Weekly Summary of Accounting, SEC and Auditing Developments: August 29 - September 2, 2022
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The SEC’s Acting Chief Accountant, Paul Munter, recently discussed auditor independence and ethical responsibility considerations in the context of audit firm restructuring transactions. Munter indicates that the SEC’s Office of the Chief Accountant (OCA) has observed “audit firms exploring the sale of a portion of their business to an external party while retaining an equity interest or other form of continuing involvement in that business, or divesting all or portions of the accounting firm’s consulting practice to a third-party entity. While such contemplated sale and divestiture deals are not new, in the view of OCA staff, complex transactions with investors that are not traditional accounting firms, and have not previously been subject to the same independence and ethical responsibilities, elevate the risk to an auditor’s independence with respect to its audit clients. In these complex practice structures and divestitures, it is paramount that the accounting firm fully understands its responsibility for maintaining auditor independence and it discloses such requirements to the non-accounting firm investors involved in the transaction so that the accounting firm can obtain the information necessary to fulfill its responsibilities.”
OCA has observed that recent contemplated transactions by accounting firms may involve private equity or other investment structures purchasing ownership interests in the accounting firm. Munter cautions that, ‘When an accounting firm is considering obtaining an investment from a private equity or other investment structure, each entity within such structure would need to be carefully evaluated to determine if the entity is an ‘associated entity’ and is therefore part of the accounting firm for purposes of assessing potential impacts on, among other things, compliance with the Commission’s auditor independence requirements.”
Munter discussed the following broad topics in relation to auditor independence considerations related to audit firm restructuring transactions:
OCA staff observations related to these transactions;
Additional challenges from private equity investment; and
Divestiture of a portion of a business.
Munter reminds accountants of the requirement to be independent in both fact and appearance, and when auditor independence is a close-to-the-line call, accounting firms need to have a strong culture and tone at the top that prioritizes independence and ethical responsibilities above all else.
Proxies – SEC Staff Updates Compliance and Disclosure Interpretations
The staff in the SEC’s Division of Corporation Finance (Corp Fin) has updated its Compliance and Disclosure Interpretation (C&DI), Proxy Rules and Schedules 14A/14C. New or revised Q&As are noted as updated on “August 25, 2022” and include guidance on Rule 14a-19 notice requirements.
Fair Value – New Edition of GAAP Update Service Published
We have published a new edition of the GAAP Update Service, Fair Value of Equity Securities with Sale Restrictions. This new edition discusses FASB Accounting Update Service (ASU) No. 2022-03, Fair Value Measurement (Topic 820) – Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 provides that a contractual sale restriction is not a characteristic of the security. Therefore, the fair value of an equity security that is subject to a lock-up agreement or similar contractual sale restriction ignores the prohibition on sale. Additional disclosures about contractual restrictions are required.
For public companies, the new rule is effective for fiscal years beginning after December 15, 2023. Private companies may defer adoption for an additional year. Transition is prospective, with special transition rules for investment companies.
AUDITING AND INTERNAL CONTROL HEADLINES:
Tax Standards – AICPA Proposes Revisions to Tax Standards
The AICPA has released an Exposure Draft proposing revisions to its Statements on Standards for Tax Services (SSTSs) and an Invitation to Comment (ITC). The comment deadline is December 31, 2022.
The proposed changes to the SSTSs include revisions to the existing standards as well as three new standards. Additionally, the invitation to comment requests feedback on the subject of quality management in tax. The combined document is divided into two separate sections, with the exposure draft of the proposed new standards in part one, and the invitation to comment on the subject of quality management in tax in part two.
Part One: Proposed New Standards
If adopted as proposed, in addition to inclusion of three new standards, the amendments to the SSTSs would reorganize the tax standards to provide what the Exposure Draft describes as “a new practice-based organizational structure for the standards.” The Exposure Draft sets out this new framework as follows:
Standard 1, which provides “general tax guidance,” including “new standards on data protection and reliance on tools;”
Standard 2, which “includes tax return preparation guidance;”
Standard 3, which provides guidance relating to provision of tax advice; and
Standard 4, which is a new standard for “members providing tax representation services.”
Part Two: Invitation to Comment
The ITC includes proposals for quality management in tax practice. The introduction to the ITC notes that discussions on the topic gave rise to a “resonating theme … defined as a proactive, risk-based, scalable approach to ensure that an individual or firm possesses the necessary competence to practice.”
The ITC is separate from the proposed SSTSs and has been issued for consideration and discussion. The proposals in the ITC are not expected to be adopted with the proposed SSTS amendments, because of the likelihood that they will require additional research and investigation, depending on the comments received.
Effective Date for SSTS Amendments
The AICPA expects that the proposed SSTSs, if adopted, will be approved by May 31, 2023, and effective January 1, 2024.
Material Misstatements – New Edition of GAAS Update Service Published
We have published a new edition of the GAAS Update Service, Practice Issues and Questions & Answers Relating to SAS-145 (SAS-145), "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement." This new edition discusses Statement on Auditing Standards (SAS) No. 145, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, which supersedes AU-C Section 315 of the same title. SAS 145 enhances the requirements and guidance on identifying and assessing the risks of material misstatement, especially in the areas of understanding the entity’s system of internal control and assessing control risk. The ASB developed SAS-145 to address recurring deficiencies in the auditor’s risk assessment procedures that have been identified by practice monitoring programs (i.e., peer reviews).
SAS 145 is effective for audits of financial statements for periods ending on or after December 15, 2023. Early implementation is permitted.
Accounting Changes and Error Corrections – New Edition of Governmental GAAP Update Service Published
We have published a new edition of the Governmental GAAP Update Service, GASB Hits 100 With Accounting Changes and Error Corrections." This new edition summarizes the provisions of GASB Statement No. 100, Accounting Changes and Error Corrections, which will be effective for accounting changes and error corrections made in fiscal years beginning after June 15, 2023.
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