Public Policy and Technical Alert | February 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.

SEC Division of Examinations Announces 2023 Priorities

The SEC’s Division of Examinations announced its 2023 examination priorities. The Division publishes its examination priorities annually to provide insights into its risk-based approach, including the areas it believes present potential risks to investors and the integrity of the U.S. capital markets. The following are a selection of the Division’s 2023 priorities:

• New Investment Adviser and Investment Company Rules
• RIAs to Private Funds
• Retail Investors and Working Families
• Environmental, Social, and Governance (ESG)
• Information Security and Operational Resiliency
• Emerging Technologies and Crypto-Assets

SEC Seeks Applicants for Public Company Accounting Oversight Board Seat

The SEC announced the start of the selection process to fill a seat on the PCAOB that will become vacant in October. The PCAOB appointment is for a five-year term from October 2023 through October 2028. Under the current composition of the PCAOB Board, the candidate selected must be or have been a Certified Public Accountant. Applications are due by March 7, 2023.

SEC Updates Compliance and Disclosure Interpretations (C&DI) for Regulation S-K Item 402(V) Pay Versus Performance

The SEC updated Section 128D and 228D Pay Versus Performance. See the new C&DIs Questions and Answers at 128D.01 through 128D.13, and 228D.01 through 228D.02.

Accounting Standard Setting in a Rapidly Evolving Business Environment: A Focus on the Timely Delivery of Investor Priorities

The SEC posted a statement by Chief Accountant Paul Munter on improving the accounting standard-setting process. Munter says the SEC issued a statement a year ago about the efforts of the FASB, notes that the Board’s technical and research agendas were reprioritized, and adds that it has recently made progress on many reprioritized projects, such as disaggregation of income statement expenses; accounting for and disclosure of crypto assets; improvements, including further disaggregation, to income tax disclosures; and segment reporting. Munter addresses enhancing the accounting standard-setting process and producing timely, high-quality accounting standards updates responsive to investor priorities.

The PCAOB Expects Firms to Remedy Quality Control Deficiencies

The PCAOB released Spotlight: Additional Insights on the Remediation Process. The report discusses the PCAOB’s expectations for firms when remedying quality control deficiencies.

PCAOB Announces Agenda for March 9 Meeting of Its Investor Advisory Group (IAG)

The PCAOB will hold a virtual meeting of its IAG on Thursday, March 9, 2023, at 12:30 p.m. ET. The discussion will center on fraud, digital assets, and inspection and data transparency. Viewers can join via Webex.

Financial Accounting Foundation (FAF) Debuts Enhanced Free Access to Online Accounting Standards Codification and Governmental Accounting Research System

The FASB announced that the FAF launched its free, enhanced online access to the Accounting Standards Codification and the Governmental Accounting Research System, implementing a change announced to stakeholders last month. The Codification is the complete and official version of Generally Accepted Accounting Standards (GAAP) published by the FASB, while GARS is the complete and official version of GAAP published by the Governmental Accounting Standards Board. The new system provides enhanced features compared to the former free offering including enhancements to navigation, search, printing, and copy and paste.

Cost of Business Report

AICPA & CIMA announced that they set out proposals that could help bring down inflation faster. The AICPA & CIMA inflation report includes research among their members and finds that the current inflation problem has multiple drivers outside of monetary policy and the war in Ukraine. The report highlights how management accountants are already supporting their businesses in dealing with the consequences and effects of high inflation, and how their skill sets are supporting effective mitigation strategies for their businesses. The report also shows what strategies and actions finance leaders globally are taking to mitigate risks against inflation for their businesses, and identifies several additional areas where action could be taken.

Momentum Builds for Corporate ESG Reporting and Assurance, Yet Disclosure Inconsistencies Linger, Study Finds

The AICPA & CIMA announced that a new study with the International Federation of Accountants reveals that 95% of large companies reported on ESG matters in 2021, the latest year available, up from 91% in 2019. The study also reveals 64% of companies obtained assurance over at least some ESG information in 2021, up from 51% in 2019.

New Technology-Focused FAQ From International Auditing and Assurance Standards Board (IAASB)

The Technology Consultation Group of the IAASB released non-authoritative support material to help address certain frequently asked questions about investigating exceptions and the concept of performance materiality when performing audit procedures using automated tools & techniques. The publication does not amend or override the International Standards on Auditing (ISAs), the texts of which alone are authoritative. Reading the publication is not a substitute for reading the ISAs.

