Public Policy and Technical Alert | June 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.

The critical importance of the general standard of auditor independence and an ethical culture for the accounting profession

In a statement, SEC acting chief accountant Paul Munter discussed the critical importance of the auditor independence framework under Rule 2-01(b) of Regulation S-X (“Rule 2-01(b)” or the “general standard”); the Office of the Chief Accountant’s approach to auditor independence consultations; certain recurring issues in recent auditor independence consultations; and the paramount importance that accounting firms foster an ethical culture with respect to auditor independence and fulfill their professional responsibilities.

SEC Division of Corporation Finance updates Compliance and Disclosure Interpretations (CD&Is)

The SEC updated CD&I Question 101.01, would the staff of the Division of Corporation Finance or the Division of Trading and Markets consider a future or forward contract that permits cash or physical settlement to be “intended to be physically settled” and therefore excluded from the definitions of “swap” and “security-based swap” if, at the time the parties enter into the contract, the underlying securities cannot be legally transferred, or the transfer of the underlying securities is restricted by contract? Answer: No.

SEC announces spring 2022 regulatory agenda

The U.S. Office of Information and Regulatory Affairs released the Spring 2022 Unified Agenda of Regulatory and Deregulatory Actions. The report, which includes contributions related to the SEC, lists short- and long-term regulatory actions that administrative agencies plan to take. There are 53 rules on the SEC’s rulemaking list, including 27 rules in the proposed stage and 26 rules in the final stage.

SEC adopts rules to require electronic filing for investment advisers and institutional investment managers

The SEC adopted amendments to require certain documents filed by investment advisers, institutional investment managers, and certain other entities to be filed or submitted electronically. The amendments also make technical amendments to modernize Form 13F and enhance the information provided. The amendments are intended to promote efficiency, transparency, and operational resiliency by modernizing how information is filed or submitted to the Commission and disclosed to the public. Electronic filings will be more readily accessible to the public and available on websites in easily searchable formats. With the exception of the amendments to Form 13F, the new rules and form amendments will be effective 60 days after publication in the Federal Register. The amendments to Form 13F will be effective on January 3, 2023.

Mark T. Uyeda sworn in as SEC Commissioner

The SEC announced Mark T. Uyeda has been sworn into office as a Commissioner by Brian Johnson, Assistant Director of the Division of Investment Management’s Rulemaking Office. Commissioner Uyeda fills a term that expires on June 5, 2023.

Saba Qamar named Investor Advocate at the PCAOB

The PCAOB announced that Sabahat Qamar has been appointed the PCAOB’s Investor Advocate. In this newly created role, Ms. Qamar will be responsible for maintaining and expanding the PCAOB’s engagement with the investor community, as well as serving as the organization’s primary point of contact for this critical stakeholder group.

PCAOB adopts new requirements for lead auditor’s use of other auditors

The PCAOB adopted amendments to its auditing standards to strengthen requirements that apply to audits involving multiple audit firms. The amendments aim to improve the quality of audits where other accounting firms or individual accountants perform important work on the audit. Subject to SEC approval, the amendments will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024. The amendments, which include changes to existing standards and adoption of a new standard, improve PCAOB standards principally by:

• Specifying certain procedures for the lead auditor to perform when planning and supervising an audit that involves other auditors; and
• Applying a risk-based supervisory approach to the lead auditor’s oversight of other auditors for whose work the lead auditor assumes responsibility.

PCAOB issues Spotlight providing staff overview for planned 2022 inspections

The PCAOB issued a Spotlight report that highlights selected areas of planned inspection focus in 2022. Selected areas of inspection focus include fraud and other risks, IPOs and M&A activity, audit firms’ execution challenges, broker-deal specific considerations, independence, use of service providers in the confirmation process, critical audit matters, audit areas with continued deficiencies, firms’ quality control systems, and technology.

Financial Accounting Foundation (FAF) issues 2021 annual report

The FAF posted its 2021 Annual Report on its website. The annual report commemorates the 50th anniversary of the creation of the FAF. The report also offers an overview of how the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) focus on obtaining and incorporating stakeholder input during standards-setting activities. The 2021 Annual Report includes:

• Letters from FASB, GASB, and FAF leaders
• Milestones of the FAF’s 50-year history
• Highlights of 2021 FASB and GASB standards and Exposure Drafts
• Complete 2021 management’s discussion and analysis and audited financial statements (MD&A) (previously posted to the FAF website).

FASB publishes its 2021 Agenda Consultation Report

The FASB issued its 2021 FASB Agenda Consultation Report. The report summarizes the robust stakeholder feedback obtained during the 2021 agenda consultation project and how that feedback has influenced the Board’s technical and research agendas and standard-setting process as of June 29, 2022. The Board also added the following projects to its technical agenda based on feedback from investors and a broad range of stakeholders:

• Accounting for and Disclosure of Digital Assets
• Accounting for Environmental Credit Programs
• Accounting for and Disclosure of Software Costs.

FASB issues standard to improve fair value guidance for equity securities

The FASB issued an Accounting Standards Update (ASU) that improves financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities. The amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about the restriction including the nature and remaining duration of the restriction.

Auditors staying focused on quality management

The AICPA posted an update on quality management. In June, the AICPA Auditing Standards Board issued a new quality management standard that CPA firms are required to follow that will take effect Dec. 15, 2025. The new quality management standard further sharpens the focus on firms’ self-administered internal quality control processes. It is designed to move quality management systems away from using standard checklists that were designed to apply to many firms. Instead, the standard requires firms to evaluate their specific risks to deliver a high-quality audit and act to mitigate those risks. Those risks may change over time, and they may need to be addressed accordingly.

