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Big Four, AIPCA Lobbying Includes FASB Independence, PCAOB Enforcement Transparency

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Big Four audit firms and the AICPA reported lobbying on a wide range of accounting-related matters in the third quarter of 2021, some of them perennial topics such as independence of accounting standard setting and PCAOB enforcement transparency, according to quarterly lobbying disclosures filed with Congress.

The specific lobbying disclosures from Deloitte LLP, Ernst & Young LLP (EY), KPMG LLP, PricewaterhouseCoopers LLP (PwC), and the AICPA vary in content and detail, and none of them disclose a position on particular legislation.

In some cases, the items were particular to one entity; KPMG alone reported lobbying activity around the Internal Control Disclosure Improvement Act, a House bill not yet introduced this year that would mandate that public companies that have been sanctioned for certain internal controls failures make new disclosures around whether they have completed a general ledger accounts reconciliation.

And the AICPA was the only to list accounting standards for cryptocurrency on its disclosures, a topic of increasing interest as digital currencies continue to gain a foothold on corporate balance sheets. The accounting industry group does not currently have any bills of interest and is instead monitoring the situation, according to an AICPA spokesperson.

Other issues cropped up on multiple lobbying disclosures, including:

PCAOB Enforcement

AICPA, EY, and KPMG all reported lobbying around PCAOB enforcement issues, which for the first two was tied to a specific bill: the PCAOB Enforcement Transparency Act of 2021. KPMG reported lobbying more generally around legislation related to PCAOB disciplinary proceedings, as well as whistleblower and information sharing issues.

Sens. Jack Reed, a Rhode Island Democrat, and Chuck Grassley, an Iowa Republican, in June reintroduced the bill (S. 2009), which would reverse a Sarbanes-Oxley provision that requires the proceedings to take place behind closed doors unless all parties agree to make them public.

Critics of open disciplinary proceedings say the current regime is necessary in a reputation-centric industry in which unproven charges could threaten a firm’s existence.

Proponents of the bill, however, argue that it would realign the PCAOB’s enforcement regime to more closely mirror the SEC’s own administrative actions against audit firms, and would better inform investors about current actions against a company’s auditors. Former PCAOB Chairman James Doty was a vocal supporter of the PCAOB Enforcement Transparency Act during his tenure at the board, arguing the current system is an “anomaly” that obscures enforcement actions against bad actors.

Holding Foreign Companies Accountable Act

Deloitte, EY, and KPMG reported lobbying around the Holding Foreign Companies Accountable Act (HFCA) and/or the related Accelerating Holding Foreign Companies Accountable Act (S. 2184).

The measures deal with a long-standing impasse between China and the PCAOB, where the former refuses to allow inspections of audits for U.S.-listed Chinese companies, which has resulted in widespread violations of the Sarbanes-Oxley Act. The HFCA, signed into law late last year, would delist those companies after three consecutive non-inspection years. In June, the Senate passed the acceleration bill to shorten that deadline to two years. The House Financial Services Committee discussed the bill during an October 26, 2021, hearing. (See Lawmakers Grapple with Ramifications of Delisting Chinese Companies in the October 27, 2021, edition of Accounting & Compliance Alert.)

The Council of Institutional Investors (CII), American Securities Association (ASA), and SEC Chair Gary Gensler have all voiced support for the acceleration measure.

Independence of Accounting Standard-Setting

AICPA, EY, KPMG, and PwC all reported lobbying related to the independence of accounting standard-setting, a frequently recurring item on quarterly lobbying reports.

Proponents of an independent FASB have for years sought to fend off congressional meddling in the standard-setting process. They cried foul early in the COVID-19 pandemic when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which offered large public banks an optional reprieve from the FASB’s Current Expected Credit Loss (CECL) rules. CECL, issued in 2016 in Accounting Standards Update (ASU) No. 2016-13Financial Instruments — Credit Losses, requires banks and other public companies to record losses from souring loans on their balance sheets earlier, among other changes. (See American Accounting Association Blast CECL Delay, Congressional Meddling in Standard Setting in the October 26, 2020, edition of ACA.)

Also last year, the AICPA spoke out in defense of an independent FASB after Rep. Blaine Luetkemeyer, a Missouri Republican and vocal CECL critic, filed the Responsible Accounting Standards Act, which would have placed the FASB’s work under the purview of the Administrative Procedure Act (APA). The APA sets out broad guidelines for notice-and-comment and other requirements that agencies such as the SEC must follow when issuing new rules. Also under the bill, the FASB would be required to consider the effect of accounting principles “on the broader U.S. economy, market stability, and availability of credit (particularly for low- and moderate-income borrowers),” and report to Congress and the SEC within six months on the changes it is making to ensure those effects are considered. (See AICPA Speaks out for Independent FASB Following GOP Bill in the February 10, 2020, edition of ACA.)

The Financial Accounting Foundation (FAF), the parent of the FASB and GASB, meanwhile did not lobby on any specific accounting-related legislation, but on its third quarter report included issues related to the accounting standard-setting process generally, issues related to CECL implementation and accounting standards, and issues related to whether the FASB’s accounting support fees are subject to sequestration.

Environmental, Social, and Governance Legislation

Deloitte and KPMG both lobbied on environmental, social, and governance (ESG) matters, with Deloitte reporting activity specifically around H.R. 1187, the Corporate Governance Improvement and Investor Protection Act, and KPMG lobbying on “ESG/Climate Disclosure Proposals.”

The House passed H.R. 1187 in mid-June, advancing a sweeping set of mandates for the SEC on climate risk, sustainability, outsourcing, corporate political spending, and executive pay raises. Prior to passage, Democrats amended the bill to contain additional disclosure requirements on human capital management; harassment settlements; boards of directors’ cybersecurity expertise; board and executive diversity; and the use of Chinese Uyghur forced labor in a company’s supply chain, among other amendments.

Among the bills included in the package was the Climate Risk Disclosure Act, which would amend the Securities Exchange Act of 1934 to require a set of new public company disclosures around the financial impacts of climate change and how companies plan to address it.

The Senate has so far shown no inclination of taking up H.R. 1187, which cleared the House on a tight 215-214 margin.

Corporate Transparency Act

AICPA and EY both reported lobbying activity around the Corporate Transparency Act, which mandated a set of reforms to beneficial ownership information reporting aimed at cracking down on the use of shell companies for illicit finance. The bill was included in the National Defense Authorization Act (NDAA) that passed early this year.

The reforms would require corporations and limited liability companies (LLCs) to provide a list of the entity’s beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that includes personal information such as full legal name, birth date, and residence, among other requirements. The beneficial ownership information would only be made available to law enforcement, or, with a customer’s consent, financial institutions. The legislation included a long list of exemptions meant to limit its scope to the entities most likely to be used for illicit purposes. Banks, broker-dealers, public issuers, insurance companies, nonprofits, public accounting firms, and others are exempt, as are entities with more than 20 full-time employees and $5 million in revenue, and operate in the United States, which are deemed more likely to be legitimate businesses.

House and Senate Democrats in a November 3 letter urged Treasury to move forward with final rules under the act, while acknowledging the agency was unlikely to hit its January 1, 2022, rulemaking deadline. (See Democrats Don’t Expect Treasury to Hit Beneficial Ownership Reform Deadline in the November 5, 2021, edition of ACA.)

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.

 

This article originally appeared in the November 8, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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