Financial Reporting and Regulatory Update

Second Quarter 2021

From the CAQ

Analysis of ESG reporting

The Center for Audit Quality (CAQ), on April 29, 2021, published “S&P 100 and ESG Reporting,” summarizing its findings from an examination of publicly available ESG information for S&P 100 companies through March 12, 2021. The CAQ reports that all companies provided some ESG information, most reported it in a separate stand-alone report, and 11 obtained assurance from a public company auditing firm for some of the information. The report shows which frameworks were most widely used and which standards were commonly referenced, information about what types of information assurance were obtained from auditors, and a description of assurances obtained from other providers such as engineering and consulting firms.

Effective governance over ESG reporting

On April 22, 2021, the CAQ and the American Institute of CPAs published “Key Actions for Establishing Effective Governance Over ESG Reporting” to provide guidance on the creation of high-quality ESG disclosures. The report describes key actions to establish effective governance over ESG reporting, including:

  • Conducting materiality or risk assessments to determine which ESG topics are important or material to the organization, its investors, and other stakeholders
  • Implementing appropriate board oversight of material ESG matters
  • Integrating and aligning material ESG topics into the enterprise risk management process
  • Integrating ESG matters into the overall company strategy

According to the CAQ, “Good governance plays a critical role in a company’s ability to produce high-quality, accurate and reliable information,” and this document provides a starting point with actions entities can take to reach that goal.

SPACs alert

The CAQ issued Alert 2021-01, “Auditor and Audit Committee Considerations Relating to Special Purposes Acquisition Company (SPAC) Initial Public Offerings and Mergers,” on May 3, 2021. It describes the five phases of a SPAC life cycle and provides a listing of considerations for auditors and audit committees regarding challenges of a private company entering the public markets through a merger with a SPAC. While these considerations are intended for auditors and audit committees, members of management also might find them helpful.

Referring to the SEC statement on “Financial Reporting and Auditing Considerations of Companies Merging With SPACs,” the alert repeats, “it is critical that the board of directors, audit committees (as applicable), management, and auditors of operating companies involved in a merger with a SPAC fully understand and fulfill their professional responsibilities so that companies meet their obligations under the federal securities laws and investors are provided with high quality financial reporting at the time of the merger and on an ongoing basis.” To help address this responsibility, the alert lists numerous considerations related to SPAC merger transactions for auditors and audit committees. For audit committees, the alert describes considerations related to public company readiness; SPAC sponsor experience; corporate governance; accounting, reporting, and disclosure issues; and external auditor selection and oversight.

Effectiveness of management review controls

On April 21, 2021, the CAQ released “Issues Related to the Assessment of the Effectiveness of Management Review Controls: Roundtable Summary.” This report summarizes the information gathered during a roundtable discussion led by the CAQ and the Financial Education & Research Foundation with preparers and auditors who did not participate in the research study on internal control over financial reporting management review controls, “Perspectives on Management Review Controls: Challenges and Solutions.” The objective of the roundtable was to identify and share practices that can mitigate challenges of addressing management review controls. The report addresses planning and communication, design and precision, and operation and performance of management review controls. It identifies important best practices to address management review control challenges and provides a detailed listing of suggested actions to address challenges with management’s assessment and the auditor’s evaluation of the effectiveness of management review controls.