Tom Seidenstein reappointed as IAASB chair

The International Auditing and Assurance Standards Board (IAASB) announced the reappointment of Tom Seidenstein as IAASB Chair for a further three-year term commencing July 1. Seidenstein has chaired the IAASB since July 2019 and has been instrumental in the delivery of milestone projects, such as the new quality management standards, and addressing the issue of standards for less complex entities.

IFIAR comments on the IESBA Proposed Exposure Draft on Proposed Revisions to the Code Relating to the Definition of Engagement Team and Group Audits

The International Forum of Independent Audit Regulators published its comment letter on the International Ethics Standards Board for Accountants (IESBA) Proposed Exposure Draft on Proposed Revisions to the Code Relating to the Definition of Engagement Team and Group Audits.

IFRS Foundation Trustees appoint four further members to the International Sustainability Standards Board (ISSB)

The IFRS Foundation Trustees announced the appointment of Richard Barker, Verity Chegar, Bing Leng, and Ndidi Nnoli-Edozien as inaugural members of the ISSB. All appointees will start their roles as full-time ISSB members in July. The ISSB’s first public board meeting will be held at the ISSB’s offices in Frankfurt the week commencing July 18. The Trustees aim to complete the inaugural appointments to the ISSB during the third quarter of 2022.

IESBA commits to readying global ethics and independence standards timely in support of sustainability reporting and assurance

The IESBA released a statement saying it has tasked its recently established Sustainability Working Group to develop a strategic vision to guide its standard-setting actions in relation to sustainability reporting and assurance. The Working Group will prepare a project plan by December 2022 as a launchpad for commencement of standard-setting work soon after. This work will proceed in tandem with the development of IFRS Sustainability Disclosure Standards by the International Sustainability Standards Board (ISSB), and sustainability-related International Standards on Assurance Engagements (ISAEs) by the IAASB.

IAASB Digital Technology Market Scan: Natural language processing

The IAASB posted a Market Scan bulletin that explores natural language processing (NLP), technology that has the potential to impact many areas of the audit—enhancing the way auditors work and providing opportunities for greater insight. The IAASB’s Disruptive Technology team covers:

• What is natural language processing and why is it important?
• The latest developments
• What this might mean for the IAASB

IFRS Foundation and Value Reporting Foundation (VRF) vote to approve consolidation from July 1

The Trustees of the IFRS Foundation and the Board of Directors of the VRF voted to approve the consolidation of the VRF into the IFRS Foundation, effective July 1, 2022. The consolidation of VRF will entail several organizational arrangements to align with the vision and meet the objectives of the parties that led to their announcing consolidation plans at COP26 in Glasgow on November 3, 2021. These arrangements will inform the work of the IFRS Foundation through the industry-based approach of the SASB Standards and the Integrated Reporting Framework.

FRC seeks stakeholders’ views on publicly available audit quality indicators to drive audit quality improvements

The FRC issued a consultation on publishing audit quality indicators (AQIs) for the largest UK audit firms, which would provide users of audited information with greater detail on audit firms’ efforts to deliver high quality audit. The 11 proposed AQIs would provide stakeholders with 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 individual audits.

FRC publishes first of its kind professional judgement guidance for auditors

The FRC published comprehensive professional judgement guidance for auditors to improve how they exercise professional judgement. The new guidance includes a framework for making professional judgements and a series of illustrative examples. If applied widely, the guidance will improve audit quality by enhancing the consistency and quality of professional judgement exercised by auditors. The guidance will be of particular use for auditors and central technical teams but will also have wider interest for those interested in audit quality, such as audit committee members and investors.

International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) provide update on ongoing collaboration

The IFRS Foundation posted an update on the collaboration between the ISSB and the GRI. IFRS Sustainability Disclosure Standards and GRI Standards can be viewed as two interconnected reporting pillars that address distinct perspectives, which can together form a comprehensive corporate reporting regime for the disclosure of sustainability information. In May, technical representatives from both organizations outlined activities that could provide the necessary clarification and alignment. Among the initiatives discussed were:

• An agreed schedule of meetings and roadmap to advance technical aspects of the collaboration.
• A mapping exercise to establish those requirements in the ISSB’s General Requirements and Climate Exposure Drafts that are equivalent with GRI Standards in order to guide an exercise on alignment of disclosures, guidance, concepts and definitions.

PCAOB: Estimates and specialists post-implementation review

The CAQ posted a comment letter that provides views to the PCAOB related to its Interim Analysis No. 2022-001, Post-Implementation Review, Estimates and Specialists Audit Requirements. The CAQ continues to support outreach to monitor the implementation of the final standard and final amendments. In the letter, the CAQ applauds the PCAOB’s approach in working with the members of the profession, including meeting with CAQ task forces, as doing so allows for an ongoing dialogue on implementation. This dialogue was instrumental in permitting the profession to share specific feedback on unique implementation challenges and enabling the PCAOB staff to provide helpful clarification through guidance about the intent of the standards after they were finalized and before the effective date.

CAQ comments on SEC climate disclosure rule proposal, supports objectives but identifies needed changes

The CAQ posted a comment letter to the SEC that voices support for requiring certain registrants to subject Scope 1 and Scope 2 greenhouse gas (GHG) emissions disclosures to attestation as this will enhance the reliability and quality of these disclosures. In its response to the SEC’s proposal, the CAQ expressed its support for a globally accepted ESG reporting system that is built from existing standards and frameworks. The CAQ also identified a few noteworthy challenges and solutions for the current proposal, including:

• Organizational boundaries for GHG emissions disclosures
• GHG emissions methodology
• Regulation S-X proposed amendments

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

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. 

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).