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Making Sure Your Voice Is Heard on A&A and Ethics Standards

The PICPA regularly formulates responses to proposed regulatory and professional standards on your behalf. This blog highlights several that the PICPA sent in during a very active spring among various standards boards.

Jul 8, 2024, 05:00 AM

Allison Henry photoBy Allison M. Henry, CPA, PICPA Vice President, Professional and Technical Standards


Tax season has come and gone, but it was a wild and turbulent spring in the areas of A&A and Ethics standards. Numerous proposals were put forth for comment, and the PICPA has been busy reviewing these proposed new rules and sharing our thoughts and concerns. If you missed some of these very important issues over the past few months, below is a roundup of what we’ve been tracking and the PICPA’s responses.

NOCLAR

The Public Company Accounting Oversight Board (PCAOB) issued a proposal on noncompliance with laws and regulations (NOCLAR) that would fundamentally change the nature and scope of the audit. Essentially, PCAOB’s plan makes it the auditor’s responsibility for identifying noncompliance with laws and regulations, and greatly expands this expectation to include those agencies having an indirect impact on the financial statements or operational compliance, such as EPA, OSHA, FDIC, FDA, FCPA, AML on privacy laws, tax laws, and consumer protection laws.

CPA working on comment letter for proposed standardsThe PICPA is vigorously advocating against the untenable expansion of the scope of the audit as proposed, and PICPA members are strongly encouraged to reach out to their congressional representatives to make them aware of this significant issue.

PICPA Response

IESBA and Sustainability Assurance

The International Ethics Standards Board for Accountants (IESBA) proposed revisions to the International Code of Ethics for Professional Accountants on sustainability reporting. The exposure draft contains proposed independence standards for use by all sustainability assurance practitioners – regardless of whether they are professional accountants – and specific ethics provisions relevant to sustainability reporting and assurance. The PICPA is fundamentally concerned with the use of IESBA’s Code of Ethics for nonprofessional accountants, as the code is supported by significant structural foundations, such as required training, experience and education, and enforcement and licensure. It is not in the public interest to create the appearance of an ethics regime without the key underpinnings necessary to support the ethics framework.

PICPA Response

IESBA and Using the Work of External Experts

The IESBA proposed guidance to ensure that public accountants (PAs) use external experts who are objective and competent. The PICPA believes that the proposed Section 5390 on using the work of an external expert for sustainability assurance providers should be considered holistically in connection with proposed ethics standards for sustainability assurance. However, PICPA disagrees with permitting the use of the standards promulgated by the International Audit and Assurance Standards Board (IAASB) without appropriate training, licensing, and enforcement mechanisms similar to those of PAs. Further analysis should be done to ensure that any broadening of the ethics code to non-PAs includes a rigorous standard-setting and regulatory framework so as to not dilute its value.

PICPA Response 

IAASB International Standard on Auditing 240

The International Auditing and Assurance Standards Board (IAASB) issued an exposure draft in February on the auditor’s responsibilities related to fraud in the audit of financial statements. The PICPA supports high and consistent audit quality and rigorous standards that support this end. However, the PICPA has concerns regarding materiality considerations and whether certain  procedures are required if potential fraud is not material or is inconsequential, the terminology around the entity’s “process to investigate” a potential fraud, the ability to accept the authenticity of documents unless something comes to the auditor’s attention to the contrary, and a proposed requirement to communicate specified fraud-related items as key audit matters in the auditors’ report.

The PICPA further does not support the proposed requirement to communicate “that there are no key audit matters related to fraud to communicate.” This could potentially mislead financial statement users into believing that the auditor is providing more assurance than is required under the standards. The PICPA does not support requiring the communication of confidential client information in the auditor’s report, such as client-specific risks of material misstatement due to fraud or the identification of significant deficiencies in internal control that are relevant to the prevention and detection of fraud.

PICPA Response

Financial Accounting Foundation – Input on the Private Company Counsel

The Financial Accounting Foundation requested input on the Private Company Counsel (PCC). Specific questions included the effectiveness of the PCC, potential areas of improvements, whether the PCC has been successful in proposing alternatives within GAAP that address the needs of users of private company financial statements, whether the FASB has been appropriately responsive to the needs of private companies and the recommendations from the PCC, whether changes to the standard-setting process for private companies are warranted, and suggestions about changes to the size, composition, term length, or responsibilities of the PCC.

The PICPA acknowledges that a number of significant changes were made when the PCC was first established, but we believe improvements are needed to ensure that the PCC represents the financial reporting needs of smaller organizations. Our response noted that many privately held entities have switched their financial reporting framework to alternative special purpose frameworks other than U.S. GAAP due to cost considerations. However, this use of special purpose financial reporting frameworks is not in the public interest since many are not sufficiently robust (e.g., tax basis) to appropriately present an organization’s financial performance and others (e.g., special purpose framework for small to medium sized entities) are not commonly accepted. The PICPA believes that improvements can be made to the PCC to ensure that the needs of privately held entities are timely met.

PICPA Response

PCAOB Firm Reporting and Firm and Engagement Metrics

The PCAOB issued two proposals that would greatly increase the information firms would be required to report externally, including more detailed fee information, financial and operational information, policies and procedures that relate to engagements for private company audit clients and for nonaudit services, cybersecurity policies and procedures, a vague and all-encompassing incident report requirement, details on firm governance and structure and the process for making changes to that structure, and a summary description of the firm’s policies and procedures, even for inactive firms. The largest firms also would be required to provide U.S. GAAP financial statements. Many of these proposed requirements would include information related to private company audits and services for nonattest clients, which we believe is outside of the PCAOB’s statutory authority. Proposed engagement and firm metrics include information on time reporting (e.g., average hours worked by partners each quarter), experience of personnel, retention rates, hours spent by senior level professionals on material audit areas, results of internal inspections, restatements, the use of specialists and shared-service centers, etc.

The PICPA is concerned regarding the magnitude and granularity of the proposed requirements. The costs of compliance would be astronomical and would not contribute to improving audit quality. Instead, they would further burden existing staff and challenge the already constrained talent pipeline. The PICPA also argued that investors would not have sufficient context to understand many of the proposed metrics, including the results of a firm’s internal inspection findings. While the PCAOB’s proposal is predicated upon the need to provide investors with additional information to assist in their ratification of the auditor, in many cases investor votes on ratification are nonbinding. We believe that audit committees already access much of this information, and this required reporting disintermediates the role of the audit committees.

PICPA Response to Firm Reporting
PICPA Response to Firm and Engagement Metrics

SEC - PCAOB Quality Control Standards

In May, the Public Company Accounting Oversight Board (PCAOB) filed proposed rules on a firm’s system of quality control and related amendments to PCAOB standards with the Securities and Exchange Commission (SEC). The PICPA supports rigorous audit quality and the modernization of audit standards but believes this proposal will not improve audit quality and will only reduce competition, increase audit fees, and introduce conflicts with international standards. In short, it includes a concerning number of prescriptive requirements that would compound greater enforcement actions but would achieve little to no benefits.

PICPA Response

As the PICPA formulates our responses on your behalf, we post them online on the PICPA Professional Issues Tracker.  Not only do we set our efforts in the areas of A&A and Ethics (such as those presented above), but we also share our efforts on Legislative Initiatives and Licensure and Pipeline issues. Be sure to check out the Professional Issues Tracker on a regular basis for the latest on our efforts to fight for your interests.


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Disclaimer

Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.

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