SEC - PCAOB

Summary - The PCAOB inspectors outlined their priorities for 2024 inspections in a PCAOB staff report. The staff report includes key risks, like high interest rates, and other considerations, like audit areas with recurring deficiencies, that auditors should focus on when planning and performing audit procedures. It notes the PCAOB will continue to prioritize inspections of financial-services sector audits, digital assets, and more. The report also includes suggested questions for audit committees to hold firms accountable to high standards when hiring and overseeing the audit process.

The report also reiterates the inspection staff’s commitment to enhancements to the PCAOB’s inspection program, such as increasing the number of engagements reviewed and improving the timeliness of inspection reports.

Among the PCAOB’s inspection enhancements in 2024 will be the creation of a PCAOB team that will evaluate culture across the largest domestic audit firms. This initiative will include interviewing firm personnel and evaluating other documentation, with the aim of using this information to enhance the PCAOB’s understanding of how audit firm cultures may be affecting audit quality.

The staff report addresses the following areas for consideration in the PCAOB’s 2024 inspection program:

Overall Business Risk Considerations

Persistent high interest rates, tightening of credit availability, and/or inflationary challenges.
Disruptions in the supply chain and rising costs.
Business models that are significantly impacted by rapidly changing technology.
Geopolitical conflicts.
Financial statements that include areas with a higher inherent risk of fraud, estimates involving complex models or processes, and/or presentation and disclosures that may be impacted by complexities in the public company’s activities.

Prioritized Sectors/Industries for audit selection and inspection

Continued emphasis on companies engaging in merger and acquisition activities or business combinations.
Continued emphasis on audits of broker-dealers that file compliance reports and others that provide customers with various investment opportunities, such as introducing brokers.
Continued selection of non-traditional audit areas.
Continuing emphasis on public companies in industries and sectors with specialized accounting and/or that may be negatively impacted by uncertainties and volatility in the economic and geopolitical environment, prioritizing in particular Financials,
Information Technology, and Other.

Inspections Considerations

The report also discusses a range of considerations that should be important for auditors when planning and performing risk assessments and audit procedures, including:

Challenges and Recurring Deficiencies Observed in Inspections of Auditors of Broker-Dealers.
Recurring Deficiencies.
Evaluating Audit Evidence.
Understanding the Company and Its Environment.
Use of Other Auditors.
Going Concern.
Critical Audit Matters (CAMs).
Digital Assets.
Cybersecurity.
Use of Data and Technology.

Updated List of Questions that Audit Committees May Want to Consider

In the context of the PCAOB’s 2024 inspections, the report contains suggested questions for audit committee members to consider amongst themselves or in discussions with their independent auditors. These questions are designed principally to further two-way communication on topics such as auditor understanding of the business, fraud, going concern, other auditors, CAMs, and the company’s use of technology. Chair Williams has encouraged audit committees to ask questions in order to hold firms accountable to performing high-quality audits.

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Audit Committees –PCAOB Releases a New Staff Spotlight Publication

Summary - The PCAOB has made it a strategic priority to engage directly and regularly with audit committees, which play a vital role in furthering the collective goal that public companies have appropriate policies and controls for the preparation of accurate financial statements and share a goal of promoting high-quality auditing through the oversight of external auditors.

In 2022, more than 200 audit committee chairs accepted the PCAOB’s invitation to discuss topics related to the 2021 audit of their company’s financial statements. PCAOB staff took notes during those conversations and analyzed them for recurring themes, which are presented as high-level observations and takeaways in the publication.

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Confirmation –PCAOB Adopts New Standard on Auditors’ Use of Confirmation

Summary - The PCAOB adopted a new standard to strengthen and modernize the requirements for the auditor’s use of confirmation. The new standard reflects changes in technology, communications, and business practices since the interim standard was first adopted by the PCAOB in 2003 after being issued by the AICPA in 1991. The updated standard is intended to better protect investors by strengthening procedures that enhance an auditor’s ability to identify fraud in certain circumstances and improving overall audit quality.

