Public Policy and Technical Alert | December 2022

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.

SEC issues sample letter to companies regarding recent developments in crypto asset markets

The SEC issued an illustrative letter with sample comments that the Division of Corporation Finance may issue to companies depending on their particular facts and circumstances with regard to crypto asset market developments. In meeting their disclosure obligations, companies should consider the need to address crypto asset market developments in their filings generally, including in their business descriptions, risk factors, and management’s discussion and analysis.

SEC updates Compliance & Disclosure Interpretations (C&DI) for Proxy Rules and Schedule 14A

The SEC updated the following Compliance and Disclosure Interpretations (CD&Is) for Proxy Rules and Schedules 14A/14C:

• Question 139.04
• Question 139.05
• Question 139.06

SEC updates Compliance & Disclosure Interpretations (C&DI) for Non-GAAP Measures

The SEC updated the following CD&Is for Non-GAAP Financial Measures:

• Question 100.01
• Question 100.04
• Question 100.05
• Question 100.06
• Question 102.10

SEC final rule Insider Trading Arrangements and Related Disclosures

The SEC adopted amendments to the rule under the Securities Exchange Act of 1934 that provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases. The amendments add new conditions to this rule that are designed to address concerns about abuse of the rule to trade securities opportunistically on the basis of material nonpublic information in ways that harm investors and undermine the integrity of the securities markets. The SEC also adopted new disclosure requirements regarding the insider trading policies and procedures of issuers, the adoption and termination (including modification) of plans that are intended to meet the rule’s conditions for establishing an affirmative defense, and certain other similar trading arrangements by directors and officers.

Post-implementation review of AS 2501, auditing accounting estimates, including fair value measurements; amendments to auditing standards for auditor’s use of the work of specialists

The PCAOB released an interim analysis report and two accompanying staff white papers examining the initial impact of new requirements for auditing accounting estimates, including fair value measurements (“Estimates Requirements”) and the auditor’s use of the work of specialists (“Specialists Requirements”). Among the key findings from the staff’s analyses:

• About one-third of the audit firms in the staff’s survey reported that the new requirements improved auditing practices.
• Almost all audit firms and audit engagement partners reported that the new requirements did not result in significant increases in audit hours or audit fees.
• Statistical analysis finds evidence of changes in specialist usage following implementation of the Specialists Requirements.
• The staff has not found evidence of significant unintended consequences or implementation challenges associated with the new requirements.

Audits with deficiencies increased in 2021, according to new PCAOB staff report

The PCAOB announced a new staff report shows a year-over-year increase in the number of audits with deficiencies at audit firms that it inspected in 2021. The report, “Staff Update and Preview of 2021 Inspection Observations,” presents aggregate observations from the PCAOB’s inspections of 141 annually and triennially inspected audit firms in 2021. According to the report, PCAOB staff expects approximately 33% of the audits reviewed will have one or more deficiencies that will be discussed in Part I.A of the individual audit firm’s inspection reports, up from 29% in 2020.

Fact sheet: PCAOB secures complete access to inspect, investigate Chinese firms for first time in history

The PCAOB determined that it was able to secure complete access to inspect and investigate audit firms in China for the first time in history, in 2022, thanks to the Holding Foreign Companies Accountable Act of 2020 (HFCAA). Therefore, on December 15, 2022, the PCAOB Board voted to vacate previous determinations to the contrary. Investors are now more protected because Congress acted, giving the PCAOB leverage through the HFCAA to secure this unprecedented access.

PCAOB proposes new standard for the auditor’s use of confirmation

The PCAOB issued for public comment a proposed new standard that, if adopted, would strengthen and modernize the requirements for the auditor’s use of confirmation. The Board requests public comment on the proposal by February 20, 2023. The proposed standard includes principles-based requirements that would apply to all methods of confirmation, including paper-based and electronic communications. The proposal, if adopted, would better integrate the PCAOB’s confirmation standard with its risk assessment standards.

FASB improves certain transition requirements in long-duration insurance guidance

The FASB issued an Accounting Standards Update (ASU) that amends transition guidance in ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), for contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date. In August 2018, the FASB issued ASU 2018-12 to improve, simplify, and enhance the financial reporting requirements for long-duration contracts issued by insurance entities. The amendments in Update 2018-12 require an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early application is elected.

FASB defers sunset date of reference rate reform guidance

The FASB issued an Accounting Standards Update (ASU) that extends the period of time preparers can utilize the reference rate reform relief guidance. The Board included a sunset provision within Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Enhance audit quality from the top down

The new auditing standard Statement on Auditing Standards (SAS) No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, streamlines the audit process and addresses compliance issues. Additionally, embracing a top-down approach to how risks of material misstatement and relevant management assertions are addressed could lead to more efficient audits. Revisions that can be expected include:

• New requirement for separate assessments of inherent risk and control risk
• Changes in the definition of significant risk
• New application guidance when controls are relevant to information technology
• Updated guidance on scalability for less complex entities
• Revised definition of “relevant assertions”

The effective date is Dec. 15, 2023.

