December 2023 financial reporting, governance, and risk management

| 12/20/2023
December 2023 financial reporting, governance, and risk management

Message from John Epperson, Managing Principal, Financial Services

Dear FIEB readers,

The holiday season typically brings good cheer and gift-giving traditions. It just so happens that our December Financial Institutions Executive Briefing is the gift that keeps on giving as readers will delight in the wealth of information to consider for year-end financial reporting. The American Institute of CPAs and the Chartered Institute of Management Accountants held the annual Conference on Current SEC and PCAOB Developments in Washington, D.C., Dec. 4-6, 2023, and we provide a summary of key themes and perspectives from throughout the financial reporting ecosystem.

We had a number of releases of interest this month from the federal financial institution regulators, including quarterly banking and credit union highlights and the Office of the Comptroller of the Currency’s fall semiannual risk perspective. The Financial Accounting Standards Board issued three final standards. Securities and Exchange Commission (SEC) rulemaking continues at a fast pace. This month, the SEC’s rulemaking agenda was issued and the final climate disclosure rule is forecasted for April 2024; however, the forecasted agenda is just that – a forecast – it could be sooner, it could be later. The Public Company Accounting Oversight Board (PCAOB) confirmation standard was approved by the SEC, and the Center for Audit Quality issued its annual audit committee transparency barometer and its fall audit partner pulse survey results.

As we all prepare for a busy year-end financial reporting season, I wish you and yours a very happy and healthy new year.

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2023 Conference on Current SEC and PCAOB Developments

AICPA & CIMA hold annual conference

The American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) held the annual Conference on Current SEC and PCAOB Developments in Washington, D.C., Dec. 4-6, 2023. Key themes included:

  • Investor information needs are top of mind for regulators and standard-setters.
  • Engagement of all stakeholders is needed to support high-quality financial reporting.
  • The accounting profession fosters public trust and protects our capital markets.

Various stakeholders – preparers, regulators, standard-setters, auditors, users, and others – presented the audience with wide-ranging perspectives and insights.

Acting chief accountant remarks at conference

Securities and Exchange Commission (SEC) Chief Accountant Paul Munter provided perspectives through the lens of financial reporting as a communication exercise, noting:

  • The current economic environment is uncertain – citing interest rates, supply chain disruptions, and geopolitical matters – and stakeholders across the financial reporting ecosystem must ensure that investors have transparent disclosure to understand risks.
  • Continued stakeholder engagement is necessary for standard-setting to be responsive to investor needs.

On the same day as his remarks, Dec. 4, 2023, Munter released “The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors,” highlighting the critical information that the statement of cash flows communicates to investors and reminding preparers and auditors of the need to subject the statement of cash flows to the same rigor and attention as other financial statements.

During the conference, Munter was asked for his perspectives on firm culture. He noted that the culture must cascade throughout the firm and the audit practice alone cannot be solely responsible for audit quality and independence matters.

Finally, Munter shared reflections on the accounting profession:

  • We all play an integral role in serving the public interest, which requires a commitment to lifelong learning.
  • Attracting and retaining talent requires a coordinated approach to best convey the profession’s value proposition.

OCA staff recaps 2023 at conference

Office of the Chief Accountant (OCA) senior associate chief accountants Anita Doutt, Nigel James, and Gaurav Hiranandani; Shehzad Niazi, deputy chief counsel; and Carlton Tartar, associate chief accountant, covered various topics that the staff has addressed in the past year, including:

  • Perspectives on the Financial Accounting Standards Board (FASB) final Accounting Standards Update (ASU) on segments
  • Fair value matters
  • Miscellaneous accounting topics, such as special purpose acquisition company (SPAC) and de-SPAC matters, deferred offering costs, and investment company observations
  • Auditor independence
  • Financial reporting in the current economic environment
  • Monitoring of international standard-setting

