Accounting, Audit, and ESG Insights from the 2022 AICPA Conference
Riveron experts provide key takeaways from the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments
For the fourth year in a row, Riveron returned as an underwriter at the annual AICPA Conference, where SEC, FASB, and PCAOB representatives laid out their priorities for 2023, and accounting, finance, and audit professionals reflected on recent developments—including evolving ESG standards.
Attendance was notably higher than the previous year, with nearly every seat in the main hall filled, which gave the gathering a pre-pandemic tone. Echoes of last year’s in-depth panel discussions reviewed remote working arrangements, the critical importance of attracting talent to the profession against the headwinds of impending baby boomer retirements, many states having fifth-year education requirements for professional certification, and the often-negative perceptions of SOX-related control work, but the conference markedly emphasized other themes. Riveron experts engaged with conference participants and compiled highlights of the key challenges and emerging opportunities, plus updates from regulators.
Audit, ESG trends, and other conference themes
A handful of recurring themes arose throughout the conference, including audit quality, ESG, cybersecurity, and crypto assets. Each topic will have notable impacts on financial reporting or represent 2023 areas of focus for regulators.
Audit quality remains a focal point
In a conference address, PCAOB Chair Erica Williams reviewed the 20-year history of the Sarbanes-Oxley Act that created the Board and its evolving programs, noting the unfavorable trend of a third of audits failing to provide appropriate evidence to support the auditor’s opinion. Some of this uptick may be associated with the pandemic, remote work, and the challenges of attracting and retaining accounting talent. Other areas reflect ethical implications, such as lack of independence or the post-report-date modification of working papers. The Board is seeing record penalties and increases in the barring of individuals and firms, and it might require the admission of wrongdoing in certain cases. The PCAOB and SEC both emphasized the critical need for audit quality amid growing complexities and economic uncertainty.
ESG reporting is top of mind
Environmental, social, and governance (ESG) presentations and panels took on a different tenor this year, with the SEC’s proposed climate disclosure rule issued in March and a final rule forthcoming in 2023. Companies are increasingly being asked to provide information on ESG matters to a variety of groups, from investors to employees and customers to rating agencies. Reporting disparate information to multiple groups is a challenge for companies. While a final SEC rule on climate disclosures will provide critical information to shareholders and financial statement users, it is unlikely disparate information requests will abate given the myriad topics that encompass ESG and investors’ increasing appetite for ESG information. Further, the formation of a global, unified standard remains difficult as a result of how non-US standard setters and regulatory agencies are approaching ESG reporting. This is particularly evident as it relates to double materiality, wherein reporting would encompass both financial materiality and impact materiality. Incorporating such a concept into SEC rulemaking would dramatically shift the nature of SEC activities and the intent behind corporate disclosures.
As a result, companies are working to solve the problem of how they can satisfy various stakeholder requests for ESG data and also provide quality information. The staff acknowledged that there is likely much ambiguity that exists in current climate reporting and that less precise approaches taken to create existing climate disclosures will likely not be acceptable in financial reporting. As pressures and expectations from stakeholders grow, preparers will need to produce consistent, comparable, reliable information driven by a successful reporting program. Many companies’ accounting and finance leaders are struggling with where and how to start as they take greater ownership over ESG and climate reporting, including how to address the SEC’s proposed rule. Familiar with leading their companies’ efforts on ESG reporting, preparers shared the key first steps to take:
- Assess the SEC’s proposed rule as well as other climate-related disclosures a company is making or considering
- Inventory climate-related data available to address the reporting requirements and identify gaps
- Evaluate current-state methodologies and processes to capture relevant data in a timely manner
- Establish a framework of SOX-like internal controls covering the systems, processes, assumptions, and data to ensure the information reported is investor-grade
While the SEC’s climate disclosure rule is prompting many entities to tackle ESG, companies that view ESG reporting and engaging with ESG as a compliance exercise are likely to be left behind as newer or competitor companies strategically embrace ESG and include it within their risk assessments and strategy–setting processes. Strong governance and a commitment to accurate reporting will be critical as ESG moves from a proposed rule to reporting that is regularly expected by investors.
Cybersecurity’s ever-present threat requires everyone’s engagement
A panel on cybersecurity included David Hirsch, the head of the SEC Enforcement Division’s Crypto Office, Pedro Cordero, a cybersecurity consultant and former longstanding FBI agent, and moderator Charles Seets. Panelists identified cyber-attacks as the current number one threat to businesses, with an average cost to companies of cyber-attacks estimated at $9.5 million. In addition, successful attacks can cause negative brand impacts, require infrastructure upgrades, and present regulatory liability. From an investor protection perspective, cyber incidents require appropriate and timely disclosure. The panel cited instances where disconnects between technology staff and public-facing management personnel created inaccurate and untimely disclosures, driving home that a true defense against cybersecurity threats demands everyone’s focus and attention—from the chief technology officer to investor relations to frontline personnel. Cybersecurity requires everyone to remain vigilant, coordinated, and discerning.