The new standard establishes principles-based requirements designed to stay relevant as technology evolves by applying to all methods of confirmation, including electronic and paper-based communications. In addition, the new standard better integrates with the PCAOB’s risk assessment standards. Among its key provisions, the new standard:

Includes a new requirement regarding confirming cash and cash equivalents held by third parties or otherwise obtaining relevant and reliable audit evidence by directly accessing information maintained by a knowledgeable external source;
Carries forward the existing requirement regarding confirming accounts receivable, while addressing situations where it is not feasible for the auditor to perform confirmation procedures or otherwise obtain relevant and reliable audit evidence for accounts receivable by directly accessing information maintained by a knowledgeable external source;
States that the use of negative confirmation requests alone does not provide sufficient appropriate audit evidence;
Emphasizes the auditor’s responsibility to maintain control over the confirmation process and provides that the auditor is responsible for selecting the items to be confirmed, sending confirmation requests, and receiving confirmation responses; and
Identifies situations in which alternative procedures should be performed by the auditor.

The adoption of the new confirmation standard was informed by input from an extensive notice-and-comment process, including issuance of a concept release and two proposing releases.

The new standard will apply to all audits conducted under PCAOB standards. Subject to approval by the SEC, the new standard will take effect for audits of financial statements for fiscal years ending on or after June 15, 2025.

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Engagement Quality Reviews –PCAOB Staff Report Addresses Rising Audit Deficiencies Related to Engagement Quality Reviews

Summary - The PCAOB has published a Staff Report, Inspection Observations Related to Engagement Quality Reviews. This new report reveals that 42% of firms the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews (EQRs), up from 37% in 2020. The report focuses on the PCAOB-mandated EQR process, in which a reviewer who is not part of the engagement team evaluates significant judgments made by the audit engagement team. In addition to covering recent trends in audit deficiencies related to EQRs, the staff report provides good practices and reminders for auditors so they can avoid such deficiencies. It also highlights key questions related to EQRs that audit committees might want to consider as discussion points as they engage with external auditors.

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Exchange Act Rules –SEC Staff Updates Compliance and Disclosure Interpretation

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its Compliance and Disclosure Interpretation, Exchange Act Rules. Corp Fin has added new questions 120.26-120.28. These new questions provide guidance related to the implementation of the SEC’s new Final Rule, Insider Trading Arrangements and Related Disclosures.

Among other things, this new rule provides affirmative defenses to trading on the basis of material nonpublic information in insider trading cases and includes new disclosure requirements under Regulation S-K and revisions to Rule 16a-3 and Forms 4 and 5.

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Crypto Assets –PCAOB Issues Staff Report: Auditors Must Respond to Unique Risks of Crypto Assets, Including Fraud

Summary - The PCAOB released a new Spotlight staff report, "Inspection Observations Related to Public Company Audits Involving Crypto Assets," based primarily on observations gathered during 2021 and 2022 inspections. The staff report says that the use of crypto assets presents unique audit risks to public companies and broker-dealers and requires an appropriate risk assessment and audit response by audit firms.

Since 2017, PCAOB inspectors have been reviewing audits of public companies where transactions or holdings associated with crypto assets were material to the financial statements. In its 2023 inspections, the PCAOB is continuing to prioritize risks related to material digital assets.

As detailed in the staff report, PCAOB inspections have identified common audit deficiencies related to crypto assets in the auditor’s procedures for the following areas:

Fraud and significant unusual transactions.
Ownership of crypto assets.
Relevance and reliability of information used as audit evidence.
Revenue recognition in crypto asset transfer.
Arrangements with mining pool operators.

In addition to inspection observations, the staff report discusses good practices that some audit firms have implemented that may enhance audit quality, including the following:

Consultations – Engagement teams at some firms are encouraged to consult with the members of the firm’s professional practice group and/or subject-matter specialists related to crypto assets.
Subject-matter specialists – Certain firms have established centralized groups related to distributed ledger technology (e.g., cryptography, blockchain technology).
Technology-based tools – To support public company audits involving crypto assets, some firms have developed proprietary, technology-based tools.

The staff report also presents reminders for auditors regarding execution of their responsibilities in areas such as client acceptance and retention evaluation, information technology infrastructure, consideration of fraud, and critical audit matters.

