Category: Accounting and Auditing
CAQ’s 2024 audit committee practices report discusses priorities and practices
The Center for Audit Quality has released its 2024 “Audit Committee Practices Report: Common Threads Across Audit Committees.” The report highlights the top five audit committee priorities identified by committee members in a survey from CAQ and discusses practices to improve effectiveness and other observations. Interspersed throughout the report are recommendations and advice from the CAQ. What was identified by respondents as the “most important topic, risk, or issue” for their audit committees in the next 12 months? Not financial reporting or financial audits—core responsibilities for the audit committee—as you might expect. Nope, it was cybersecurity. According to the CAQ report, the scope of audit committee responsibilities “continues to expand beyond the traditional remit of financial reporting and internal controls, internal and external audit, and ethics and compliance programs. Topics like cybersecurity, artificial intelligence (AI), and climate are now regularly showing up on many audit committee agendas, especially when it’s a matter of complying with regulatory disclosure requirements.” Audit committee members and their advisors may want to check out the report.
What happened at the Corp Fin Workshop of PLI’s SEC Speaks 2024?
At the Corp Fin Workshop last week, a segment of PLI’s SEC Speaks 2024, the panel focused on disclosure review, a task that occupies 70% of Corp Fin attorneys and accountants. The panel discussed several key topics, looking back to 2023 and forward to 2024. Some of the presentations are discussed below.
Another EV manufacturer charged for material misrepresentation to investors
It’s almost as if someone put a hex on electric vehicle manufacturers that went public through de-SPACs. In 2022, SEC Enforcement charged Nikola Corporation, an aspiring manufacturer of low- or zero-emission semi-trucks, alleging that Nikola “defrauded investors by misleading them about its products, technical advancements, and commercial prospects,” leading to a $125 million settlement. (See this PubCo post.) Then we had a twofer—settled actions against two manufacturers of electric vehicles for misleading investors. In the first case, Hyzon Motors Inc., a maker of hydrogen fuel cell electric vehicles, was charged with misleading investors about the status of Hyzon’s products, business relationships and vehicle sales, agreeing to pay a civil penalty of $25 million. Then, the predecessor to Spruce Power Holding Corporation, XL Fleet, which provided fleet hybrid electrical vehicles, was alleged to have misled investors about its sales pipeline and revenue projections. As the successor, Spruce agreed to pay a civil penalty of $11 million. (See this PubCo post.) But that’s not the end of it. Now we have charges against Lordstown Motors Corp., a manufacturer of electric vehicles focused on the commercial fleet market, for “misleading investors about the sales prospects of Lordstown’s flagship electric pickup truck, the Endurance.” Lordstown went public through a de-SPAC transaction in 2020 and filed for bankruptcy in 2023. As a result of this action, Lordstown agreed to a cease-and-desist order and disgorgement of $25.5 million.
SEC Chief Accountant urges focus on professional skepticism and audit quality
SEC Chief Accountant Paul Munter has posted a new Statement. What’s on his mind? Apparently, he is disturbed that, in recent inspections of audits, the PCAOB has reported a “troubling” increase in deficiency rates—meaning the PCAOB found that there was insufficient audit evidence obtained to support the auditor’s opinion. Deficiency rates went from 29% in the PCAOB’s 2020 inspections to 34% in its 2021 inspections, up now to 40% in its 2022 audit inspections. This, he warned, was a “troubling trendline in PCAOB inspections results”—emphasis again on “troubling.” What does he prescribe? A “commitment to high-quality audits,” which, “in turn, calls for the auditor to exercise objective, impartial judgment and rigorous professional skepticism in gathering and evaluating evidence throughout the audit to support the audit opinions provided.” To be sure, both auditors and audit committees “should pay particularly close attention to areas that have been frequently identified as causes of deficiencies in PCAOB inspections.” In addition, he advises that “auditors should conduct engagements with a mindset that the investors, rather than management, are the audit client.” This commitment to high-quality audits, he contends, is the only way for auditors to protect the investing public. He offers advice for both auditors and audit committees.
What’s happening with critical audit matters?
Ideagen AuditAnalytics has just released its 2024 Report on Critical Audit Matters, a 3-Year Review, covering the years 2020 to 2022. Under the auditing standard for the auditor’s report (AS 3101), adopted in 2017, CAMs are defined as “matters communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” Essentially, the concept is intended to capture the matters that kept the auditor up at night, so long as they meet the standard’s criteria. AS 3101 was initially adopted in 2017 and phased in beginning in 2019 according to the status of the filer. (See this PubCo post.) The Report provides data on the prevalence of CAMs and the most common topics for CAMs, and takes a deeper dive on matters such as valuation of assets in the merger context and going concerns.
