Public Policy and Technical Alert, February 2021

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

• Satyam Khanna named Senior Policy Advisor for Climate and ESG
• John Coates named Acting Director of the Division of Corporation Finance
• Kelly L. Gibson named Acting Deputy Director of Division of Enforcement
• Allison Herren Lee Statement on the review of climate-related disclosure
• The Division of Examinations’ continued focus on digital asset securities

FASB

• FASB announces new investor education video on convertible instruments
• FASB, IASB, and the Accounting Review seek academic research papers for joint 2022 “Accounting for An Ever-Changing World” Conference

International

• IASB, Accounting in Europe, and the British Accounting Review publish joint call for research papers on corporate disclosures
• IFRS Foundation Trustees announce next steps in response to broad demand for global sustainability standards
• IASB proposes to extend support for lessees accounting for COVID-19-related rent concessions
• IASB amends IFRS Standards related to accounting policy disclosures and clarifies distinction between accounting policies and accounting estimates
• IFRS: Call for academic research to inform the IASB’s post-implementation reviews of IFRS Standards
• FRC posts draft 2021/2022 strategy, plan, and budget
• FRC: Virtual and augmented reality offer a new frontier for corporate reporting
• IAASB seeks public comment on exposure draft aligning existing standards with new, revised quality management standards
• FRC: Operational separation of audit practices

AICPA

• AICPA’s proposed new quality management standards aim to enhance and maintain a CPA firm’s audit quality
• AICPA’s proposed new auditing standard aims to enhance communication between past and potential new financial statement auditors

CAQ Updates

• CAQ comment letter on IAASB Discussion Paper, Fraud and Going Concern in an Audit of Financial Statements
• Profession in focus: Exclusive conversation with former SEC Chair Jay Clayton
• ESG reporting and attestation: A roadmap for audit practitioners

Upcoming Events

SEC

Satyam Khanna named Senior Policy Advisor for Climate and ESG

The SEC announced that Satyam Khanna will serve as Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee. In this new role, Khanna will advise the agency on environmental, social, and governance (ESG) matters and advance related new initiatives across its offices and divisions. Mr. Khanna was most recently a resident fellow at NYU School of Law’s Institute for Corporate Governance and Finance and served on the Biden-Harris Presidential Transition’s Federal Reserve, Banking, and Securities Regulators Agency Review Team. He was previously a member of the SEC’s Investor Advisory Committee, where he served on the Investor-As-Owner Subcommittee and was a senior advisor to the Principles for Responsible Investment.

John Coates named Acting Director of the Division of Corporation Finance

The SEC announced that John Coates will serve as Acting Director of the agency’s Division of Corporation Finance. Coates has been the John F. Cogan Professor of Law and Economics at Harvard University, where he also served as Vice Dean for Finance and Strategic Initiatives, and taught courses on corporate law and governance, securities regulation, and finance to lawyers, business students, and executives. Prior to joining the faculty of Harvard Law School, Mr. Coates was a partner at Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and financial institutions, and in helping companies register and sell more than $10 billion of securities.

Kelly L. Gibson named Acting Deputy Director of Division of Enforcement

The SEC announced that Kelly L. Gibson has been named the Acting Deputy Director of the Division of Enforcement. Prior to starting in the Acting Deputy Director role, Gibson served as the Director of the Philadelphia Regional Office since February 2020. She joined the SEC in 2008 as a staff attorney in the Division of Enforcement in the Philadelphia office, and joined the Market Abuse Unit when it was established in 2010. Gibson was promoted to Assistant Regional Director in 2013 and to Associate Regional Director in 2017.

Allison Herren Lee Statement on the review of climate-related disclosure

Acting SEC Chair Allison Herren Lee issued a statement directing the Division of Corporation Finance to enhance its focus on climate-related disclosure in public company filings. In 2010 the SEC provided guidance to public companies regarding existing disclosure requirements as they apply to climate change matters.   As part of its enhanced focus in this area, the SEC staff will review the extent to which public companies address the topics identified in the 2010 guidance, assess compliance with disclosure obligations under the federal securities laws, engage with public companies on these issues, and absorb critical lessons on how the market is currently managing climate-related risks. The SEC staff will use insights from this work to begin updating the 2010 guidance to consider developments in the last decade.

The Division of Examinations’ continued focus on digital asset securities

The Division of Examinations issued a Risk Alert to provide observations made by division staff during examinations of investment advisers, broker-dealers, and transfer agents regarding digital asset securities that may assist firms in developing and enhancing their compliance practices. The division encouraged market participants to reflect upon their own practices, policies, and procedures, as applicable, and to promote improvements in their supervisory, oversight, and compliance programs.