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Audit Committees –PCAOB Issues Spotlight for Audit Committees to Facilitate Dialogue on Risk of Fraud and Other Topics

Summary - The PCAOB released a new Spotlight staff report, “Staff Resource for Audit Committees,” which suggests questions that may be of interest to audit committee members to consider among themselves or in discussions with their independent auditors, particularly given today’s economic and geopolitical landscape.

Investors and other stakeholders look to audit committees of public companies to oversee the quality and sufficiency of the accounting and financial reporting processes of public companies, as well as the audits of public companies. Effective execution of the audit committee’s responsibilities is especially important, given higher audit deficiency rates that the PCAOB staff has observed recently – and the consequent need for audit firms to sharpen their focus on increasing audit quality.

As part of their responsibilities, it is important that audit committees engage in effective two-way communication with auditors and ask relevant questions throughout the audit. The Spotlight suggests questions that audit committees may want to consider regarding the auditor’s work on the following topics:

Risk of fraud;
Risk assessment and internal controls;
Auditing and accounting risks;
Digital assets;
Merger and acquisition activities;
Use of the work of other auditors;
Talent and its impact on audit quality;
Independence;
Critical audit matters; and
Cybersecurity

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Auditor Responsibilities – PCAOB Issues Proposal to Bring Greater Clarity to Certain Auditor Responsibilities When Using Technology-Assisted Analysis

Summary - The PCAOB issued a proposal for public comment designed to improve audit quality and enhance investor protection by addressing aspects of designing and performing audit procedures that involve technology-assisted analysis of information in electronic form. The proposal includes changes to AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement and conforming amendments to other related PCAOB auditing standards.

Existing PCAOB standards relating to audit evidence and responses to risk were issued by the PCAOB in 2010. Since that time, companies have greatly expanded their use of information systems that maintain large volumes of information in electronic form. As a result, auditors have greater access to large volumes of company-produced and third-party information in electronic form that may potentially serve as audit evidence. Some auditors have greatly expanded their use of data analysis tools.

Although the PCAOB staff’s research indicates auditors are using technology-assisted analysis in audit procedures, it also indicates that audit quality would benefit if the standards included additional direction addressing specific aspects of designing and performing audit procedures that involve technology-assisted analysis.

The proposal seeks to improve audit quality by reducing the likelihood that an auditor who uses technology-assisted analysis will issue an opinion without obtaining sufficient appropriate audit evidence. In particular, the proposal would bring greater clarity to auditor responsibilities in the following areas:

Using reliable information in audit procedures – Technology-assisted analysis often involves analyzing vast amounts of information in electronic format. The proposal would emphasize auditor responsibilities when evaluating the reliability of such information. For example, when auditors test a company’s controls over electronic information, their testing should include controls over the company’s information technology related to such information.

Using audit evidence for multiple purposes – Technology-assisted analysis can be used to provide audit evidence for various purposes in an audit, such as performing risk assessment procedures when planning an audit and performing substantive procedures in response to the auditor’s risk assessment. The proposal would specify that if an auditor uses audit evidence from an audit procedure for more than one purpose, the auditor should design and perform the procedure to achieve each of the relevant objectives.

Designing and performing substantive procedures –When designing and performing substantive procedures, auditors can use technology-assisted analysis to identify transactions and balances that meet certain criteria and warrant further investigation. For example, auditors can identify all transactions within an account processed by a certain individual or exceeding a certain amount. The proposal would clarify factors the auditor should consider as part of that investigation, including whether the identified items represent a misstatement or a control deficiency or indicate a need for the auditor to modify its risk assessment or planned procedures.

The deadline for public comment on the proposal is August 28, 2023.

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Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023

Summary - The staff in the SEC’s Division of Corporation Finance and Division of Trading and Markets has published Staff Statement on the Holding Foreign Companies Accountable Act and the Consolidated Appropriations Act, 2023. This statement provides SEC staff guidance on the amendments to the Holding Foreign Companies Accountable Act that shorten the timeframe before certain issuers face a trading prohibition from three to two consecutive years, and to clarify that any foreign authority impeding PCAOB inspections or investigations can trigger the provisions of the legislation.

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PCAOB Inspections –PCAOB 2023 Inspections to Prioritize Audit Risks Related to Fraud, the Financial Services Sector, and Crypto

Summary - The PCAOB inspectors outlined their priorities for 2023 inspections in a new PCAOB staff report. The report outlines plans to increase the focus on fraud-related audit procedures, continue prioritizing risks related to material digital assets, and continue selecting audits in the financial services sector for inspection, among other priorities.

