U.S. Audit Partner Disclosures: What’s in a Name?
After over a decade of back and forth negotiations, the Public Company Accounting Oversight Board’s Rule 3211 came into effect on January 31, 2017. The rule requires audit firms to publicly disclose the names of the engagement partners who participate in an audit.
Expectations were high that the rule would increase transparency, partner accountability, and improve audit quality overall. Public audit firms were opposed, arguing that it would create greater legal exposure to individual partners and that it would increase audit costs.
A new academic study conducted by professors at the Universities of Tennessee, Kansas, Virginia Tech and James Madison found that although the rule did not lead to an increase in audit costs, it has had very little effect on anything else. Researchers were unable to detect a significant change in audit quality attributable to the rule.
The research study, appropriately titled “What’s in a Name,” was published in the September/October issue of the American Accounting Association’s magazine, The Accounting Review.
Investor Confidence in Markets and Auditors Surveyed
The percentage of US retail investors expressing confidence that public company auditors are effective in their investor protection roles remains high, according to the 2019 Main Street Investor Survey. The annual Center for Audit Quality (CAQ) poll captures the views of US retail investors with at least $10,000 invested in the capital markets through retirement plans or direct holdings.
Fielded by Morning Consult from August 19 to August 22, 2019, the survey’s key findings include the following:
74% of U.S. investors express confidence in US capital markets, unchanged from 2018 levels.
76% of U.S. investors have confidence in US companies that are publicly traded, down two points from 2018.
78% of U.S. investors express confidence in audited financial statements, up three points from 2018.
47% of U.S. investors have confidence in capital markets outside the US, down significantly from a level of 56% in 2018.
Talking about ESG
It may be challenging for companies to measure the financial impact of environmental, social and governance (ESG) factors, but more executives are talking about ESGs with investors.
In a June 15 to Sept. 14 survey by FactSet, twenty-four S&P companies mentioned ESGs on earnings conference calls — a major increase over just two companies that did so in the second quarter of 2017.
The financial sector had the highest number of companies mentioning ESGs, followed by the real estate and utilities sectors, according to the Wall Street Journal.
Suggesting reasons for executives to speak about ESGs is Shannon Murphy, a managing director overseeing equities content at Jefferies, who told the Journal, “One contributing factor is a transfer of wealth to members of the millennial generation, who as a group are more focused on sustainability. Investment stewardship groups in the U.S. also are paying more attention to these issues.”
Tax Cuts 2.0 Promised
White House economic adviser Larry Kudlow confirmed that the administration would gather the best ideas from Congress and other experts to construct another round of tax cuts directed at providing middle class relief, dubbed “Tax Cuts 2.0.”
Fox Business reports that a senior administrative official said that items being considered “include making permanent some provisions of the Tax Cuts and Jobs Act that are set to expire in 2025, such as lowered personal rates, the double standard deduction and the $10,000 cap on state and local tax deductions.”
“It will be a very, very substantial tax cut for middle-income folks, who work so hard,” President Trump told House Republicans, saying details would be released in the coming year.
IRS Focus on Crypto-Currency Transactions
The IRS is well into its crack down of unreported or misreported crypto-transactions which began over the summer with letters sent to thousands of taxpayers. Virtual currency is an ongoing focus area for IRS Criminal Investigation.
“Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties,” said IRS Commissioner Chuck Rettig. “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations,” he said.
IRS Notice 2014-21 (PDF) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions.
Banking on the Election
After a decade of keeping a low profile, the banking industry is expected to be more active in the 2020 elections, with a large industry group promising to boost campaign spending and political advertising, reports the Wall Street Journal.
The American Bankers Association (ABA) will likely be the largest contributor. It plans to spend over $10 million in the election cycle for advertising and supporting both Democrats and Republicans in congressional races.
Banks are working to sell their message to a broader public, shifting the focus away from business practices such as risky mortgages that fed the financial crisis. They also are attaching their names to newsletters, glossy magazine ads and public policy events, according to the WSJ.
Simply Stated Thoughts…
Modern Day Scarlet Letters
SEC Commissioner Hester M. Peirce recently addressed the American Enterprise Institute. Her entertaining speech (worth reading in its entirety), entitled Scarlet Letters, focused on the practice of publicly shaming companies that do not adequately satisfy environmental, social and governance (ESG) standards.
Peirce said, there is labeling “based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people. In our purportedly enlightened era, we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances and seemingly without caring about the unwarranted harm such labeling can engender. After all, naming and shaming corporate villains is fun, trendy, and profitable.”
Acknowledging that ESG issues may well be relevant to a company’s long-term financial value, Peirce has little concern if ESG disclosures mean disclosing what is financially material, but she said, “the ESG tent seems to house a shifting set of trendy issues of the day, many of which are not material to investors, even if they are the subject of popular discourse.”
She continued, “Environmental and social categories tend to be much more nebulous. The environmental category can include, for example, water usage, carbon footprint, emissions, what industry the company is in, and the quantity of packing materials the company uses. The social category can include how well a company treats its workers, what a company’s diversity policy looks like, its customer privacy practices, whether there is community opposition to any of its operations, and whether the company sells guns or tobacco. Not only is it difficult to define what should be included in ESG, but, once you do, it is difficult to figure out how to measure success or failure.”
Peirce closed with, “The moral authorities of today, like their puritanical forebears, are motivated by a dream of a better society, but methods matter and so do facts. We ought to be wary of shrill cries from a crowd of self-appointed, self-righteous authorities, even when all they are crying for is a label.”
Strong words indeed. But not surprising coming from Hester Peirce, who, at last December’s SEC’s Investor Advisory Committee, quipped “ESG” stands for “enabling shareholder graft.”
An Audited Legacy of Quality
It’s become a lot easier to choose the best audit firm. That’s because the Public Accounting Oversight Board (PCAOB) conducts periodic inspections of all audit firms and publishes its reports online. For all to see.
Yes, we get audited too.
Weinberg & Company is consistently at the very top when it comes to the quality of our work– just check our legacy of stellar inspection reports.
We thought we were building a leading, international accounting firm by providing Big 4 expertise, delivered with personal service.
Turns out we were also building “An Audited Legacy of Quality.”