Corp Fin presents at conference

SEC Director of the Division of Corporation Finance (Corp Fin) Erik Gerding was joined by Corp Fin staff members Sarah Lowe, deputy chief accountant; Lindsay McCord, chief accountant; Craig Olinger, senior adviser to the chief accountant; and Melissa Rocha, deputy chief accountant, to discuss recent Corp Fin developments and focus areas including:

  • Disclosure considerations in the current economic environment – transparent disclosures around inflation, other macroeconomic variables, interest-rate risk, and liquidity
  • Perspectives on the FASB’s final ASU on segments
  • Views on non-GAAP measures
  • Observations on recent final rules – erroneously awarded incentive-based compensation, pay versus performance, cybersecurity, and issuer share repurchases
  • Miscellaneous matters – waiver requests, significance tests performed for acquisitions and disposals of businesses, and transaction accounting adjustments for pro forma presentation

PCAOB chair delivers keynote speech, joins board for roundtable

Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams in her speech “Too Much Is at Stake to Let Complacency Win” highlighted the role of the audit and how the work of auditors gives stakeholders trust and confidence in the markets. Williams stressed the importance of auditors choosing vigilance over complacency in performing audits. She also covered:

  • Standard-setting activities
  • Inspection trends
  • Enforcement actions

Williams and the PCAOB held a panel discussion covering various topics including how the board receives input and feedback on its rulemaking agenda through advisory groups and the comment letter process; key elements to promoting public trust in audits; the talent shortage in the public accounting profession; transparency in oversight activities, including inspection reports; inspections in China and Hong Kong; the role of technology in the audit; the PCAOB’s interaction with global audit regulators; and the importance of timely communication with audit committees.

From the federal financial institution regulators 

FDIC issues banking profile for third quarter 2023

On Nov. 29, 2023, the Federal Deposit Insurance Corp. (FDIC) issued the quarterly banking profile covering the third quarter of 2023. FDIC Chair Martin Gruenberg noted the continuing resilience and stability of the banking industry as a whole. Gruenberg also acknowledged risks presented by rising interest rates, inflation, geopolitical uncertainty, and deterioration of the commercial real estate sector.

According to the banking profile, FDIC-insured banks and savings institutions earned $68.4 billion in the third quarter of 2023, a decrease of $2.4 billion or 3.4% from the previous quarter. Gruenberg said the fluctuation is largely attributable to nonrecurring accounting gains recorded in connection with three large bank failures.

The report provides these additional third quarter statistics:

  • Net interest income totaled $175.2 billion for the third quarter of 2023, up from $174.3 billion in the second quarter of 2023. From the previous quarter, average net interest margin increased three basis points to 3.30%.
  • The average return on assets ratio was 1.17%, down from 1.21% in the previous quarter.
  • Total loan and lease balances increased $45.9 billion (0.4%) from the previous quarter, driven primarily by increases in credit card loans and residential mortgages.
  • Total deposits were $18.6 trillion in the third quarter of 2023, a decline of $90.4 billion (0.5%) from the previous quarter and marking the sixth straight quarter of decline. The decrease was reflected across both domestic and foreign offices.
  • The noncurrent loan rate (loans and leases 90 days or more past due) increased four basis points to 0.51% compared to the previous quarter.
  • Community banks’ net income totaled $6.7 billion in the second quarter of 2023, a decrease of $335.5 million (0.48%) compared to the previous quarter.
  • Unrealized losses on available-for-sale and held-to-maturity securities totaled $683.9 billion, up $125.5 billion (22.5%) from the prior quarter. The increase was driven by an increase in mortgage rates, which in turn reduced the value of mortgage-backed securities.
  • The deposit insurance fund balance totaled $119.3 billion, an increase of $2.4 billion from the previous quarter.

The total number of FDIC-insured commercial banks and savings institutions declined from 4,645 in the second quarter of 2023 to 4,614 in the third. During the third quarter, two banks opened, one bank failed, and 28 institutions merged. The number of banks on the problem bank list increased by one to 44 in the third quarter. Total assets of such institutions increased by $7.5 billion, totaling $53.5 billion in the third quarter.