FASB

FASB announces new investor education video on convertible instruments

The FASB posted an investor education video on its August 2020 guidance on convertible instruments. The video is the latest in a series of FASB investor education videos that explain how recent or upcoming standards may impact a company’s financial reports. The video walks viewers through examples that demonstrate how the guidance will impact the income statement, earnings-per-share calculations, and other related areas.

FASB, IASB, and the Accounting Review seek academic research papers for joint 2022 “Accounting for An Ever-Changing World” Conference

The FASB, the International Accounting Standards Board (IASB), and The Accounting Review issued a joint call for academic research papers on how key standards are performing in the capital markets. The initiative is intended to strengthen connections between the academic and standard-setting communities and encourage academic research that supports the FASB and the IASB in their post-implementation review of recent major standards.

International

IASB, Accounting in Europe, and the British Accounting Review publish joint call for research papers on corporate disclosures

The IASB, Accounting in Europe, and The British Accounting Review published a joint call for research. The call for research papers pertains to one or more of the following topics:

• Compliance with mandatory disclosure requirements;
• Specific areas of interest to the IASB; and
• Alternative research approaches.

The deadline for submissions is January 31, 2022.

IFRS Foundation Trustees announce next steps in response to broad demand for global sustainability standards

The IFRS Foundation posted an update after the Trustees of the IFRS Foundation met to review responses to the first three questions asked by their consultation paper on sustainability reporting. They discussed demand for global sustainability standards, whether the IFRS Foundation should play a role, and, if so, the requirements for success in doing so. The update states that the responses to their consultation paper indicate growing and urgent demand to improve the global consistency and comparability in sustainability reporting, as well as strong recognition that urgent steps need to be taken and broad demand for the IFRS Foundation to play a role in this. The Trustees have agreed to undertake further detailed analysis of feedback on the requirements for success and other conditions to be satisfied prior to consideration of whether to establish a new board. The Trustees intend to produce a definitive proposal (including a road map with timeline) by the end of September 2021.

IASB proposes to extend support for lessees accounting for COVID-19-related rent concessions

The IASB published for consultation a proposal to extend by one year the application period of the amendment to IFRS 16 Leases issued in 2020 to assist lessees accounting for COVID-19-related rent concessions. The original amendment was issued in May 2020 and was intended to make it easier for lessees to account for COVID-19-related rent concessions, and currently applies to rent concessions that reduce only lease payments due on or before June 30, 2021. In response to calls from stakeholders and because the pandemic is still at its height, the IASB proposed to extend the relief to cover rent concessions that reduce only lease payments due on or before June 30, 2022.

Comments are due by February 25, 2021.

IASB amends IFRS Standards related to accounting policy disclosures and clarifies distinction between accounting policies and accounting estimates

The IASB issued narrow-scope amendments to IFRS Standards. The amendments were intended to help companies:

• Improve accounting policy disclosures so that they provide more useful information to investors and other primary users of the financial statements; and
• Distinguish changes in accounting estimates from changes in accounting policies.

The amendments are effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

IFRS: Call for academic research to inform the IASB’s post-implementation reviews of IFRS Standards

The IFRS Foundation issued a call for research proposals to help inform the IASB’s planned post-implementation reviews of three standards, focusing specifically on the quality of disclosures provided by companies applying IFRS 9 Financial Instruments, together with the disclosure requirements in IFRS 7 Financial Instruments: Disclosures, and on the disclosures required by IFRS 15 Revenue from Contracts with Customers.

The deadline for submitting research proposals is March 31, 2021.

FRC posts draft 2021/2022 Strategy, Plan, and Budget

The Financial Reporting Council (FRC) published for consultation its draft 2021/2022 Strategy, Plan, and Budget. The draft reflects the FRC’s desire to serve the public interest while also moving at pace towards building the enhanced capacity and capability necessary to transform into the new Audit, Reporting, and Governance Authority. The FRC’s objectives for the year are to:

• Set high standards in corporate governance and stewardship, corporate reporting, auditing and actuarial work, and assess the effectiveness of the application of those standards, enforcing them proportionately where it is in the public interest;
• Promote improvements and innovation in the areas for which the FRC is responsible, exploring good practice with a wide range of stakeholders;
• Influence international standards and share best practice through membership of a range of global and regional bodies and incorporate those standards into the UK regulatory framework;
• Promote a more resilient audit market; and
• Transform the organization into a new robust and independent regulator, acting in the public interest.

FRC: Virtual and augmented reality offer a new frontier for corporate reporting

The FRC published a new FRC Lab report on virtual and augmented reality in corporate reporting. The report considers how virtual and augmented reality are and might be used to expand the scope and audience for corporate reporting and includes examples of current practice and highlights some possible future uses.

IAASB seeks public comment on exposure draft aligning existing standards with new, revised quality management standards

The IAASB published a request for public comment on its exposure draft addressing changes in some of its standards and framework resulting from the new and revised quality management standards. The exposure draft aligns the IAASB’s standards related to review, assurance, and related services, as well as its framework, with the quality management standards through conforming amendments.

