposal, while 10% (14) questioned the PCAOB’s statutory authority to enact the proposal. A detailed analysis of the comment letter is forthcoming from the CAQ.

Comment Letter: Proposed Amendments to PCAOB Rule 3502 Governing Contributory Liability
The CAQ posted a comment letter regarding the PCAOB’s proposed amendments related to Rule 3502 Governing Contributory Liability. The CAQ believes that any project to modify the framework by which auditors can be held liable for violations of PCAOB rules and standards should include a clear assessment of why that current framework exists and whether, in practical application, the current framework has impeded the PCAOB’s effectiveness in bringing enforcement actions to fulfill its mission. The CAQ’s primary concerns are that:

• Adoption of the proposed rule could have unintended consequences by negatively impacting audit quality
• The rationale for the proposal is not clear. The CAQ is concerned the proposal does not have an adequate cost-benefit assessment
• Individual liability for single instances of simple negligence would be contrary to SEC practice and inappropriate
• The legal basis for a contributory liability standard based in negligence is not clear

Comment Letter Analysis: CAQ Analysis of PCAOB Proposed Auditing Standard: General Responsibilities of the Auditor in Conducting an Audit and Proposed Amendments to PCAOB Standards (AS 1000)
The CAQ posted a comment letter analysis regarding the PCAOB’s proposal for a new standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit. The PCAOB received 28 comment letters, with more than half from accounting firms and related groups. Key themes from the analysis are:

• The proposal expands the auditor’s responsibilities despite the Board’s statement that the amendments were clarifications of existing standards
• The proposal eliminates key concepts and principles from the extant standards
• The proposal creates confusion about the auditor’s role and will have other unintended consequences
• Accounting firms and related groups, among other commenters, oppose the clarification of the meaning of fair presentation and state it is important that the auditor’s evaluation of the presentation of the financial statements be applied within the applicable financial reporting framework

Comment Letter: File Number SR-NYSE-2023-09; Notice of Filing of Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies
The CAQ posted its comment letter regarding the SEC’s Notice of Filing of Proposed Rule Change to Amend the NYSE Listed Company Manual to Adopt Listing Standards for Natural Asset Companies. The CAQ’s comments focus on the proposed requirements regarding 1) examination and attestation by independent reviewers and 2) corporate governance. Given the limited timeframe to evaluate the specifics of the reporting framework, and the fact that this will represent a new type of company with novel license arrangements, the CAQ believes additional questions could arise as entities begin to apply the Reporting Framework. The CAQ recommends the NYSE continue to monitor developments, including relating to the operability of the reporting and examination requirements, and propose changes to the Reporting Framework should the need arise. As noted in the proposal, such changes would be considered changes to the listing standards and thus would be subject to approval by the SEC.

International Fraud Awareness Week: Are You Prepared to Fight Fraud?
To mark this year’s International Fraud Awareness Week (November 12-18), the CAQ partnered with the Association of Certified Fraud Examiners to help members of the financial reporting ecosystem fight fraud. Fighting fraud is a shared responsibility among all members of the financial reporting ecosystem. As a partner of the Anti-Fraud Collaboration, the CAQ and the AFC collaborated to create a wide range of resources to assist in deterring and detecting financial fraud.

Perspectives on Corporate Reporting, the Audit, and Regulatory Environment: Institutional Investor Research Findings
The CAQ posted new research on the perspectives of institutional investors, who utilize the work of public company auditors, on corporate reporting, audit quality, and potential standard setting topics. In an effort to engage capital market stakeholders and better understand their information expectations, the CAQ commissioned KRC Research to conduct qualitative research with institutional investors whose portfolio consists primarily of equities in North America, working in a range of investment settings from family offices to pensions and large banks. The research was primarily designed to:

• Understand what information institutional investors seek regarding public company auditing and the audit process, and
• Explore attitudes toward potential standards and regulations related to additional reporting or audit requirements.

Audit Committee Transparency Barometer Shows Continued Positive Disclosure Trends, Room to Improve
The CAQ and Ideagen Audit Analytics released the 10th annual Audit Committee Transparency Barometer Report. The data gathered provides a macro-level view of public company transparency over the last decade, as well as disclosure trends in evolving areas such as cybersecurity and ESG. Some key toplines of the report include:

• Disclosures of the fact that audit committees are responsible for cybersecurity risk oversight and ESG rose by as much as 50% in the last year.
• These new responsibilities also require expanded skill sets from audit committee members. Notably, we have seen changes in the audit committee’s composition, in terms of members and expertise, and responsibilities.
• Areas with room for improved disclosures include how the audit committee considers the tenure of the external auditor, how audit committees are involved in selecting the external audit engagement partner, and discussions of audit fees.

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).