Public Policy and Technical Alert | March 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 Proposes New Requirements to Address Cybersecurity Risks to the U.S. Securities Markets

The SEC announced it proposed requirements for broker-dealers, clearing agencies, major security-based swap participants, the Municipal Securities Rulemaking Board, national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents (collectively, “Market Entities”) to address their cybersecurity risks. The proposal includes new notification requirements applicable to all Market Entities and additional reporting requirements applicable to Market Entities other than certain types of small broker-dealers (collectively, “Covered Entities”) that would improve the Commission’s ability to obtain information about significant cybersecurity incidents affecting these entities. Further, new public disclosure requirements for Covered Entities would improve transparency about the cybersecurity risks that can cause adverse impacts to the U.S. securities markets.

SEC Reopens Comment Period for Proposed Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds

The SEC announced it reopened the comment period on proposed rules and amendments related to cybersecurity risk management and cybersecurity-related disclosure for registered investment advisers, registered investment companies, and business development companies that were proposed by the Commission on February 9, 2022. The initial comment period ended on April 11, 2022. The reopened comment period will allow interested persons additional time to analyze the issues and prepare comments in light of other regulatory developments, including whether there would be any effects of other Commission proposals related to cybersecurity risk management and disclosure that the Commission should consider.

Responsibilities of Lead Auditors to Conduct High-Quality Audits When Involving Other Auditors

The SEC posted a statement by Paul Munter, Chief Accountant, regarding the expectation for the level of audit quality in audits involving other auditors. Munter discusses the auditor’s responsibilities with respect to audits involving other auditors, including members of their own network firms; highlights how the auditor’s responsibilities are incorporated currently in the PCAOB standards, including the PCAOB’s quality control standards; and provides reminders on good practices for audit committees and issuers.

SEC Proposes to Modernize the Submission of Certain Forms, Filings, and Materials Under the Securities Exchange Act of 1934

The SEC proposed amendments designed to modernize its information collection and analysis methods by, among other things, proposing that a number of filings be submitted to the Commission electronically on EDGAR using structured data where appropriate. Specifically, the proposed amendments would require the electronic filing, submission, or posting of certain forms, filings, and other submissions that national securities exchanges, national securities associations, clearing agencies, broker-dealers, security-based swap dealers, and major security-based swap participants make with the Commission. The proposed amendments would also make certain amendments regarding the Financial and Operational Combined Uniform Single (“FOCUS”) Report to harmonize it with other rules, make technical corrections, and provide clarifications. The public comment period will remain open for 30 days after publication in the Federal Register or until May 22, 2023, whichever is later.

Investor Advisory: Exercise Caution With Third-Party Verification/Proof of Reserve Reports

The PCAOB’s Office of the Investor Advocate issued an Investor Advisory due to concern that investors and others may place undue reliance on proof of reserve reports (“PoR Reports”), which are not within the PCAOB’s oversight authority. The Office of the Investor Advocate is aware of some service providers, including PCAOB-registered audit firms, issuing PoR Reports to certain crypto entities (e.g., crypto exchanges, stablecoin issuers). The Investor Advisory says investors should note that PoR engagements are not audits and, consequently, the related reports do not provide any meaningful assurance to investors or the public.

Meeting of the PCAOB Standards and Emerging Issues Advisory Group (SEIAG)

The PCAOB held a virtual meeting of its SEIAG on Thursday, March 30. Discussion centered on:

• Proposed QC 1000, A Firm’s System of Quality Control
• Proposed AS 2310, The Auditor’s Use of Confirmation
• Post-Implementation Review: CAMs and Estimates & Specialists – Findings and Steps Forward
• Going Concern
• Substantive Analytical Procedures

PCAOB Proposes Modernization of Standards Addressing Core Auditing Principles and Responsibilities

The PCAOB issued for public comment a proposed new standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit. The Board requests public comment on the proposal by May 30, 2023. If adopted, AS 1000 would reorganize and consolidate a group of standards that were adopted on an interim basis by the PCAOB in April 2003 and that address the core principles and responsibilities of the auditor, such as reasonable assurance, professional judgment, due professional care, and professional skepticism. The proposal would also amend certain other standards that address responsibilities fundamental to the conduct of an audit.

