This Financial Reporting Update highlights key developments and issues that are relevant to Finance and Accounting Professionals.
Financial Accounting Standards Board
On October 9th, The Financial Accounting Standards Board (FASB) issued a Accounting Standards Update (ASU). The update put fourteen different Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. These requirements come from an SEC release dated August 17, 2018 which modifies, “…the disclosure or presentation requirements of a variety of Topics in the Codification. The requirements are relatively narrow in nature. Some of the amendments represent clarifications to, or technical corrections of, the current requirements. Because of the variety of Topics amended, a broad range of entities may be affected by one or more of those amendments.”
For any entity that is required to provide financial statements to the SEC or an entity that must adhere to the SEC’s disclosure requirements that are already in place, the amendments will take effect on the day that the SEC, “removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity.”
Securities and Exchange Commission
On October 13th, The Securities and Exchange Commission issued a press release related to a new rule adopted by the SEC as well as changes made to the National Market System Plan (NMS) which governs the consolidated audit trail (CAT). Rule 13f-2 aims to increase the transparency of data related to short sales within the market.
The rule now requires that institutional investment managers, “that meet or exceed certain thresholds to report on Form SHO specified short position data and short activity data for equity securities.” The data that is collected will be grouped by each security so that the reporting managers remain confidential. The data will then be posted onto the EDGAR database on a “delayed basis.”
The changes to the CAT NMS Plan will make it so firms who report their consolidated audit trail that are reporting short sales when, “it is asserting use of the bona fide market making exception in Rule 203(b)(2)(iii) of Regulation SHO.”
The SEC will publish Rule 13f-2 and related Form SHO, and the CAT NMS Plan amendment in the Federal Register. These will take effect two months after they are published. The SEC will require compliance with the final rule and Form SHO one year after the adoption release date and will start releasing data to the public months later. The SEC will require compliance with the CAT NMS Plan amendment eighteen months after it takes effect.
American Institute of Certified Professional Accountants
On October 12th, the International Auditing and Assurance Standards Board (IAASB) issued a news release related to the amendments made to two of its own standards. These changes are related to the International Standard on Auditing (ISA). The IAASB amended ISA 700: Forming an Opinion and Reporting on Financial Statements, and ISA 260: Communication with Those Charged with Governance.
According to the IAASB, the changes made will allow auditors to apply recent changes to the ethics code made by the International Ethics Standards Board for Accountants (IESBA). The changes made by the IESBA states that firms must disclose when they have, “applied the independence requirements for public interest entities in an audit of the financial statements of an entity.”
Public Company Accounting Oversight Board
On October 13th the Public Company Accounting Oversight Board (PCAOB) released a report based on the findings from a PCAOB staff report. The staff report titled, “Inspection Observations Related to Engagement Quality Reviews” focused on quality control criticisms related to engagement quality reviews (EQRs). The report found that, “…42% of firms the PCAOB inspected in 2022 had a quality control criticism related to engagement quality reviews (EQRs), up from 37% in 2020.” EQRs are meant to protect investors as they provide a way to ensure that audits are properly supported and that the decisions being made are objectively correct. An EQR is conducted by someone who did not make decisions or take responsibilities, “on behalf of the engagement team.” These are essential to the audit process and must be handled correctly for the engagement to be as high quality as possible.