The complete list of 2023 inspection priorities outlined in the report includes:

Risk of fraud;
Auditing and accounting risks;
Risk assessment and internal controls;
Financial services specific considerations;
Broker-dealer specific considerations;
M&A, including de-SPAC transactions;
Digital assets;
Use of the work of other auditors;
Quality control (particularly talent retention and its impact on audit quality, and independence); and
Other inspection areas (critical audit matters, cybersecurity, and use of data and technology in the audit).

The report notes inspectors will focus their work in 2023 on audits that include risks related to digital assets, first year audits, multi-location audits, and significant or unusual events or transactions. As part of ongoing efforts to enhance inspections, the report also says inspectors will expand the number of audits they review for certain annual firms.

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Professional Competence and Skepticism –PCAOB Publishes Spotlight

Summary - The PCAOB has published Spotlight: Professional Competence and Skepticism Are Essential to Quality Audits. Periodically, the staff of the PCAOB provides reminders to auditors on applying specific PCAOB requirements, including relevant examples. PCAOB staff reminds auditors of the importance of critically assessing the firm’s capabilities, obtaining proper understanding of the company they are auditing, and performing work with due professional care and professional skepticism. These matters are particularly important in circumstances where changes to economic conditions or other factors affect the company.

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Core Auditing Principles –PCAOB Proposes Modernization of Standards Addressing Core Auditing Principles and Responsibilities

Summary - The PCAOB issued for public comment a proposed new standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit. 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. Among other changes, the amendments would: (1) reinforce and clarify the engagement partner’s responsibility to exercise due professional care related to supervision and review; and (2) accelerate the documentation completion date by reducing the maximum period for the auditor to assemble a complete and final set of audit documentation from 45 days to 14 days.

The proposal intends to bring improvements designed to reflect changes in the auditing environment, eliminate outdated and inconsistent language, and increase consistency throughout PCAOB standards.

Public comments on the proposal are requested by May 30, 2023.

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Cybersecurity –SEC Proposes New Requirements to Address Cybersecurity Risks to the U.S. Securities Markets

Summary - The SEC has proposed for public comment 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 would require all Market Entities to implement policies and procedures that are reasonably designed to address their cybersecurity risks and, at least annually, review and assess the design and effectiveness of their cybersecurity policies and procedures, including whether they reflect changes in cybersecurity risk over the time period covered by the review. The proposal, through 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”), would improve the SEC’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.

The public comment period will remain open until 60 days after the date of publication of the proposing release in the Federal Register.

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

Summary - The SEC has 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 SEC on February 9, 2022.

The SEC indicates that 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.”

The comment period will remain open until 60 days after the date of publication of the reopening release in the Federal Register.

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Proof of Reserve Reports –PCAOB Investor Advocate Cautions on Third-Party Verification/Proof of Reserve Reports

Summary - The PCAOB’s Office of the Investor Advocate issued Investor Advisory: Exercise Caution With Third-Party Verification/Proof of Reserve Reports (POR Reports). 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). Crypto entities may engage a service provider to issue a PoR Report to reassure customers in response to concerns about the type of reserve holdings or the safety and availability of customers’ digital assets if some or all of the customers decide to withdraw their assets. The Advisory states, “Proof of reserve reports are inherently limited, and customers should exercise extreme caution when relying on them to conclude that there are sufficient assets to meet customer liabilities.

PoR engagements are not subject to PCAOB inspection. The PCAOB is concerned investors and others may place undue reliance on the reports. Despite any representations to the contrary, the PCAOB notes PoR Reports are not equivalent or more rigorous than an audit, are not conducted in accordance with PCAOB auditing standards, and do not provide any meaningful assurance to investors or the public.

In addition, there is a lack of uniformity in service providers that perform PoR engagements, because some PoR engagements are performed by accounting firms and others are performed by non-accountant assurance providers. Management of the crypto entities has discretion on whether the results of PoR reports are made public and the extent and format of the information provided.