FASB Seeks Public Comment on Proposed Enhancements to Income Tax Disclosures

The FASB published a proposed Accounting Standards Update (ASU) that addresses requests for improved income tax disclosures from investors, lenders, creditors, and other allocators of capital (collectively, “investors”) that use the financial statements to make capital allocation decisions. The amendments in this proposed ASU would address investor requests for more transparency about income tax information, including jurisdictional information, by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. Comments are due by May 30, 2023.

FASB Seeks Public Comment on Proposed Improvements to the Accounting for and Disclosure of Certain Crypto Assets

The FASB published a proposed ASU intended to improve the accounting for and disclosure of certain crypto assets. The amendments would require an entity to measure crypto assets at fair value each reporting period with changes in fair value recognized in net income. They also would improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, restrictions, and changes in those holdings. The amendments would apply to all entities holding crypto assets that meet all the following criteria:

• Meet the definition of intangible asset as defined in the FASB Accounting Standards CodificationMaster Glossary
• Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets
• Are created or reside on a distributed ledger based on blockchain technology
• Are secured through cryptography
• Are fungible
• Are not created or issued by the reporting entity or its related parties

Comments are due by June 6, 2023.

FASB Improves Leases Guidance on Related Party Arrangements Between Entities Under Common Control

The FASB issued an ASU that improves the guidance for applying Topic 842, Leases, to arrangements between entities under common control. The ASU provides private companies and not-for-profit organizations that are not conduit bond obligors with a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and, if so, the classification of and accounting for that lease. In addition, the ASU requires all entities (that is, including public companies) to amortize leasehold improvements associated with common control leases over the useful life to the common control group.

FASB Improves Accounting for Investments in Tax Credit Structures

The FASB issued an ASU that improves the accounting and disclosures for investments in tax credit structures. The ASU allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

SAS No. 149 New Group Audits Standard

AICPA posted an alert on SAS 149, which introduces a risk-based approach to planning and performing a group audit.

Proposed New and Revised Interpretations Related to Fees

The Professional Ethics Executive Committee (PEEC) is exposing for comment two new interpretations and revisions to two interpretations of the “Independence Rule” (ET sec. 1.200.001):

• New “Determining Fees for an Attest Engagement” interpretation (ET sec. 1.230.030)1
• New “Fee Dependency” interpretation (ET sec. 1.230.040)
• Revised “Conceptual Framework for Independence” interpretation (ET sec. 1.210.010)
• Revised “Client Affiliates” interpretation (ET sec. 1.224.010)

Comments are due by June 15, 2023.

Proposed Revised Interpretation Uniform CPA Examination and Continuing Professional Education

The PEEC is proposing to expand the interpretation of the AICPA Code of Professional Conduct to include information about question and answer sharing on examinations taken in connection with CPE courses unless collaboration is expected and permitted. The PEEC also included language to clarify that falsifying attendance checks in any way is also considered an act discreditable to the profession. Comments are due by May 15, 2023.

AICPA Provides Comments on Interim Guidance Regarding Application of Corporate Alternative Minimum Tax

Following the release of interim guidance (Notice 2023-7) by the Department of the Treasury and the Internal Revenue Service (IRS) addressing how the Corporate Alternative Minimum Tax (CAMT) applies to corporations, certain partnerships, troubled companies, and affiliated groups of corporations that file consolidated tax returns, the AICPA submitted comments and recommendations that identify and provide additional information regarding CAMT guidance provided in the Notice and for rules not included in the Notice. The AICPA submitted comments and recommendations on the following issues:

• Financial Reporting and Accounting for Income Taxes
• Passthrough Issues
• General Concepts and Methods & Periods
• Mergers & Acquisitions Issues

IAASB Digital Technology Market Scan: Digital Assets

The International Auditing and Assurance Standards Board posted a Market Scan bulletin that explores Digital Assets, with a focus on recent developments within the Cryptocurrency market and what it might mean for the audit and assurance ecosystem. The IAASB’s Disruptive Technology team covers:

• What are digital assets and why are they important?
• The latest developments
• What this might mean for the IAASB

 IFIAR Releases 2022 Report on Annual Survey of Audit Inspection Findings

The International Forum of Independent Audit Regulators (IFIAR) announced it has released its 11th annual survey of inspection findings arising from its Member regulators’ individual inspections of audit firms affiliated with the six largest global audit firm networks.

