AICPA & CIMA conference on current SEC and PCAOB developments highlights – December 13, 2022

Representatives from Accounting Research Manager are attending the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments. This conference is being held Monday through Wednesday, December 12-14, 2022. The following are some highlights from conference speeches or presentations. 

Keynote with PCAOB Chair Erica Y. Williams and discussion with the PCAOB Board

Erica Y. Williams

PCAOB Chair Erica Y. Williams delivered a keynote address, and the entire PCAOB Board discussed their regulatory initiatives and priorities. The PCAOB’s mission is investor protection, and Williams noted that audit quality protects people’s “families, savings, and futures.” She called on auditors to “resist complacency, sharpen your focus and meet your responsibility to verify the honesty our system depends on with a vigilance that is worthy of their trust.”

Williams discussed the history of the Sarbanes-Oxley Act signed into law 20 years ago, which was put in place to ensure fairness and honesty in public markets and established the PCAOB. Although audit quality improved since SOX, Williams noted the trendline is recently moving in the wrong direction. A PCAOB staff Spotlight issued last week previewing 2021 inspection findings showed one third of audits inspected had deficiencies so significant that the PCAOB believes the auditor did not obtain sufficient appropriate audit evidence to support the audit opinion. There were also increased comment forms in 2022 inspections of U.S. and non-U.S. firms that usually result in inspection findings. Williams noted firms attributed deficiencies to the pandemic, shortage of staff, and remote audits, but she observed these are not new challenges and some of the deficiencies, like auditor independence, have been recurring for many years.

The PCAOB sanctioned firms in 2022 for issues like noncooperation with investigations, modifying workpapers, and cheating on exams. Williams stated, “Let me be clear: the PCAOB will not tolerate unethical behavior.” She indicated the PCAOB will “use every tool in our enforcement toolbox”, including revoking firm registrations, barring individuals, seeking admissions of wrongdoing for intentional or egregious conduct, and monetary penalties that “won’t be limited to the level of penalties that have been seen before.”

Williams discussed the PCAOB ‘s project to update over 30 of its standards, including a proposed quality control standard for all registered firms issued for public comment in November 2022. She also noted the amendments to requirements for audits involving multiple audit firms and a proposed rule on the confirmation process issued this month. There are several proposals expected in 2023, including illegal acts by clients, going concern, PCAOB attestation standards, and AS 1000 standard topics.

PCAOB Board discussion

The PCAOB’s five-year strategic plan approved in November 2022 includes four goals for investor protection that were discussed by members of the Board: 

• Modernizing standards;
• Enhancing inspections;
• Strengthening enforcement; and
• Improving organizational effectiveness.

Duane DesParte, CPA, discussed the inspection process. He noted it is the primary way the Board interacts with firms and is not a “gotcha approach” but rather a way to walk through areas where firms need improvement. Over the last three years, the PCAOB inspected an average of approximately 160 firms and 700 audit engagements. The strategic plan includes enhancing the inspection process, providing additional information publicly to help audit committees and preparers, and improving the timeliness of issuing inspection reports.

Christina Ho, CPA, stated that the greatest challenges for the profession and the PCAOB for the 21st century are technology and talent. The PCAOB launched a Technology Alliance Working Group this year, a way for seasoned technical experts to work with preparers, auditors, and investor advocates on emerging technologies and the impact on the future of auditing. The PCAOB will consider changes to standards that may be required to address issues like distributed ledgers, Artificial Intelligence, and documentation requirements for digital audits.

In the area of talent, Ho reminded auditors not to forget the “P” in CPA standards for “public” and that auditors must protect the public interest. She called for the profession to help each other in this area to “be the shining light” in helping the public achieve their financial freedom. 

Kara Stern shared her excitement about the PCAOB’s commitment to engaging with and listening to the public because audits are foundational to the strength of financial markets. She also stated she is excited about modernizing audit standards and re-envisioning the role of audits using technology tools to address the impact on public company internal controls of changes in technology.

Anthony Thompson discussed the operational component of the PCAOB’s strategic plan related to its capabilities. He noted recruiting and retaining talent is a large focus of the new board, because regardless of the system, process, and infrastructure, “people always get you to the end game.” He stated there is a very competitive environment for talent, and the PCAOB implemented Workplace 2.0 this year to address benefits, remote work arrangements, and diversity and inclusion for its staff. He noted initiatives at universities, along with proposed legislation that would classify accounting as a “STEM field” and allow grant funding to be used for accounting awareness and education, as areas that could help attract and retain accountants in the profession.

Developments in the Division of Corporation Finance  

Members of the SEC’s Division of Corporation Finance (Corp Fin) provided an overview of activities of the division and future priorities. 

Disclosure review

Corp Fin highlighted changes within its disclosure review groups based on the need to focus resources and expertise. Generally registrant filings are assigned to one of these specialized groups for filing review. These groups evolve based on changes to industries and the growth of emerging areas. The SEC previously announced plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division of Corporation Finance's Disclosure Review Program (DRP). The DRP has long had offices to review company filings by issuers. The two new offices join the seven existing offices that provide focused review of issuer filings and that are grouped by industry expertise to further Corp Fin’s work to promote capital formation and protect investors. Company or registrant allocation to these new groups and leadership additions are ongoing. 