The Advisory states that, in general, PoR Reports provide an asset verification for an asset type at a particular moment in time, subject to significant limitations based on the procedures performed. Also, because PoR Reports concern digital assets at one point in time, they do not provide any assurance about whether the assets were used, loaned, or otherwise became unavailable to customers after issuance of the PoR Report, that reserves will be adequate, or that customer assets will be protected. PoR Reports also provide no assurance regarding the effectiveness of internal controls or governance of the crypto entity.

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Conflicts of Interest –SEC Proposes Rule to Prohibit Conflicts of Interest in Certain Securitizations

Summary - The SEC has proposed for public comment a rule to implement Section 27B of the Securities Act of 1933, a provision added by Section 621 of the Dodd-Frank Act. The rule is intended to prevent the sale of asset-backed securities (ABS) that are tainted by material conflicts of interest. Specifically, the rule would prohibit securitization participants from engaging in certain transactions that could incentivize a securitization participant to structure an ABS in a way that would put the securitization participant's interests ahead of those of ABS investors. The SEC originally proposed a rule to implement Section 27B in September 2011.

If adopted, new Securities Act Rule 192 would prohibit an underwriter, placement agent, initial purchaser, or sponsor of an ABS, including affiliates or subsidiaries of those entities, from engaging, directly or indirectly, in any transaction that would involve or result in any material conflict of interest between the securitization participant and an investor in such ABS. Under the proposed rule, such transactions would be “conflicted transactions.” They include, for example, a short sale of the ABS or the purchase of a credit default swap or other credit derivative that entitles the securitization participant to receive payments upon the occurrence of specified credit events in respect of the ABS. The prohibition on conflicted transactions would commence on the date on which a person has reached, or has taken substantial steps to reach, an agreement that such person will become a securitization participant with respect to an ABS, and it would end one year after the date of the first closing of the sale of the relevant ABS.

The public comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

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Quality Control Defects –PCAOB Releases Spotlight on Remediation of Quality Control Defects

Summary - The PCAOB released a new staff Spotlight Additional Insights on the Remediation Process. As part of its strategic drive to enhance PCAOB inspections, the PCAOB is focused on audit firms’ quality control defects – particularly those that are persistent – and the steps that firms take to remediate them.

Under the Sarbanes-Oxley Act and PCAOB rules, the PCAOB does not disclose its criticisms of a firm’s quality control systems for a period of 12 months after the initial publication of an inspection report. During that period, the firm is expected to address identified quality control deficiencies. If the firm fails to address quality control deficiencies to the PCAOB’s satisfaction, those criticisms are disclosed to the public.

This staff Spotlight highlights some of the factors that the PCAOB staff considers, particularly related to design, implementation, and effectiveness of a firm’s actions to remediate quality control deficiencies. Key considerations discussed include heightened expectations for addressing repeat or persistent quality control deficiencies, the importance of root cause analysis, how the PCAOB staff considers subsequent inspection results, PCAOB staff expectations on the timing of remediation design and implementation, and more.

This Spotlight reflects the staff’s current remediation program, as well as previous PCAOB and staff guidance documents available on the PCAOB’s website.

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Division of Corporation Finance - Financial Reporting Manual

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has published a new edition of its Division of Corporation Finance Financial Reporting Manual (Manual). Sections of the Manual have been updated as of December 31, 2022. These sections have been marked with the date tag, “Last updated: 12/31/2022,” to identify the changes.

This new edition has been updated for a number of SEC rulemakings and changes, including:

Updated the phone number for contacting Corp Fin staff and provided a link to the new online submission for financial statement waiver or substitution requests.
Revisions for amendments to Rules 3-10 and 3-16 of Regulation S-X in SEC Release No. 33-10763, Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.
Revisions to add guidance related to the implementation of Accounting Standards Update (ASU) No. 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.
Removed information that is no longer applicable due to the passage of time.

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Shareholder Reports –SEC Adopts Amendments to Modernize Fund Shareholder Reports and Information in Fund Advertisements

Summary - The SEC adopted rule and form amendments to require mutual funds and exchange-traded funds to transmit concise and visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisements.

Fund Shareholder Reports Amendments

The SEC adopted rule amendments will require funds to provide concise, tailored shareholder reports that highlight key information, such as fund expenses, performance, and portfolio holdings. The SEC indicates that the instructions for the revamped reports will “encourage the use of graphic and text features to make them more effective. Funds will be required to tag the information in their reports in a structured data format.”