NCUA issues third quarter 2023 performance data

On Dec. 7, 2023, the National Credit Union Administration (NCUA) reported quarterly figures for federally insured credit unions based on call report data submitted to and compiled by the agency for the third quarter of 2023. Highlights include the following statistics:

  • The number of federally insured credit unions declined to 4,645 in the third quarter of 2023, from 4,686 in the previous quarter. In the third quarter, 2,908 federal credit unions and 1,737 federally insured, state-chartered credit unions existed.
  • Total assets reported for federally insured credit unions rose by 3.7% to $2.23 trillion, up $79 billion from a year ago.
  • Net income totaled $16.6 billion at an annualized rate in the first three quarters of 2023, down $1.9 billion (10.3%) compared to the same period a year earlier.
  • The annualized return on average assets was 76 basis points in the first three quarters of 2023, down from 88 basis points in the first three quarters of 2022.
  • The credit union system’s net worth increased by $11.4 billion (5%) over the year to $239.2 billion. The aggregate net worth ratio as of the third quarter of 2023 was 10.73%, up from 10.60% a year prior.

OCC publishes semiannual risk perspective for fall 2023

On Dec. 7, 2023, the Office of the Comptroller of the Currency (OCC) released its semiannual risk perspective, summarizing the foremost issues facing the federal banking system. The report denotes credit, market, operational, and compliance risks as key risk themes and addresses the impact of higher interest and deposit rates, inflation, cybersecurity threats, and artificial intelligence on the banking sector.

OCC releases guidance on venture lending

On Nov. 1, 2023, the OCC issued a bulletin providing policy guidance for banks engaging in venture lending. Banks are expected to maintain safe and sound practices when lending to venture borrowers, as these activities can expose banks to a higher degree of uncertainty and elevated risk of borrower failure. The bulletin advises banks against weakening underwriting standards and emphasizes the importance of rigorous credit analysis, monitoring, borrower reporting, and other risk management practices. A bank’s board and management are responsible for ensuring that such practices are appropriately documented and for determining whether a bank’s venture lending activities are consistent with the bank’s established risk appetite.

OCC issues guidance on buy now, pay later lending

On Dec. 6, 2023, the OCC issued new risk management guidance for institutions engaging in “buy now, pay later” (BNPL) retail lending, addressing the growing popularity of these consumer loan offerings. BNPL loans are defined as those that are payable in four installments or fewer and carry no finance charges. Banks engaging in BNPL lending should do so within a tailored risk management framework, maintaining appropriate underwriting criteria, repayment assessment, and other risk management practices and safeguards. Such banks also should ensure that marketing materials contain clear and conspicuous consumer disclosures stating a borrower’s obligations and applicable fees. Further, the bulletin notes that comprehensive reporting of BNPL loans to credit bureaus could improve industrywide transparency and help mitigate credit risk associated with BNPL loans.

FinCEN extends beneficial ownership reporting deadline

On Nov. 29, 2023, the Financial Crimes Enforcement Network (FinCEN) issued a final rule extending the deadline for certain reporting companies to file initial beneficial ownership information (BOI) reports with FinCEN. Reporting companies created or registered in 2024 must file their initial reports within 90 calendar days after receiving actual or public notice of their creation or registration becoming effective. FinCEN will begin to accept BOI reports on Jan. 1, 2024.

Reporting companies created or registered before Jan. 1, 2024, will still have until Jan. 1, 2025, to file an initial BOI report. Reporting companies created or registered in 2025 or beyond continue to have 30 calendar days to file an initial report.

