Earlier this week, the PCAOB announced that it had proposed amendments to its standards to address auditor responsibilities when using technology-assisted analysis of information in electronic form. The deadline for public comment on the proposal is August 28, 2023. The proposal includes changes to update aspects of AS 1105, Audit Evidence, and AS 2301, The Auditor’s Responses to the Risks of Material Misstatement. In the announcement for this proposal, the PCAOB notes:
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. For example, 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 the 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 staff of the Public Company Accounting Oversight Board (PCAOB) from time to time provides Spotlights to highlight timely information for auditors, audit committee members, investors, and others. Our oversight activities continue to indicate that 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. As part of audit committees’ audit oversight responsibilities, it is important that audit committees engage in effective two-way communication with auditors and ask relevant questions throughout the audit.
This “Spotlight: Audit Committee Resource” suggests questions that may be of interest to audit committee members to consider amongst themselves or in discussions with their independent auditors, particularly given today’s economic and geopolitical landscape. Stakeholders may also consider other Spotlights as reference points for relevant discussions, including our April 2023 Spotlight, “Staff Priorities for 2023 Inspections.”
The Spotlight addresses a number key areas that are of interest audit committees, including the risk of fraud, risk assessment and internal controls, auditing and accounting risks, digital assets, M&A activities, use of the work of other auditors, talent and Its impact on audit quality, independence, critical audit matters and cybersecurity.
My colleagues at Morrison Foerster have announced the results of a second annual “GCs and ESG” survey. The highlights of the survey are described as follows:
The results show that ESG considerations have quickly evolved into a top corporate priority over the past year as companies are increasingly balancing ESG regulatory and internal mandates with a focus on both enhancing positive impact for the benefit of shareholders and stakeholders and mitigating negative ESG externalities. As priorities have shifted, so, too, has ESG leadership, with seventy-two percent of respondents this year reporting that either the CEO, Chief Compliance Officer or another C-Suite leader is spearheading ESG strategy, whereas it was only ten percent last year. The top ESG efforts have also shifted somewhat from last year’s focus on “G” (governance) to “E” (environment) this year. This shift is likely due to both more mature governance frameworks and increasing regulatory mandates from leading government agencies across the globe.
On the topic of the ESG backlash that has been coming up more and more these days, the survey indicates that almost half of respondents report that they have neither experienced nor been impacted by anti-ESG backlash, while others report that they have responded to the backlash by focusing on specific, granular areas of concern, such as climate, human rights, or DEI. Fifteen percent of respondents report that they are no longer using the term “ESG” or have changed terminology in response to the anti-ESG backlash. Larger and publicly held companies were more likely than smaller and privately held companies to not use the term “ESG.”
Join us today at 2:00 pm Eastern on CompensationStandards.com for our annual webcast, “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear from Mark Borges of Compensia, Ron Mueller of Gibson Dunn and me as we analyze this year’s proxy season. The duration of this program has been extended to 90 minutes so we can share practical insights that will help you finalize your Dodd-Frank clawback policy.
If you attend the live version of this program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program. Members of CompensationStandards.com are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. If you have any questions, email sales@ccrcorp.com – or call us at 1-800-737-1271.
One of the topics that we will discuss later today on our very timely CompensationStandards.com webcast is all of the many considerations that go into adopting or amending your clawback policy to be compliant with the requirements of the NYSE and Nasdaq that will be effective on October 2, 2023. Companies will have until December 1, 2023 to adopt compliant clawback policies. While the requirements for the policy that are dictated by SEC Rule 10D-1 are very specific (and restrictive), the actual implementation of clawback provisions in response to those requirements is proving to be somewhat complex for listed companies.
This new alert from Gunster highlights the many decisions that companies will have to make as they seek to adopt or update clawback policies in light of the new listing requirements. The alert notes the following regarding updates to existing policies:
The new rules are complex and require a listed company to take a number of steps in order to amend existing clawback policies or provisions (contained in compensation plans or otherwise) or, if none, to adopt and implement one or more compliant policies in a timely manner. The following is a summary of the key steps to be taken and decisions to be made.
If your company has an existing clawback policy, you will need to compare the existing policy to the requirements of the new rules, including any additional requirements in the applicable listing standards. For example:
Existing policies may apply to a narrower or broader employee population than is required under the new rules, which applies to current and former Section 16 officers.
Existing policies may be tied to a specific type of restatement or may apply only in cases of misconduct. The new rules require recoupment for two types of restatements and apply whether or not the restatements are the result of misconduct.
Existing policies may apply to different forms of compensation. The new rules apply to all “incentive-based compensation,” which is broadly defined as any compensation that is granted, earned, or vested based wholly or in part upon the attainment of any “financial reporting measure.”
Existing policies may be discretionary, whereas under the new rules clawbacks are mandatory except in three limited circumstances.
The alert goes on to highlight considerations with respect to: maintaining multiple clawback policies; the treatment of existing clawback provisions (including provisions in plans, specific grants under plans, employment agreements, or otherwise); the incorporation of the clawback policy in awards going forward; the approach to enforcing the clawback policy; the determination of executive officer status; and ongoing disclosure obligations. Needless to say, there is a lot of work required to finalize a compliant clawback policy that works within a company’s existing plans and programs.
They are here! Yesterday, the International Sustainability Standards Board (ISSB) rolled out its inaugural standards—IFRS S1 and IFRS S2. As you may recall, the ISSB was established in November 2021 at COP26 to develop a comprehensive global baseline of sustainability disclosures. ISSB consolidated the CDSB and the Value Reporting Foundation (the combination of SASB and IIRC) under the auspices of the IFRS Foundation.
IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. The ISSB notes in its announcement that both IFRS S1 and IFRS S2 fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The ISSB’s announcement notes:
The ISSB Standards are designed to ensure that companies provide sustainability-related information alongside financial statements—in the same reporting package. The Standards have been developed to be used in conjunction with any accounting requirements. They are also built on the concepts that underpin the IFRS Accounting Standards, which are required by more than 140 jurisdictions. The ISSB Standards are suitable for application around the world, creating a truly global baseline.
For more coverage of these new ISSB standards, sign up today for PractialESG.com. You can begin your membership today online, or you can contact a Specialist at Sales@CCRcorp.com or at 1-800-737-1271 for assistance.
At last week’s meeting of the SEC’s Investor Advisory Committee, the role of the audit committee was explored in a panel discussion focused on audit committee workload and transparency. The Committee’s consideration of audit committees begins at around the 1 hour and 39 minute mark of the replay of the afternoon webcast. The agenda described the topic as follows:
This panel will focus on the role of the audit committee, which is rapidly changing, where many audit committees now oversee a variety of emerging risks while balancing an ever-increasing workload. Simultaneously, there is a larger focus on the audit itself with the PCAOB taking a fresh look at auditing standards. Risks continue to emerge and evolve. The presenters and the panel will explore how audit committees are keeping pace with shifting responsibilities and priorities, and whether existing audit committee disclosures adequately benefit investor needs.
Two presentations were made available to the Investor Advisory Committee: one presentation titled “Audit Committee: The Kitchen Sink of the Board,” was presented by Lauren Cunningham, Keith Stanga Professor of Accounting, University of Tennessee, while the other presentation was titled “Audit Committee Transparency Barometer,” which was presented by Vanessa Teitelbaum, Senior Director, Professional Practice, The Center for Audit Quality. A panel discussion followed which included four audit committee chairs, including Robert Herz, chair of the Morgan Stanley Audit Committee and formerly chair of the FASB and a member of the IASB and the Value Reporting Foundation.
The topic of audit committee disclosure has been something that the SEC Staff has been discussing on and off for over the past decade or so. This discussion of the Investor Advisory Committee may ultimately evolve into some further recommendations on expanding audit committee disclosures.
While much of the focus over the years has been on the robustness of audit committee disclosures in SEC filings, the topic of direct engagement between investors and audit committees has not been discussed as often. Investors have sought out engagement on compensation issues with compensation committee chairs for many years now after the advent of say-on-pay, but investor engagement with audit committee chairs seems to be less common.
Earlier this year, the UK’s Financial Reporting Council (FRC) announced the launch of a new web page that provides a series of conversation starters for engagement between investors and audit committees. The FRC indicates in the announcement that direct engagement with investors can provide insight into “the company’s approach to regulatory focus and areas of interest to market participants.”
While these conversation starters are UK-oriented, they are still useful for audit committees of US companies as a way of understanding the particular areas that investors may be focused on, which could aid in expanding disclosures or direct engagement efforts.
I have been on the road again after the long pandemic hiatus from business travel and it hit me that these trips are much less enjoyable without my friend and collaborator Marty Dunn. Marty passed away three years ago this month and his absence is strongly felt at the events that I have recently attended. To sum it up, during his life Marty had found a way to make what we do and what we talk about every day somehow fun and interesting, and that was indeed a special gift. What we do on a day-to-day basis can seem like drudgery at times, so finding that spark which makes the job fun and interesting is perhaps the most important part of having a long and successful career. Marty’s inspiration to find that spark is one of the many gifts from my friend that I am grateful for, and I hope you feel the same way.
If you are looking for a refresher on Marty’s many gifts, you can read my tribute to Marty in this blog, as well as The Fond Farewell episodes of The Dave and Marty Radio Show in 2020 section of our podcasts archive. You can also check out my tribute to Marty in this Deep Dive with Dave podcast.
Earlier this week, Vanguard published a statement on its approach to board responsiveness to shareholders & other stakeholders. After a couple of pages devoted to the usual platitudes about the importance of engagement and the general need for directors to be responsive to shareholder input, Vanguard lowered the boom by laying out its policy on board responses to majority supported shareholder proposals:
When a board fails to respond to a proposal supported by a majority of its voting shareholders and the Vanguard-advised funds supported the proposal, the funds will generally vote against relevant members of the board. For example, concerns with compensation matters would likely impact votes on members of the compensation committee, while governance concerns would generally impact votes on members of the nominating/governance committee. A pattern of unresponsiveness to shareholder feedback (e.g., a failure to act, or slow action, on shareholder votes) may be an indicator of poor governance practices and may result in increasing levels of opposition to board members’ election.
Not surprisingly, Vanguard doesn’t specify what an appropriate “response” would be to a majority-supported shareholder proposal, which is probably impossible to do in the abstract. Nevertheless, companies need to know that their responsiveness to these proposals will be graded at the ballot box by one of their largest shareholders.
Vanguard’s policy may not have a significant impact on most companies, at least for now. That’s because, as SEC Commissioner Mark Uyeda pointed out in his speech at the Society for Corporate Governance’s conference earlier this week, the percentage of shareholder proposals receiving majority support has fallen precipitously in recent years. Only 5% of proposals received majority support this proxy season, compared to 19% just two years ago.