In addition, the rule amendments require funds to make certain information that may be more relevant to investors and financial professionals who desire more in-depth information available online and available for delivery free of charge to investors on request. That information will no longer appear in fund’s shareholder reports but will remain available to investors on a website identified in the shareholder report and must be filed semi-annually with the SEC.

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Securities Listing Standards –SEC Adopts Compensation Recovery Listing Standards and Disclosure Rules

Summary - 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.

Shareholder Reports –SEC Adopts Amendments to Modernize Fund Shareholder Reports and Information in Fund Advertisements

The SEC adopted rule and form amendments to require mutual funds and exchange-traded funds to transmit concise and visually engaging shareholder reports and to promote transparent and balanced presentations of fees and expenses in investment company advertisements.

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Fund Shareholder Reports Amendments

Summary - The SEC adopted rule amendments will require funds to provide concise, tailored shareholder reports that highlight key information, such as fund expenses, performance, and portfolio holdings. The SEC indicates that the instructions for the revamped reports will “encourage the use of graphic and text features to make them more effective. Funds will be required to tag the information in their reports in a structured data format.”

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Investment Company Advertising Rules

Summary - The SEC adopted amendments to investment company advertising rules to require that fee and expense presentations in registered investment company and business development company advertisements and sales literature be consistent with relevant prospectus fee table presentations and be reasonably current. The amendments also address representations of fees and expenses that could be materially misleading.

The amendments will become effective 60 days after publication in the Federal Register. The SEC is providing an 18-month transition period after the effective date of the amendments to allow mutual funds and exchange-traded funds with adequate time to adjust their shareholder report and transmission practices. The SEC is also providing an 18-month transition period after the effective date to comply with the final amendments to the advertising rules. The rule amendments that address representations of fees and expenses that could be materially misleading will apply on the effective date.

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Quality Control –PCAOB Proposes a New Quality Control Standard

Summary - The PCAOB issued for public comment a proposed standard it believes would, if adopted, lead registered public accounting firms to significantly improve their quality control (QC) systems. The proposal advances the PCAOB’s strategic goal of modernizing standards. The PCAOB requests public comment on the proposal by February 1, 2023.

Current QC standards were developed and issued by the AICPA before the PCAOB was established in 2002. The auditing environment has changed significantly since that time, so QC is a pressing area for modernization.

The PCAOB has considered the potential for improvements to its QC standards, including through discussion with the PCAOB’s former advisory groups. In December 2019, the PCAOB issued a concept release that generated comment letters from firms, investors, investor advocates, academics, trade groups, and others. This input, along with the PCAOB’s own quantitative and qualitative economic analysis, helped to inform the proposal.

The proposed standard, if adopted, would replace the current QC standards in their entirety and would provide a framework for a firm’s QC system that is grounded in proactively identifying and managing risks to quality, with a feedback loop from ongoing monitoring and remediation designed to drive continuous improvement. Among other provisions, the proposal would foster a more structured approach where a firm would annually evaluate its QC system and report the results of its evaluation on new Form QC.

Detailed questions are included throughout the proposal, and commenters are encouraged to (1) comment on any or all topics, (2) respond to any or all questions, (3) provide feedback in areas not covered by specific questions, and (4) provide any evidence that informs commenters’ views.

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PCAOB Interim Attestation Standards –PCAOB Staff Requests Information and Comment on Application and Use of the PCAOB’s Interim Attestation Standards

Summary - As discussed above, the PCAOB issued a staff request for information and comment on matters related to the application and use of the PCAOB’s interim attestation standards. Input from the public will help inform any potential recommendation the staff may make to the PCAOB regarding updates to the standards.

Modernizing standards is one of the four key goals the PCAOB identified in its draft strategic plan, including modernizing interim standards that have not been updated since they were initially adopted decades ago. In April 2003, the PCAOB adopted, on an interim basis, certain attestation standards from the AICPA. These standards have continued in effect substantially as they were adopted.