Monitoring Group reports on progress to implement recommendations to strengthen the international audit and ethics standard-setting system

The Monitoring Group reported that it is on track to implement its recommendations Strengthening the International Audit and Ethics Standard-Setting System within the established timeframe. The MG has worked collaboratively with the Public Interest Oversight Board (PIOB), the International Auditing and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA), and the International Federation of Accountants (IFAC). The MG has implemented a new global, robust nominations process to appoint gender, geographically, and experientially diverse PIOB members. The nominations process of the standard-setting boards has been transitioned to the PIOB. The MG has made strides on two other important works streams: the implementation of the resource and costing plans for the standard-setting boards and the launch of the new independent legal entity that will house the standard-setting boards.

FRC’s new AQIs give greater insight into audit quality

The FRC published new firm-level audit quality indicators (AQIs) following support from users of audit services for greater insight into many of the indicators that drive audit quality. The AQIs will provide users of audit services provided by the largest UK audit firms with more information about factors that drive audit quality and help them make an informed choice when selecting an auditor. The 11 AQIs include a range of comparable indicators on perceived culture within an audit firm, audit quality inspection results, staff workloads, and the level of partners’ involvement in audits.

Call for papers on hedge accounting requirements of financial instruments accounting standard

The IASB and Accounting & Finance journal announced a call for research papers on the application and impact of hedge accounting requirements in IFRS 9 Financial Instruments and new disclosure requirements in IFRS 7 Financial Instruments: Disclosures related to this. The IASB is seeking evidence about: whether the requirements are working as intended; any important or contentious issues that have come to the attention of the IASB; and any unexpected costs or implementation issues. It will consider when to begin a post-implementation review of IFRS 9 on hedge accounting in the second half of 2023. Papers must be submitted by September 1, 2023.

FRC launches Audit & Assurance Sandbox

The FRC launched its Audit & Assurance Sandbox, a collaborative space for approaching issues facing the audit and assurance industry, to support high quality audit and assurance work. The sandbox offers a confidential environment for relevant parties to discuss ideas and technical issues in audit and assurance policy areas such as the application of the FRC’s auditing, assurance and ethical standards, relevant technologies, ESG, and competition.

New IAASB fact sheet helps auditors navigate quality management for group audits

The International Auditing and Assurance Standards Board (IAASB) published a new fact sheet on the interactions between International Standard on Audit (ISA) 220 (Revised), which addresses quality management at the engagement level, and ISA 600 on group audits. The fact sheet highlights aspects of a group audit that may be affected by ISA 220 (Revised) and International Standard on Quality Management 1 addressing quality management at the firm level. This includes the revised definition of engagement team and leadership and direction, supervision, and review responsibilities. The fact sheet will be particularly useful for group audits in which component auditors are involved.

New edition of the IAASB handbook now available on the IAASB website

The IAASB released a new edition of the Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements, which includes:

• International Standard on Auditing (ISA) 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement, replacing ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
• The back of Volumes 1, 2, and 3 includes standards that are not yet effective for this version of the handbook, such as International Standard on Quality Management (ISQM) 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements; ISQM 2, Engagement Quality Reviews; and ISA 220 (Revised), Quality Management for an Audit of Financial Statements.

The IESBA releases update on sustainability work

The International Ethics Standards Board for Accountants (IESBA) released “Continuing with the Development of Global Ethics and Independence Standards for Sustainability Reporting and Assurance,” a publication providing an overview of the sustainability-related decisions made by the Board at it’s recent meeting and how those decisions will shape the Board’s work in 2023 and beyond. On December 2, 2022, the Board unanimously approved two new projects that will deliver the following: Sustainability Project

• Profession-agnostic independence standards for use by all sustainability assurance practitioners
• Specific ethics provisions relevant to sustainability reporting and assurance

Experts Project

• Specific ethics and independence provisions addressing the use of experts by organizations as well as in the context of audit and assurance engagements (including sustainability assurance)

IASB publishes its review of classification and measurement requirements relating to financial instruments

The IASB published its project report and feedback statement concluding the Post-implementation Review (PIR) of the classification and measurement requirements in IFRS 9 Financial Instruments. The IASB has initiated a standard-setting project focused on a company’s assessment of the contractual cash flow characteristics of financial assets with ESG-linked features and on electronic cash transfers as settlement of a financial asset or liability. This will also include:

• clarification of the application of contractual cash flow characteristics assessments to contractually linked instruments; and
• improvements to disclosures of fair value changes relating to equity instruments a company has presented in other comprehensive income rather than in profit or loss (OCI presentation election).

An exposure draft setting out proposed amendments from this project will be published in Q1 of 2023.

​​​​Missed something? Read up on past PPTA Newsletters.

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 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 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 Joseph Bailey, Manager, Professional Practice (jbailey@thecaq.org).