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  • Writer's pictureDaniel Goelzer

EY Has Q1 Suggestions for Audit Committees

The EY Center for Board Matters (EY Center) has issued How audit committees can prepare for 2024 Q1 reporting.  The EY Center’s paper provides a summary of key developments related to risk, financial reporting, and regulatory matters of interest to audit committee members.  It addresses five topics:

  • Risk management.  In late 2023, Tapestry Networks, an independent firm supported by EY, convened audit committee chairs to discuss audit committee risk concerns and oversight practices. The audit committee chairs identified seven top risk concerns: (1) Artificial intelligence and other technology-driven risks; (2) Cybersecurity; (3) Political and regulatory uncertainty; (4) Tensions stemming from international conflict; (5) Shifts in global tax policy; (6) Labor challenges; and (7) Unforeseen or “black swan” risks.  With respect to item (5), global tax policy changes, the paper highlights the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) rules, which took effect on January 1, 2024 in many countries.  The Center suggests that “[a]udit committees will want to make sure management teams are monitoring developments in the relevant jurisdictions to determine the impact of GloBE rules on financial statements, audits and tax filings.”

  • New changes to internal audit standards. The Institute of Internal Auditors has issued new Global Internal Audit Standards which become effective on January 9, 2025.  These standards are designed to guide the professional practice of internal auditing and serve as a basis for evaluating the quality of the internal audit function.  While the standards are not mandatory, EY notes that “conformance to them offers boards comfort that Internal Audit (IA) is operating against a trusted framework and delivering on its mandate.”

  • Accounting and disclosures.  The EY Center notes two accounting and disclosure issues -- Financial reporting considerations related to commercial real estate and interim period estimation of the annual effective tax rate.  With respect to commercial real estate, the Center states:  “Entities that own or operate commercial real estate and their lenders will need to consider how their accounting and financial reporting may be affected by current macroeconomic factors such as the increased cost of capital, tighter lending standards, and industry trends, including changes in cash flows and occupancy rates for certain properties.”  As to tax rate estimation,  EY recommends that audit committees “inquire whether forecasts used for estimating income taxes are consistent with those used for other purposes and incorporate the effects of current economic conditions.”

  • Investor views on risks and other growing areas of focus in 2024.  Based on conversations with “investor stewardship leaders,” the EY Center identifies several areas of investor focus, including the impact on talent of shifting labor dynamics and emerging technologies; climate change and related environmental issues; and board quality, effectiveness, and engagement. 

  • SEC rulemaking and other reporting considerations. The Center highlights four SEC developments that impact audit committees:

(1)   Adoption of climate-related disclosure rules.  Audit committees should monitor “the company’s readiness and implementation efforts to comply once legal challenges are resolved.”  Audit committees should also “monitor that companies are implementing (and maintaining) strong disclosure controls and procedures over climate‑related data to produce investor-grade and assurance-ready climate disclosures.” See SEC Adopts Landmark Climate Change Disclosure Rules, March 2024 Update and SEC Puts its New Climate Disclosure Rules on Hold in this Update.

(2)   Adoption of disclosure rules for special purpose acquisition companies.

(3)   Chair Gensler’s public remarks about the risks and opportunities of artificial intelligence in the capital markets.

(4)   SEC Chief Accountant Paul Munter’s statement calling for greater auditor attention to professional skepticism and reminding audit committees of their investor protection role.  See SEC Chief Accountant Calls on Auditors to Improve and on Audit Committees to Be Proactive, February 2024 Update.

The paper concludes with a series of questions that audit committees should consider asking in their discussions with management, compliance personnel, and internal and external auditors.  These questions fall under three headings:  Risk management-related inquiries; Accounting, disclosures, and other financial reporting-related inquiries; and Inquiries to auditors. 

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