What’s new in best practices for board governance in 2024?
In this brand new report, The Conference Board looked at several of the less glitzy areas of board governance to identify some evolving best practices for attaining board excellence, such as board continuing education. From AI to ESG, corporate boards are bombarded by new and important issues about which they must attain some level of understanding and fluency. But how? Is there anything new in best practices for continuing education? Other areas of focus in the report are board self-evaluations, director overboarding and committee rotation. Are there any developments in best practices in those areas? TCB has some data and some advice, discussed below.
The CAQ has some ideas for improving audit committee disclosure
The Center for Audit Quality, working with Ideagen Audit Analytics, has just released a new edition of its annual Audit Committee Transparency Barometer, which, over the past ten years, has measured the robustness of audit committee disclosures in proxy statements among companies in the S&P Composite 1500. Why is that important? According to the CAQ, “numerous studies have identified a positive correlation between increased communication of audit committee oversight through disclosures in the proxy statement and increased audit quality.” Not to mention the interest of investors and other stakeholders in better disclosure. The bottom line, according to the CAQ, is that the level of voluntary transparency has continued to increase steadily in most core areas of audit committee responsibility, such as oversight of the external auditor, as well as in evolving areas, such as cybersecurity risk and ESG. But it could still stand some improvement. In light of the “current environment of economic uncertainty, geopolitical crises, and new ways of working,” the CAQ encourages audit committees to jettison boilerplate and “tell their story through tailored disclosures in the proxy statement…. For audit committees to enhance their disclosures, they should provide further discussion not just of what they do in their oversight of the external auditor but also how they do it.” In the Barometer, the CAQ offers some specific ideas on just how audit committees can improve their disclosure and enhance its utility.
FASB issues final ASU requiring enhanced disclosure of segment expenses
The FASB has announced a final Accounting Standards Update designed to improve disclosures about public companies’ reportable segments, particularly disclosures about significant segment expenses—information that the FASB says investors frequently request. The ASU indicates that investors and others view segment information as “critically important in understanding a public entity’s different business activities. That information enables investors to better understand an entity’s overall performance and assists in assessing potential future cash flows.” According to FASB Chair Richard R. Jones, the “new segment reporting guidance is based on the FASB’s extensive outreach with stakeholders, including investors, who indicated that enhanced disclosures about a public company’s segment expenses would enable them to develop more decision-useful financial analyses….It will improve financial reporting by providing additional information about a public company’s significant segment expenses and more timely and detailed segment information reporting throughout the fiscal period.” Previously, at the proposal stage, Jones had referred to the ASU as the “FASB’s most significant change to segment reporting since 1997.” While the extent of new information will vary among entities, the FASB “expects that nearly all public entities will disclose new segment information under the amendments.” It’s worth pointing out here that the financial reporting changes could well lead to changes in MD&A disclosure. The ASU will apply to all public entities required to report segment information (under Topic 280). Compliance with the new guidance will be required starting in annual periods beginning after December 15, 2023.
SEC Chief Accountant has some thoughts about the statement of cash flows
The SEC’s Office of Chief Accountant appears to be taking a hard look these days at statements of cash flows. In “The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors,” SEC Chief Accountant Paul Munter discusses the importance of the statement of cash flows, the failure of companies and auditors to prepare and review cash flows statements with an appropriate level of care and the mischaracterization of classification errors on the cash flows statement as immaterial, resulting in questionable “little r” restatements. Munter cautions that “preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements, which may impede high quality financial reporting for the benefit of investors.” According to Munter, that conclusion is evidenced by both the prevalence of restatements associated with the statement of cash flows as well as by the staff’s “observations of material weaknesses in internal control over financial reporting…around the preparation and presentation of the statement of cash flows.” It’s worth noting here that, as reported by the WSJ, other SEC representatives have also been raising these same issues at conferences regarding inadequate attention to the statement of cash flows and lack of objectivity in assessing the materiality of cash flow errors. Statements like this one from the Chief Accountant and others at OCA usually warrant close attention because they signal topics on which the staff is focused and often presage Enforcement activity on these same subjects.
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