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The CAQ Response on the SEC’s Proposed Climate-Related Disclosures

The CAQ in a comment letter to the Securities and Exchange Commission (SEC) voiced support for requiring certain registrants to subject Scope 1 and Scope 2 greenhouse gas (GHG) emissions disclosures to attestation as this will enhance the reliability and quality of these disclosures.

“For years, the CAQ has recognized the value of company-prepared climate information for investors and the role public company auditors can play,” said Julie Bell Lindsay, Chief Executive Officer of the CAQ. “Research shows that assurance over climate-reporting when performed by a public company auditor offers increased investor protection compared with other assurers.”

The reliability of ESG reporting is just one critical issue to aid investors in evaluating climate information; comparability also proves essential to investor trust and confidence. In its response to the SEC’s proposal, the CAQ expressed its support for a globally accepted ESG reporting system that is built from existing standards and frameworks.

The CAQ also identified a few noteworthy challenges and solutions for the current proposal, including:

• Organizational boundaries for GHG emissions disclosures: Many companies voluntarily report climate-related information using different boundaries from the SEC’s proposal. As a result, companies may encounter reporting challenges and burdens as they move toward reporting under a different boundary.
• GHG emissions methodology: Specifying in the final rule that a widely used framework, such as the GHG Protocol, should be used will help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods.
• Regulation S-X proposed amendments: The proposed financial statement metrics requirements as written will not achieve the intended objectives and will result in various practical implementation challenges. The SEC should consider alternatives to help focus companies on preparing more meaningful, cost-effective climate-related disclosures that are comparable from company to company.

Additionally, the CAQ provided an alternative phased in approach by both disclosure area and registrant type to provide registrants with more time to prepare for aspects of the disclosure areas.

“Despite the challenges we identified, the SEC’s climate proposal is an important step forward to provide investors, public companies and other capital market stakeholders with clarity around information that is increasingly being used to make investment decisions,” said Lindsay. “We look forward to continued dialogue with the SEC and other stakeholders as this rule is finalized.

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Role of the Audit Committee: How to Oversee 3rd Party Risk

Third party risk is growing. And so is dependence of 3rd parties. 

What are the hurdles to managing 3rd ​party risks? PwC’s Governance Insights Center provides insights: Lack of inventory of 3rd party relationships and lack of understanding of what 3rd parties are doing.

What are common third-party risks? Cyber and data security, bribery/FCPA, compliance, ethical/social/environmental issues, brand/reputation, and operational vulnerability. 

What should boards be doing? Companies are developing robust third-party risk management programs (TPRM) with 10 key elements:

1. Ongoing monitoring of third parties
2. Alignment to ERM program
3. Clear accountability via a governance model
4. Use of automation and other tech to expand scope and scale of TPRM
5. AC and board reporting of 3rd party risk landscape, on a regular cadence
6. In-depth assessment of third parties supporting critical functions
7. Accurate inventory of all third-party relationships
8. Pre and post contract processes and controls
9. Mapping of applicable regulations to third parties
10. Third-party functions formally defined, governed, controlled, measured & reported

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Need more on board diversity trends? Deloitte’s Missing Pieces Report, 6th Edition reviews data providing insight into board diversity changes from 2018 to 2020 across the Fortune 500. The report quotes Michael C. Hyter, president and CEO, The Executive Leadership Counci

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You care about diversity, equity and inclusion. You don’t want the focus on this important topic to die down. Nasdaq doesn’t either. Beginning in August 2022, all Nasdaq-listed companies, with limited exceptions, must have at least two diverse board members or explain why they do not. The new listing standard will require disclosure, in an aggregated form, of information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board.

Disclosure of board diversity data will be required annually and companies have until the later of August 8, 2022 or the date the company files its proxy statement or information statement for its annual shareholder meeting during 2022. Read more here from BDO on this new requirement approved by the SEC on August 6, 2021.

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Recent global corporate fraud scandals such as those related to Wirecard in Germany and Carillion in the United Kingdom have driven a focus by capital market participants on the auditor’s role in identifying and detecting fraud. Certain audit regulators, including the International Auditing and Assurance Standards Board (IAASB) and the Public Company Accounting Oversight Board (PCAOB) have taken action with respect to fraud. 

Today, the CAQ released a resource, Illegal Acts: The External Auditor’s Responsibilities, to educate users of financial statements on the auditor’s responsibilities in regards to illegal acts under PCAOB auditing standards and how they differ from the auditor’s responsibilities as it relates to fraud.
  
The publication provides an overview of the external auditor's responsibilities with respect to illegal acts and how they differ from fraud, outlining key differences and providing illustrative examples of each. 

Learn more by reviewing the publication, Illegal Acts: The External Auditor’s Responsibilities here. 

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Hot Topic: Still SPACs 

In April we mentioned SPACs were hot and the SEC issued public statements (from Corp Fin and a joint Corp Fin-OCA statement) to highlight key accounting and financial reporting considerations. In May, the CAQ issued our SPAC Alert with key considerations for auditors and audit committee members. 

Why it matters. There are unique elements to SPACs. Audit committee members should consider all the key elements of public company readiness: financial reporting expertise, adequate internal control and corporate governance structures to comply with Sarbanes-Oxley requirements, stock exchange listing requirements such as internal audit, and ability of the external auditor to comply with PCAOB standards and SEC auditor rules.