Comments are requested by May 24, 2021.

FRC: Operational separation of audit practices

The FRC published principles for operational separation of the audit practices of the ‘Big 4’ firms in July 2020. The FRC asked the firms to submit their implementation plans by October 23, 2020, and after reviewing the plans, is now content for the firms to move to the next stage of implementation. The FRC has made some changes to the principles following its analysis of the firms’ implementation plans, including:

• Clarifying that services provided to non-audited entities should be commissioned by those charged with governance at the entity or be assurance services for third party recipients;
• Increasing the minimum proportion of revenue within the ring-fence that must be derived from audit; and
• Confirming that the audit practice should not receive fees for introducing business to other parts of the firm and that partners in the audit practice should not be incentivized for sales passed to other parts of the firm.

AICPA

AICPA’s proposed new quality management standards aim to enhance and maintain a CPA firm’s audit quality

The AICPA issued an exposure draft, Proposed Quality Management Standards, that includes three interrelated standards that address the way CPA firms manage quality for their accounting and auditing practices. The standards offer a new proactive, risk-based approach to effective quality management systems within CPA firms and are designed to improve the scalability of the standards and promote a system tailored to the firm and its engagements. The three proposed standards are:

• Proposed Statement on Quality Management Standards (SQMS): A Firm’s System of Quality Management;
• Proposed SQMS: Engagement Quality Reviews; and
• Proposed Statement on Auditing Standards (SAS): Quality Management for an Engagement Conducted in Accordance with Generally Accepted Auditing Standards.

Interested parties are encouraged to submit their feedback on the exposure draft by June 11, 2021.

AICPA’s proposed new auditing standard aims to enhance communication between past and potential new financial statement auditors

The AICPA issued an exposure draft, Proposed SAS: Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations (NOCLAR) to amend SAS No. 122, as amended, section 210, Terms of Engagement. The standard would require immediate past auditors and presumed successor auditors, once management consents to the past auditor responding, to communicate about potential NOCLAR situations. Examples of NOCLAR situations include, but are not limited to, noncompliance with tax or pension laws and regulations.

Interested parties are encouraged to submit their feedback on the exposure draft by June 30, 2021.

CAQ Updates

CAQ comment letter on IAASB Discussion Paper, Fraud and Going Concern in an Audit of Financial Statements

The CAQ published a comment letter providing views on the IAASB’s Discussion Paper, Fraud and Going Concern in an Audit of Financial Statements: Exploring the Differences Between Public Perceptions About the Role of the Auditor and the Auditor’s Responsibilities in a Financial Statement Audit. The CAQ expressed support for the IAASB’s efforts to gather perspectives from its stakeholders about the role of the auditor in relation to fraud and going concern in an audit of financial statements, and to obtain input on matters about whether the IAASB standards related to fraud and going concern remain fit-for-purpose in the current environment.

Profession in focus: Exclusive conversation with former SEC Chair Jay Clayton

In this video, CAQ Executive Director Julie Bell Lindsay sits down with former SEC Chairman Jay Clayton for an exclusive conversation about the SEC under Clayton’s tenure. They discuss the modernization of auditor independence rules, financial reporting during COVID-19, fraud, audit quality, and Clayton’s advice for the next SEC Chairman.

ESG reporting and attestation: A roadmap for audit practitioners

The CAQ teamed up with the AICPA to provide audit practitioners with an overview of ESG reporting in the form of a roadmap. The roadmap outlines the related risk and legal considerations associated with a company’s decision to report ESG information in SEC submissions. This roadmap can aid practitioners with discussions around:

• Where and how to report ESG information (e.g., in an SEC submission);
• Whether to engage an independent accounting firm to perform an attestation engagement on the ESG information, and topics such as;
• Where to include the attestation report or reference such report.

Upcoming Events

MARCH 8-10, 2021

CII Spring 2021 Conference, Virtual

MARCH 15-19, 2021

IAASB Board Meeting, Virtual

March 23-25, 2021

Nareit’s REITwise, Virtual

May 3-5, 2021

AICPA & CIMA Employee Benefit Plans Conference, Virtual

JUNE 14-18

IAASB Quarterly Board Meeting, Virtual

OCTOBER 25-27, 2021

ICGN Annual Conference, Toronto, Canada

NOVEMBER 15-16

AICPA and CIMA National Tax Conference, Washington, DC

 

The Center for Audit Quality is an autonomous, nonpartisan, nonprofit organization dedicated to enhancing investor confidence and public trust in the global capital markets by fostering high-quality public company audits; collaborating with other stakeholders to advance the discussion of critical issues; and advocating policies and standards that promote public company auditors’ objectivity, effectiveness and responsiveness to dynamic market conditions. Based in Washington, D.C., 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 PPTA can be addressed to: info@thecaq.org.