The DRP selectively reviews company filings and must review all public companies once every three years. Significant issues that remain a focus of the DRP are non-GAAP financial measures and Management’s Discussion and Analysis. Emerging issues the DRP has dealt with more often in recent times include inflation, supply chain issues, and Russia’s Invasion of Ukraine. Corp Fin urged conference participants to review Sample Letters issued publicly by the Division, including:

• Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues;
• Sample Letter to Companies Regarding Climate Change Disclosures; 
• Sample Letter to China-Based Companies; and
• Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets.

Board and entity structure

Corp Fin also indicated that it has focused on company board of director structure and risk management. Corp Fin has reviewed  proxy statement materials to see how companies are disclosing the “whys” related to their structure and oversight. Its comments and guidance focused on whether certain corporate governance disclosures could be improved. Item 407(h) of Regulation S-K requires disclosure about a company’s leadership structure, including disclosure regarding:

• Whether the company has combined or separated the chief executive officer and board chair positions;
• The basis for the board of directors’ view that the company’s particular leadership structure is appropriate for the company; and
• Where the chief executive officer and chairman positions are combined, whether and why the company has a “lead independent director” and the specific role the lead independent director plays in the leadership of the company. 

Corp Fin encourages companies to provide disclosure of why a certain leadership structure has been chosen and how related risk is associated. They see a significant number of boilerplate disclosures within Item 407(h). These disclosures should be tailored to a company’s specific facts and circumstances and should highlight challenges facing the specific company, especially when the spotlight on company leadership roles and shareholder interest in this area is growing. Corp Fin did not encourage a particular structure for Item 407(h) disclosures, but it should be made specific to the particular company’s facts and circumstances. Preparers may want to revisit the adopting release, which provides helpful guidance on Item 407(h) disclosure requirements. At a minimum, companies should take a fresh look at their leadership structure disclosures given the current environment.

Crypto assets

Corp Fin also discussed the guidance in its previously issued Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets. Corp Fin indicates that it “believes that companies should evaluate their disclosures with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions, and the potential impact on investors. Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated.” 

Areas within SEC filings that may warrant disclosures regarding crypto assets include:

• General disclosure of any significant crypto asset market developments material to understanding or assessing an entity’s business, financial condition and results of operations, or share price; 
• Description of business;
• Management’s discussion and analysis of financial condition and results of operations; and
• Risk factors.

Corp Fin cautions that the sample comments in the letter “do not address an exhaustive list of the issues that companies should consider. As always, companies should evaluate whether they have experienced or may be affected by matters characterized as potential risks and, if so, update their disclosures accordingly.” 

During the conference, Corp Fin indicated that the accounting for a particular crypto asset should begin with understanding the specific terms and conditions of the crypto asset being offered. For example, are goods and services being offered as part of the offering or are the crypto assets being offered as dividends? Corp Fin reviews the specific terms and conditions of a crypto asset to determine the rights of the holder and obligations of the issuer. This may include implied obligations that could impact the accounting for the crypto asset. Disclosure and discussion of the terms and conditions of the crypto asset must be included in the financial statements to provide adequate disclosure to stakeholders. This should include any rights to the holder and obligations to the issuer such as voting rights, vesting, conversion features, ability to return crypto asset to the issuer, and others. Corp Fin recommends a rigorous review be undertaken of the offering prior to filing with the SEC. The disclosure documents must include adequate accounting policy disclosures regarding the crypto asset and all other required SEC disclosures.

Non-GAAP financial measures

Non-GAAP financial measures continue to be a focus of Corp Fin and the DRP. During the conference, Corp Fin announced that it has revised its guidance in Compliance & Disclosure Interpretation, Non-GAAP Financial Measures. This guidance provides guidance on many of the non-GAAP financial measures that Corp Fin comments on, including:

• Business combination transactions;
• EBIT and EBITDA;
• Undue prominence;
• Reconciliation to GAAP; and
• Segment information.

Corp Fin reminded conference participants that no one non-GAAP measure fits all and that these measures should be used based on the specific company facts and circumstances. 

Inflation

Corp Fin urged companies to disclose information about the impacts of inflation. This may include discussion of higher costs or lower customer demand for products due to a reduction in discretionary income. In some cases, the inflation discussion may also include the impacts of higher interest rates on company operations, uncertainties, and potential future plans. Corp Fin reminded conference participants that these disclosures may have been made in general form as potential risks in the past, but now should be revisited and, if necessary, made more specific given new facts and circumstances.  

Rulemaking

Corp Fin discussed its rulemaking agenda and highlighted several new rules that are applicable to the upcoming year-end financial reporting period. These include:

• Pay-vs-performance disclosures: Beginning in 2023, proxy statements requiring executive compensation disclosures must provide the following incremental pay and performance information: (1) Compensation actually paid to the principal executive officer; (2) Average compensation actually paid to named executive officers; (3) Total shareholder return for the company; (4) Total shareholder return for the company’s peer group; and (5) The most important measure of financial performance the company used to link executive pay to performance.
• Compensation recovery listing standards. The SEC adopted rules to require securities exchanges to adopt listing standards that require issuers to develop and implement a policy providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. The SEC indicates that the final rules require a listed issuer to file the policy as an exhibit to its annual report and to include disclosures related to its recovery policy and recovery analysis where a recovery is triggered.

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