February 2023 International Accounting Standards Board (IASB) Agenda and Meeting Papers

The IASB posted the agenda and papers for its February 2023 meeting, items include:

• Dynamic Risk Management
• Financial Instruments with Characteristics of Equity
• Rate-regulated Activities
• Maintenance and Consistent Application
• Business Combinations—Disclosures, Goodwill, and Impairment
• Post-implementation review of IFRS 9—Impairment

Global Ethics Board Raises Expectations of Ethical Conduct in Tax

The International Ethics Standards Board for Accountants (IESBA) released for public comment the Exposure Draft Proposed Revisions to the Code Addressing Tax Planning and Related Services. Among other matters, the proposed ethical framework:

• Explains the types of threats to compliance with the fundamental ethics principles of the Code that might be created when professional accountants are involved in tax planning.
• Sets a clear principle that professional accountants recommend or otherwise advise on a tax planning arrangement only if they have determined that there is a credible basis in laws and regulations for it.
• Requires consideration of the reputational, commercial and wider economic consequences that could arise from the way stakeholders might view the tax planning arrangement before determining whether to proceed with the recommendation or advice.
• Provides practical guidance to assist professional accountants in navigating situations of uncertainty when carrying out tax planning.
• Deals with other practical matters, including disagreement with the client or management or those charged with governance, and documentation.

FRC Publishes IFRS 9 Banking Audit Methodology Thematic

The FRC published a thematic review on the Big 4 audit firms’ methodology around IFRS 9, focusing on the audit of Expected Credit Losses (ECL) for larger banks. The review identifies several examples of good practice, including around the auditing of ECL models and assumptions, but also highlights areas for improvement, such as the guidance provided on testing judgmental aspects of Significant Increase in Credit Risk. The FRC expects this to be a useful resource for auditors, audit committees, and stakeholders in the banking sector, highlighting the importance of consistent and appropriate application of IFRS 9 audit methodology, to ensure high quality auditing is performed over this critical and judgmental area.

IESBA Strengthens and Clarifies Independence Requirements for Group Audits

The IESBA released final revisions to the International Code of Ethics for Professional Accountants (including International Independence Standards) to address holistically the various independence considerations in an audit of group financial statements. The revisions also deal with the independence and other implications of the changes made to the definition of an engagement team in the Code to align with changes to the definition of the same term in the International Auditing and Assurance Standards Board’s International Standards on Auditing and International Standards on Quality Management. The pronouncement will be effective for audits of financial statements and group financial statements for periods beginning on or after December 15, 2023, with early adoption permitted.

PCAOB: A Firm’s System of Quality Control (QC)

The CAQ posted a comment letter that provides views to the PCAOB related to its request for comment on A Firm’s System of Quality Control and Other Proposed Amendments to PCAOB Standards, Rules, and Forms. The CAQ supports the objectives of the proposal as set forth by the Board, but expresses some overarching concerns that it encourages the Board to address in the final standard. These include:

• Prescriptiveness without commensurate benefit to audit quality
• Foundational differences between QC 1000 and ISQM 1
• Parallels between QC 1000 for audit firms and Sarbanes-Oxley for issuers
• Other key issues

PCAOB: The Auditor’s Use of Confirmation

The CAQ posted a comment letter that provides views to the PCAOB related to its request for comment on The Auditor’s Use of Confirmation, and Other Proposed Amendments to PCAOB Standards. The CAQ supports the Board’s objectives of updating its interim standard related to the confirmation process as the confirmation process has continued to evolve since adoption. The CAQ also expresses some overarching concerns that it encourages the Board to address in the final standard. These include:

• Risk assessment and auditor judgment
• Persuasiveness of audit evidence
• Recommendations

Audit Committee Effectiveness: A Webinar Series

The CAQ announced the second episode of Audit Committee Effectiveness: a webinar series, which will explore insights from the CAQ and Deloitte’s Center for Board Effectiveness’ Audit Committee Practices Report: Priorities and Committee Composition. The episode is scheduled for March 29, 2023, 1PM – 2PM ET.

​​​​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).