FDIC issues final rule on special assessment from systemic risk determination

On Nov. 16, 2023, the FDIC board of directors approved, by notational vote, a final special assessment to recover the estimated $16.3 billion loss to the Deposit Insurance Fund incurred to protect uninsured depositors following the failures of Silicon Valley Bank and Signature Bank. The assessment will be collected at an annual rate of 13.4 basis points for an anticipated eight quarterly assessment periods. Collection will begin with the first quarterly assessment period of 2024 (the quarter ending March 31, 2024), with an invoice payment date of June 28, 2024. 31, 2024), with an invoice payment date of June 28, 2024.

The timing and amount of the special assessment is subject to change in the event of an adjustment to the systemic risk determination. The assessment will not be collected from any banking organization with less than $5 billion in total consolidated assets.

Financial Stability Board develops third-party risk management toolkit

On Dec. 4, 2023, the Financial Stability Board (FSB) published a toolkit for third-party risk management and oversight for financial authorities and financial institutions in light of the increasing involvement of and reliance on third-party service providers. Its purpose is to promote consistency across regulatory and supervisory approaches, strengthen risk management approaches, and improve coordination across stakeholders with a flexible and risk-based set of tools.

The toolkit includes a list of uniform common terms and definitions, tools to help identify critical third-party services and manage their associated risks, and tools for supervisory authorities to identify and manage third-party risk dependencies and potential systemic risks.

From the Financial Accounting Standards Board (FASB)

FASB improves income tax disclosure requirements

On Dec. 14, 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” which increases transparency into an entity’s jurisdictional tax exposure by requiring enhanced disclosures primarily related to rate reconciliation and income taxes paid.

The ASU requires more detailed information in the reconciliation of their statutory tax rate to their effective tax rate. Public business entities (PBEs) are required to provide this incremental detail in a numerical, tabular format, while all other entities will do so through enhanced qualitative disclosures. The ASU also requires entities to disclose more detailed information about income taxes paid, including by jurisdiction, pretax income (or loss) from continuing operations, and income tax expense (or benefit).

For PBEs, the new requirements are effective for annual reporting periods beginning after Dec. 15, 2024, and interim periods beginning after Dec. 15, 2025. For all other entities the standard is effective for annual reporting periods beginning after Dec. 15, 2025, and interim periods beginning after Dec. 15, 2026.

For additional information, see the Crowe article “FASB Finalizes Enhanced Income Tax Disclosure Requirements.”

FASB issues crypto assets fair value guidance

On Dec. 13, 2023, the FASB issued ASU 2023-08, “Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60): Accounting for and Disclosures of Crypto Assets,” which requires entities to account for holdings of certain crypto assets at fair value.

Holdings of in-scope crypto assets will be measured at fair value at each reporting date, with changes in fair value recorded through earnings. Also, the standard requires extensive disclosure about crypto assets measured at fair value, including an annual rollforward of an entity’s crypto asset holdings.

For all entities, the standard is effective for reporting periods beginning after Dec. 15, 2024, including interim periods, with early adoption permitted. Entities are required to adopt the guidance using a modified retrospective approach, recording a cumulative effect adjustment to equity (or net assets) as of the beginning of the year of adoption.

More details can be found in the Crowe article “FASB Issues Final Fair Value Guidance for Crypto Assets.”

FASB amends reportable segment disclosures

On Nov. 27, 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” to enhance disclosures about significant segment expenses for public entities reporting segment information under Topic 280. The final amendments:

  • Require that a public entity disclose, on an annual and interim basis, significant expense categories for each reportable segment. Significant expense categories are derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker (CODM) and 2) included in a segment’s reported measure of profit or loss.
  • Require that a public entity disclose, on an interim and annual basis, an amount for “other segment items,” reflecting the difference between 1) segment revenue less significant segment expenses and 2) the reportable segment’s profit or loss measures.
  • Require that a public entity disclose the title and position of the CODM and how the CODM uses the reported measure of profit or loss to assess segment performance and to allocate resources.
  • Require interim disclosure of certain segment-related disclosures that previously were required only on an annual basis.
  • Clarify that entities with a single reportable segment are subject to both new and existing segment reporting requirements under Topic 280.
  • Clarify that an entity is permitted to disclose multiple measures of segment profit or loss if certain criteria are met.

The amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within fiscal years beginning after Dec. 15, 2024, with early adoption permitted. Entities must adopt the guidance on a retrospective basis.

For additional information, see the Crowe article “FASB Issues Changes to Segment Reporting Requirements.”

From the Securities and Exchange Commission (SEC) 

SEC adopts final rules on clearing U.S. Treasury securities

On Dec. 13, 2023, the SEC adopted final rules that require covered clearing agencies to have policies and procedures that require central clearing of specified secondary transactions. In addition, the final rules modify certain broker-dealer customer margin requirements.

The final rules have various effective dates beginning March 31, 2025.

SEC adopts final rules on clearing agency governance and conflicts of interest

On Nov. 16, 2023, the SEC adopted final rules governing registered clearing agencies. The new board and policy requirements aim to reduce the likelihood of conflicts of interest that could influence the board of directors or equivalent governing bodies. Among other requirements, the adopted rules establish independence requirements for boards and require the boards of clearing agencies to have both a nominating and risk management committee. The rules also create policy and procedure requirements around monitoring and documenting conflicts of interest, managing risks from relationships with core service providers, and board obligations to consider participant and other stakeholder viewpoints.

The final rules are effective Feb. 5, 2024. Compliance with the provisions is required by Dec. 5, 2024, with the exception of the board and board committee requirements, which have a compliance date of Dec. 5, 2025.

SEC stays issuer share repurchase rule

On Nov. 22, 2023, the SEC issued an order to postpone the effective date of the Share Repurchase Disclosure Modernization rule, pursuant to Section 705 of the Administrative Procedure Act. The rule is stayed pending further SEC action.

This order comes in response to the U.S. Court of Appeals for the 5th Circuit ruling in Chamber of Commerce of the USA v. SEC, which found that the SEC had failed to meet obligations throughout the rulemaking process, such as adequately addressing public comments and performing a proper cost-benefit analysis.

Gensler presents statement on corporate governance

On Dec. 7, 2023, SEC Chair Gary Gensler spoke before the American Bar Association on the critical role of corporate governance in protecting investors and facilitating capital formation by building investor trust. He highlighted the historical precedent of securities law and the SEC’s involvement in enforcing corporate governance. Gensler summarized the SEC’s recent rulemaking initiatives related to corporate governance, including rules on executive compensation, insider trading, proxy voting, and beneficial ownership. Notably, Gensler called attention to the pending incentive-based compensation rules for financial institutions in accordance with Section 956 of the Dodd-Frank Act, stating that the SEC stands ready to work with fellow financial regulators to fulfill this regulatory mandate.

SEC announces FY23 enforcement statistics

On Nov. 14, 2023, the SEC released enforcement statistics on fiscal year 2023. Overall, the SEC filed a total 784 enforcement actions, up 3% from the prior year, obtaining a total of $4.95 billion in financial remedies – one of the highest amounts in SEC history, second only to 2022 – and distributing $920 million to harmed investors.

The published statistics include an overview of enforcement actions across different areas, such as investor protection and market integrity, recordkeeping violations, whistleblower protections, fraud, insider trading and market abuse, and the Foreign Corrupt Practices Act. Cybersecurity and environmental, social, and governance (ESG) disclosures and crypto asset securities are also noted. The report highlights actions against individuals in key roles, including officers and directors, and gatekeepers such as accountants and auditors.

SEC updates fall 2023 agency rule list

On Dec. 6, 2023, the Office of Information and Regulatory Affairs released the Fall 2023 Unified Agenda of Regulatory and Deregulatory Actions, including the SEC’s updated agency rule list. Chief Gensler stressed the importance of modernizing rules to address changing technology and business models and to continue to promote fair, efficient, and resilient capital markets.