PCAOB attestation standards apply to attest engagements, which generally involve issuing a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

Specifically, the staff is seeking information and views on the following:

Use of attestation reports;
Current practice related to attest engagements, including current and anticipated uses of PCAOB attestation standards;
Potential updates to certain requirements for performing attest engagements; and
Potential economic implications of standard setting in this area.

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Beneficial Ownership Reporting –SEC Staff Updates Compliance and Disclosure Interpretations

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated the following Compliance and Disclosure Interpretations (C&DIs):

Exchange Act Section 16 and Related Rules and Forms (UPDATED 10/07/2022) Section 109. Rule 16a-1 â€• Definition of Terms (new Questions 109.02 and 209.06); and
Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting (UPDATED 10/07/2022) Section 105. Rule 13d-3 â€• Determination of Beneficial Ownership (new Question 105.07).

The SEC staff has revised these C&DIs to reflect Corp Fin’s views on certain aspects of the calculation and reporting of beneficial ownership status.

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Lead Auditors –SEC Approves PCAOB Standards for Lead Auditor’s Use of Other Auditors

Summary - The SEC has approved the Public Company Accounting Oversight Board’s (PCAOB’s) amended standards for audits that involve multiple audit firms. The amendments specify certain procedures for lead auditors to perform when planning and supervising other auditors and require lead auditors to prioritize their supervisory activities of other auditors around higher-risk areas in the audit.

The amendments apply to all audits conducted under PCAOB standards and will take effect for audits of financial statements for fiscal years ending on or after December 15, 2024.

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Audit Committees – PCAOB Issues 2022 Audit Committee Resource

Summary - The PCAOB released a new publication on August 17, Audit Committee Resource. It provides a reference for auditors, audit committees, investors, and other stakeholders. It offers questions for public company audit committees to consider for discussion with their auditors, including how auditors are responding to financial reporting and audit risks in the current economic environment.

The publication highlights the following areas:

Fraud and other risks;
IPOs and M&A activity;
Audit execution;
Independence;
Firms’ quality control systems; and
Technology (auditing digital assets, responding to cyber threats, and use of data and technology in the audit).

For more information, click here.

Securities Exchange Act –SEC Staff Updates Compliance and Disclosure Interpretation on Exchange Act Sections

Summary - The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its Compliance and Disclosure Interpretation (C&D), Exchange Act Sections. This C&DI provides guidance from the SEC staff on the registration and reporting provisions of the Exchange Act — Sections 12, 13 and 15.

The SEC staff has revised Question 101.01 which provides guidance on whether the Corp Fin staff or the Division of Trading and Markets would 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.

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Estimates and Specialists –PCAOB Requests Comment on Impact of Auditing Requirements Related to Estimates and Specialists

Summary - The PCAOB has issued the Request for Comment, Post-Implementation Review Interim Analysis of Estimates and Specialists Audit Requirements (Request for Comment). The comment due date is June 10, 2022.

In 2018, the PCAOB adopted, and in 2019, the SEC approved, amendments to PCAOB standards for auditing accounting estimates and fair value measures, as well as amendments to the PCAOB auditing standards for using the work of specialists. These new requirements took effect for audits of fiscal years beginning on or after December 15, 2020. The PCAOB staff is now seeking comments on the initial experiences with and impact of these amendments.

This analysis is an initial interim analysis that will not be a complete evaluation of the effect of the new standards. The PCAOB staff will evaluate comments received and other evidence obtained from the analysis, and will consider whether additional guidance or other steps may be appropriate. The PCAOB expects to produce a report in the fourth quarter of 2022 to communicate findings and provide stakeholders with early insights into the initial impact of the requirements.

Because some of the effects of the new requirements may take several years to fully manifest or stabilize, after a reasonable period of time, the PCAOB will conduct a full post-implementation review. The staff will evaluate the benefits and costs of the new requirements, including the effect of unintended consequences.

All comments should refer to: Interim Analysis No. 2022-001, Estimates and Specialists Audit Requirements, on the subject or reference line and should be submitted no later than June 10, 2022. Please note that staff will post comments to the PCAOB website.

The Request for Comment also details additional information on the PCAOB’s interim analysis and specific questions for consideration. The PCAOB also encourages commenters to provide data, evidence, and/or specific examples in support of their comments. More information about the PCAOB’s post-implementation review program is also available on the PCAOB website.