FRC Releases New Guidance on Audit Firm Eligibility Criteria

The FRC issued guidance for audit firms on eligibility criteria in the context of the firm’s system of quality management and the performance of engagements. ISQM (UK) 1 and ISQM (UK) 2 have been reissued with updated footnotes to reflect this guidance. The guidance contents includes details on:

• Key audit partners
• Engagement quality reviewers
• Ultimate and operational responsibilities for the system of quality management
• Public sector and local audit considerations
• Summary of eligibility criteria

IASB Proposes Narrow-Scope Amendments to Classification and Measurement Requirements for Financial Instruments

The IASB published an exposure draft proposing amendments to the classification and measurement requirements in IFRS 9 Financial Instruments. The amendments include:

• Clarifying the classification of financial assets with environmental, social, and corporate governance (ESG) and similar features
• Settlement of liabilities through electronic payment systems

Comments are due by July 19, 2023.

Insight Report: AI, Emerging Tech and Governance

The FRC posted an Insight report on AI, Emerging Tech, and Governance. The FRC held a roundtable hosted by the Centre for the Analysis of Investment Risk and the Centre for Financial Technology at Alliance Manchester Business School, and AI emerged as the primary focus in the discussions among a diverse group of stakeholders across companies, academics, accounting bodies, investors, and others. Notable takeaways were provided for governance, response, and academics and research.

IASB Initiates Project to Consider Climate-Related Risks in Financial Statements

The IASB announced it added a project to its work plan to explore whether and how companies can provide better information about climate-related risks in their financial statements. In undertaking the project, the IASB will consider the work of the International Sustainability Standards Board to ensure any proposals work well with IFRS Sustainability Disclosure Standards and that any information required by the two boards would be complementary. The project will research to what extent the educational material published in 2020 is helping companies reflect the effects of climate-related risks in the financial statements, and what actions, if any, the IASB could take to further improve information about these matters.

Monitoring Group Welcomes Important Step in Implementing Its Recommendations With the Establishment of the International Foundation for Ethics and Audit

The International Organization of Securities Commissions (IOSCO) announced the Monitoring Group (MG) recognized the announcement of the establishment of the International Foundation for Ethics and Audit (IFEA). One of the MG Recommendations is that “the standard-setting Boards should be housed in a separate legal entity outside of and independent from” the accounting profession. The creation of the Foundation marks a significant milestone in implementing the MG Recommendations in order to create a more independent and inclusive standard-setting structure that is responsive to the public interest in the development of timely, high-quality audit, assurance, ethics, and independence standards. The IAASB and the IESBA will now be housed in a separate, independent legal entity as outlined in the MG Recommendations.

IOSCO Sets Out Key Considerations to Promote an Effective Global Assurance Framework for Sustainability-Related Corporate Reporting

The IOSCO published a Report on International Work to Develop a Global Assurance Framework for Sustainability-Related Corporate Reporting. The report elaborates on IOSCO’s support for the on-going work of the IAASB and the IESBA to develop profession-agnostic assurance and ethics (including independence) standards over sustainability-related information. Among its key messages to stakeholders across the ecosystem, IOSCO encourages continued strong system-wide engagement throughout the development of the standards. A clear message in IOSCO’s factfinding work is that capabilities need to be enhanced across the entire ecosystem to support effective assurance over sustainability-related information.

The Role of the Auditor in Climate-Related Information

The CAQ released a report that discusses the increasing emphasis that investors, regulators, and other stakeholders are placing on the reliability of climate-related information. The publication provides insight into:

• The types of climate-related information companies are disclosing
• The role public company auditors play in evaluating a company’s reporting of climate-related information
• The skillsets that enable auditors to perform attestation engagements over climate-related information

Audit Quality Reports Analysis: A Year in Review

The CAQ announced a study that examines the most recent audit quality reports for each of the eight accounting firms represented on the CAQ’s Governing Board. The study observed over 100 unique qualitative disclosures and quantitative audit quality metrics providing transparency into the firm-level processes that accounting firms employ to promote and enhance audit quality.

The Center for Audit Quality and EVERFI Create Limitless Opportunities in the Accounting Field

The CAQ and EVERFI, the nation’s leading social impact education innovator, announced the launch of a first-of-its-kind digital education program, Accounting Careers: Limitless Opportunities to help high school students discover how accounting skills can help them achieve their career goals and to attract greater diversity and representation into the accounting profession.

​​​​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 Vanessa Teitelbaum, Senior Director, Professional Practice (vteitelbaum@thecaq.org).