This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On August 12th, 2024, a letter was submitted to the Financial Accounting Standards Board (FASB) by various auditors, controllers, comptrollers, and treasurers representing two dozen different states across the country. This letter was submitted to urge the FASB not to politicize GAAP by introducing climate disclosure rules as this would go against key principles of the GAAP framework. The authors of the letter argued that by implementing ESG laws into GAAP, it could create a partisan agenda which would conflict with the duties of accountants and other financial officials who allocate public funds that are utilized across state and local government activities, thus creating a conflict with the GAAP principle of sincerity.
Within their letter, the authors also specifically stated that implementing climate disclosure rules would conflict with the two other key GAAP principles. The authors argue that climate disclosure rules conflict with the principal of materiality, as the rules include concepts such as “dynamic materiality” and “double materiality” that do not align with the supreme court’s definition of materiality that GAAP currently follows. The climate disclosure standards also conflict with the principle of prudence, as they require companies to speculate about future events such as further environmental rule changes; to comply with GAAP, formally reported data must be free of speculation. The possible implementation of climate disclosure standards into GAAP remains uncertain as of now, and more developments are expected as entities continue to protest various proposed climate disclosure standards.
Securities and Exchange Commission
On August 2nd, 2024, the Securities and Exchange Commission (SEC) proposed new data standardization requirements under the Financial Data Transparency Act of 2022. These requirements are being proposed to enhance the level of compatibility of financial data that is submitted to various federal agencies. The SEC stated that the proposed standardization is being supported by eight other agencies which most notably include: the Federal Deposit Insurance Corporation (FDIC), the Department of the Treasury, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency.
If the proposed standard is implemented, it will create multiple “common identifiers” that will be used for locations, individual entities, dates, products, and currencies that can be used during an agency’s evaluation of the data. By creating these identifiers, it would help to maximize the efficiency of data interpretation when agencies are performing their regulatory and oversight duties. These new standards would also decrease the burden placed on financial institutions who report to multiple federal agencies, thus increasing their reporting efficiency as well.
Within the joint data proposal, the SEC is also advocating for a “principles-based joint standard” that will create standards for data presentation. These presentation standards would allow entities to submit data that can be interpreted by machines to further increase efficiency. While the proposal has not yet been published in the Federal Register, there will be a 60-day period for public comment upon its release.
American Institute of Certified Public Accountants
The American Institute of CPAs (AICPA) joined forces with over 60 organizations to form the Coalition Against Scam and Scheme Threats (CASST). This coalition, initiated by IRS Commissioner Danny Werfel, aims to combat the increasing number of tax scams and schemes targeting taxpayers. The CASST has received over two dozen letters of support from federal and state tax agencies, software and financial service firms such as Intuit and H&R Block, and national professional associations including the National Society of Accountants. Their primary goals are to expand outreach and education about emerging scams, develop new methods to identify fraudulent returns at the point of filing, and enhance infrastructure to protect taxpayers and tax systems.
During the past tax season, there was a notable rise in scams as the IRS stated it has seen hundreds of thousands of claims that taxpayers are not entitled to, including those involving the fuel tax credit, household employment taxes, and the sick and family leave credit. These scams often result in delayed refunds and additional documentation requirements for taxpayers. The coalition plans to implement new protections by the 2025 filing season, focusing on issues such as ghost preparers, who prepare tax returns for a fee but do not sign them, leaving taxpayers vulnerable to inflated refund claims. The AICPA’s involvement in combatting tax scams underscores its commitment to protecting taxpayers and practitioners from fraud.
Public Company Accounting Oversight Board
The PCAOB’s latest inspection results revealed a troubling level of deficiencies among the country’s largest auditors, with 46% of audits last year showing issues, up from 40% in 2022. Specifically, the audit firms failed to obtain sufficient and appropriate evidence to substantiate its opinion on the issuer’s financial statements and internal controls when it was issued, also known as a Part I.A deficiency. The audit profession was severely impacted by COVID-19, suffering from declining income and performance from which it has not yet recovered. A significant mass departure of overworked and underpaid auditors, with 300,000 accountants leaving their jobs between 2019 and 2021, has further exacerbated the problem. The PCAOB’s review of 287 audits from the six largest firms and a selection of smaller firms found that BDO had deficiencies in 86% of its audits, Grant Thornton in 54%, and the Big Four, while faring better, still showed notable issues with 38% of EY’s, 26% of KPMG’s, 21% Deloitte’s, and 18% of PWC’s audits having deficiencies.
The PCAOB’s enforcement capabilities are also in doubt following the US Supreme Court’s ruling in SEC v. Jarkesy, which affirmed that the Seventh Amendment guarantees defendants a jury trial for SEC civil penalties, thus barring the SEC from mandating adjudication in its own tribunals. This precedent may extend to the PCAOB, which oversees investigations and disciplinary actions against accounting firms for audit-related violations. Despite PCAOB Chair Erica Williams’ push for stricter enforcement, evidenced by penalties rising from $1.2 million in 2021 to over $20 million in 2023, the Jarkesy decision could significantly weaken the PCAOB’s authority. The Supreme Court’s classification of the PCAOB as a government entity suggests that Seventh Amendment protections might apply to PCAOB proceedings, potentially leading to more profound consequences than those faced by the SEC.
The PCAOB’s enforcement powers are more limited than the SEC’s – it cannot bring cases to federal court, but it can refer them to other regulators. Defendants argue that PCAOB’s monetary penalties necessitate a jury trial and question if non-monetary sanctions like censures and suspensions fall under this rule. While Jarkesy focused on fraud, its reasoning could extend to other common law claims. The PCAOB might claim its actions fall under the “public rights exception,” but Jarkesy suggests that actions resembling common law claims involve private rights. This raises the question of whether the PCAOB can conduct in-house proceedings against accountants for failing to prevent fraud, while the SEC cannot do the same for those committing the fraud.