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Audit Confirmation Process – PCAOB Releases New Spotlight on the Use of a Service Provider in the Confirmation Process

Summary - The PCAOB has released the new Spotlight publication, “Observations and Reminders on the Use of a Service Provider in the Confirmation Process.” Many audit firms rely on a service provider to send and receive electronic audit confirmations to and from “confirming parties,” such as financial institutions, investment and brokerage firms, and law firms. We observed diverse practices related to the procedures auditors perform to support such reliance. In some cases, audit firms were not giving any consideration to support whether, as required by PCAOB standards, the auditor maintains control over the confirmation requests and responses in audits where a service provider is used to send and receive confirmations. This Spotlight shares observations and suggested procedures for auditors, who may find this information valuable as they plan and perform audits.

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Audit Committees –PCAOB Issues Spotlight on Conversations with Audit Committee Chairs

Summary - As indicated above, the PCAOB has released a new Spotlight publication, “2021 Conversations With Audit Committee Chairs.” Each year, the PCAOB reaches out to audit committee chairs at U.S. public companies whose audits the PCAOB inspects, inviting them to connect with staff from the Division of Registration and Inspections for substantive conversations covering a range of topics related to oversight of external auditors.

In 2021, the PCAOB conducted more than 240 conversations with audit committee chairs from more than 475 audits reviewed by inspectors. This publication presents high-level observations and takeaways from those conversations.

The Spotlight provides information on significant discussions with audit committee chairs, which focused primarily on the following topics:

Required communications between auditors and audit committees;
Review/discussion of PCAOB inspection reports;
Discussion of outside required communications;
Auditor strengths and areas for improvement;
Quality control systems at audit firms;
Auditors’ use of technology; and
Information outside the financial statements.

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PCAOB –PCAOB Highlights Key Considerations for Auditors Related to the Russian Invasion of Ukraine

Summary - The PCAOB released the staff Spotlight document, “Auditing Considerations Related to the Invasion of Ukraine.” The Spotlight highlights important considerations for auditors of issuers and broker-dealers as they plan and conduct audits in this evolving environment.

“Beyond its terrible human toll, Russia’s invasion of Ukraine has produced economic and market implications that are still taking shape,” said PCAOB Chair Erica Y. Williams. “Our Spotlight addresses key considerations for auditors, starting with a reminder of their obligation to comply with PCAOB standards and to exercise due professional care, which may take more time or effort in highly challenging or unprecedented circumstances.”

The Spotlight covers a range of audit-related matters, including:

Identifying and assessing risks, including cybersecurity risks;
Planning and performing audit procedures, including materiality, internal control over financial reporting, effects on specific audit areas, use of other auditors, and communications with audit committees;
Possible illegal acts;
Reviews of interim financial information; and
Acceptance and continuance of clients and engagements.

For audits nearing completion, the Spotlight focuses on subsequent events, other information, and auditor reporting.

The Spotlight also reminds auditors to remain aware of developments that may affect the company. Knowledge obtained from past audits or interim reviews may no longer be relevant in light of the current information environment. Therefore, it is important for the auditor to understand how changes in events, conditions, and company activities affect risks of material misstatement and whether those changes give rise to new or different risks.

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HFCAA –PCAOB Makes HFCAA Determinations Regarding Mainland China and Hong Kong

Summary - The PCAOB issued a report on its determinations that the board is unable to inspect or investigate completely PCAOB-registered public accounting firms headquartered in mainland China and in Hong Kong, a Special Administrative Region of the People’s Republic of China (PRC), because of positions taken by PRC authorities in those jurisdictions. The Board made these determinations pursuant to PCAOB Rule 6100, which provides a framework for how the PCAOB fulfills its responsibilities under the Holding Foreign Companies Accountable Act (HFCAA).

Rule 6100 sets forth three factors that together reflect the access the PCAOB needs to completely execute its statutory mandate with respect to its inspections and investigations. The PCAOB’s determination report provides the PCAOB’s assessment of these factors based on positions taken by PRC authorities. As discussed in the report, PRC authorities assert that access by the Board to audit work papers and related information can be provided only under a cooperative agreement, but they persistently have taken positions that prevent the finalization of, or their full performance under, such agreements.

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