Corp Fin addresses cybersecurity disclosure rules

On Dec. 12, 2023, the SEC issued new compliance and disclosure interpretations (C&DIs) on its cybersecurity disclosure rules. The new C&DIs focus on the delay provision of the material cybersecurity incident disclosure requirement, which provides an allowance to delay disclosure if the U.S. attorney general provides written notification to the SEC that disclosure would pose a substantial risk to national security or public safety. They offer clarification on disclosure obligations when a registrant requests and is granted, or denied, a delay period or subsequent extension. The interpretations also state that the fact that a registrant consults with the Department of Justice (DOJ) regarding the availability of delay does not in itself determine that the incident is material, nor is a registrant precluded from consulting with the DOJ, or any law enforcement or national security agency, prior to completing a materiality assessment.

On Dec. 14, 2023, Corp Fin Director Gerding offered additional comments, emphasizing that the rule does not require registrants to disclose technical or specific incident or system information. Referencing the recent C&DIs, Gerding noted that the new disclosure rules should not deter registrants from timely engagement with the relevant authorities. Gerding also reminded registrants of Corp Fin’s open-door policy and emphasized the SEC’s aim to incentivize good faith efforts in its continuing mission to elicit tailored and meaningful disclosures.

Registrants must begin complying with the material cybersecurity incident disclosure requirement on Dec. 18, 2023.

Additional details on this requirement and other forthcoming provisions of the cybersecurity rules can be found in the Crowe article “SEC Ruling on Cybersecurity Incident Disclosure: What to Know.”

From the Public Company Accounting Oversight Board (PCAOB)

PCAOB gets SEC approval of confirmation standard

On Dec. 1, 2023, the SEC issued an order granting approval of the PCAOB’s Auditing Standard (AS) 2310, “The Auditor’s Use of Confirmation,” which was released by the PCAOB on Sept. 28, 2023. The standard, which supersedes AS 2310, “The Confirmation Process,” strengthens and modernizes confirmation requirements by enacting principles-based requirements that address both paper-based and electronically communicated confirmations as well as risk-based considerations. The new standard is effective for audits of financial statements for fiscal years ending on or after June 15, 2025.

From the Center for Audit Quality (CAQ)

CAQ issues fall Audit Partner Pulse Survey results

The CAQ, on Dec. 6, 2023, released the “Fall 2023 Audit Partner Pulse Survey,” reporting results of its poll of audit partners at the country’s leading public company accounting firms about their perspectives on the current business environment in the United States.

Topics include economic outlook, negative effects of rulemaking, climate disclosures, expanding disclosures, noncompliance with laws and regulations (NOCLAR) proposed disclosures, cybersecurity, human capital and the accounting pipeline, and artificial intelligence (AI).

The survey revealed that compared to fall 2022, pessimism about the economy decreased by 30 percentage points and that approximately 75% of audit partners believe regulations are having a negative effect on businesses, mostly due to increased regulatory and legal risks and compliance costs. The number of companies seeing cybersecurity as a large economic risk increased 20 percentage points since last year, while approximately 59% of public companies are using technology such as AI and machine learning to manage risk, fraud, and cybersecurity threats.

CAQ releases annual transparency report

On Nov. 30, 2023, the CAQ and Ideagen Audit Analytics issued the “2023 Audit Committee Transparency Barometer,” which tracks S&P Composite 1500 proxy disclosures to evaluate transparency regarding audit committee oversight of the external auditor and other important financial reporting topics. The data gathered for this 10th annual report provides a macro-level view of public company transparency over the past decade.

The findings reveal a continued trend of increasing disclosures in key areas of traditional financial oversight and in evolving areas such as cybersecurity and ESG. The report identifies several areas for audit committees to improve disclosures specifically related to discussions of audit fees, how audit committees consider auditor tenure, and how audit committees are involved in engagement partner selection. The publication provides highlights of the results, a summary of disclosure rates, examples of effective disclosures, a sample leading practice audit committee matters and report, and questions to consider when preparing audit committee disclosures.

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