Crypto-asset accounting guidance gets fast-tracked
SEC Acting Chief Accountant Paul Munter remarked on developments in standard setting over the last twelve months. This included a perspective on the FASB dropping their goodwill project, and Munter highlighted the difference in priority between a standard-setting project that revisits a prior model (e.g., the amortization of goodwill) and a project to introduce an accounting model in an area that has not previously existed (such as crypto assets). SAB 121, released last spring, focused on the crypto asset custodial function, requiring liability treatment for those holding the cryptographic keys to those assets. A recently initiated FASB and EITF project on accounting for crypto assets scopes out non-fungible tokens and certain stablecoins by holders of the assets at fair value.
The SEC has seen a number of recent inquiries on the topic of crypto-lending arrangements, indicating that these will be viewed as lending arrangements. An OCA panel discussion also put forward a “basic model” in which the lender would account for the asset at fair value and apply the CECL accounting model to any related credit exposure. This may be a provisional solution, as CECL accounts for expected losses over the entire life of an asset, where a fair-value model would not typically assume the asset is held to maturity. There will be more guidance to come on this topic as the FASB works through its standard-setting project related to accounting for crypto assets.
SEC notes reporting considerations amid economic volatility
The SEC was represented by Paul Munter and SEC Commissioner Hester Peirce, plus members of the Office of the Chief Accountant, the Division of Corporate Finance, and the Division of SEC Enforcement. Conference sessions highlighted current trending topics, including accounting issues in a recessionary environment, non-GAAP financial measures, and comment letter trends.
In the current context, where macroeconomic factors are changing and pointing toward a possible recession, it remains critical for financial statement preparers to evaluate several areas of judgment and disclosure. Areas of judgment that impact financial statements typically include projected financial information used in impairment analyses, reserves, and loss accruals. While projections typically take into account historical performance as an indicator of future performance, preparers should be careful to evaluate whether that is still true in light of current economic conditions. From a more qualitative standpoint, preparers should review risk disclosures to assess the “tense” used, especially regarding supply chain or geopolitical factors that could impact the company’s future results. Preparers need to assess whether risks that previously could impact results actually now are having an impact on the company’s results.
The SEC also provided additional guidance and continued observation of comments on non-GAAP measures, segment reporting, and MD&A. With regards to non-GAAP measures, companies should evaluate the nature of adjustments used in non-GAAP measures with particular attention to determining whether an item is truly non-recurring. The SEC Staff noted industry-specific instances in which restructuring costs incurred this year were not truly non-recurring (for instance, the restaurant industry incurs store opening and closing costs on a regular basis). The SEC issued a new C&DI on how non-GAAP measures should be presented and calculated. With regards to segment reporting, the SEC Staff noted instances where companies were utilizing the segment disclosure to disclose incremental non-GAAP measures. New rules from the FASB are expected to expand the ability of a company to use more than one segment measure of profit in its reporting.
Perhaps most helpful for preparers, sample comment letters (available online) have been made available and cover various types of comments the SEC expects to issue regarding the impact of interest rate increases, supply chain, military conflicts, and climate-related disclosures.
FASB standard-setting agenda focuses on disaggregation and modernization
The FASB update for the year was presented by FASB Chair Rich Jones, EITF Chair and FASB Technical Director Hilary Sato and Deputy Technical Director Helen Debbler. The session began with an overview of current FASB activities, noting the ongoing work on the post-implementation review of the revenue recognition, lease accounting, and current expected credit loss standards. Three lessons learned from those reviews that will likely inform future standard setting: 1) focus on scope, 2) consider the interaction of new guidance with business combinations guidance, and 3) provide clarity in the transition guidance.
Several near-term projects appear on the FASB agenda, including a standard on crypto assets, which is expected to focus on clearly defining the scope of the standard through established criteria and measurement guidance, which would require fair-value accounting.
Standards expected to have a much broader impact in the near term include:
Segment reporting, requiring companies to break out expenses by segment that impact the segment measure of income,
Income statement disaggregation, requiring companies to break out certain kinds of expenses, such as employee compensation, within line items on the income statement,
Income tax disclosures, requiring companies to disaggregate rate reconciliation impacts by jurisdiction in the income tax footnote.
Notable among longer-term projects is the FASB’s project on software capitalization. The FASB is looking to modernize the criteria for software accounting to match how software is currently developed rather than the processes in place when the standard was issued. This project appeared to be most relevant to large company chief accounting officers who participated in a CAO panel discussion. Other projects noted include accounting for government grants, accounting for environmental credits, investments in tax credit structures, and joint venture formation.
In addition to the FASB update, a panel of national accounting firms opined on challenging areas to keep in mind as companies approach 2022 year-end reporting—including impairments, revenue recognition, loss contingencies, and share-based payment modifications.
Note: Scheduled for mid-January 2023, Riveron’s forthcoming Ask The Experts webinar will provide an in-depth examination of the conference themes with related considerations for accounting and finance professionals.