Five of the most important organizations in the planning profession are pushing for lawmakers to restore tax incentives for financial advice ahead of a massive potential deadline next year.

In a letter to the U.S. House Ways and Means Committee, the CFP Board, the Financial Planning Association, the Financial Services Institute, the Investment Adviser Association and the National Association of Personal Financial Advisors described the loss of a deduction for financial advice as “an unintended consequence” of the Tax Cuts and Jobs Act. The message last month came about six weeks before one of the most consequential elections for tax policy in recent memory will decide the fate of the many expiring provisions of the law.

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The letter represents an area of agreement among wealth management trade and professional organizations that have split in other policy debates — such as the Biden administration’s rule expanding fiduciary duties to 401(k) rollovers and other types of retirement advice. The groups are just a few of the many that will be vying to get back their highly specific tax credits or deductions once the dust settles on the election and the next president and Congress work out what to do about the parts of the 2017 law with a sunset date at the end of 2025. For example, the doubling of the standard deduction, the end of personal exemptions and other changes have drastically reduced itemization in recent years.

Repeal of “a limited tax deduction for investment advice” as part of the law essentially raised the “cost of financial advice crucial to Main Street investors saving for retirement, college and other important life events such as home purchases,” according to Erin Koeppel, the managing director of government relations and public policy counsel of the CFP Board. Reinstating incentives could bring tax savings for those who weren’t previously eligible for the deduction because their fees didn’t go above 2% of their adjusted gross income, Koeppel noted.    

“Congress and the new administration will have the opportunity to restore and expand tax incentives to make financial advice more accessible to everyday Americans,” she said in a statement. “Tax credits or other subsidies aimed at moderate-income individuals would encourage these investors to seek professional financial advice, which, in turn, will improve financial outcomes. This ultimately will allow a broader range of Americans to access financial advice for major financial milestones and everyday needs.”

READ MORE: How the election — and Senate procedure — will decide tax policies

However, the earlier deduction and other “miscellaneous” items eliminated by the Tax Cuts and Jobs Act added up to roughly $32 billion worth of revenue in the first 10 years of the legislation, according to Garrett Watson, a senior policy analyst and modeling manager at the nonprofit, nonpartisan Tax Foundation. The writers of the legislation were seeking “to broaden and simplify the tax base as a partial offset to other tax changes in the law that were scored as losing revenue under the baseline,” Watson said in an email.

“I have not seen any specific evidence suggesting that the repeal of this deduction led to a decline in Americans seeking financial advice or if it noticeably impacted the prices for those services,” he said. “The AGI floor means that a portion of those services were not impacted at all, and taxpayers received tax breaks elsewhere that would offset (or more than offset) this tax increase in insolation.”

In their letter, the organizations argued that the earlier tax incentives “may have appeared inconsequential” at the time of the 2017 law, but the COVID-19 pandemic and accompanying economic volatility demonstrated the importance of “having access to affordable, professional advice from trusted financial professionals.” 

“As Congress considers extending the expiring provisions of the TCJA, we ask that Congress restore and expand tax incentives for financial advice, including financial planning,” the organizations wrote in the Sept. 16 letter. “Such tax incentives may include deductions, credits, or a combination thereof. Further, Congress should ensure that these incentives are responsive to the needs of Main Street Americans. All taxpayers need help to obtain the critical financial advice they need now, and any tax incentives should be widely available to American households.”

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They had responded to a call by House Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, and other members for public input on the expiring portions of the law. For future occupants of the White House and Congress, the looming deadline will create difficult choices about the economy, the federal budget deficit and a variety of other issues. 

“The challenge heading into next year is every specific tax deduction, credit or other expenditure has a specific use-case and set of folks who argue that they should be retained, but this comes at the cost of greater complexity in our tax code and higher tax rates,” Watson said. “If anything, we may need to further base broadening efforts to ensure the fiscal situation improves federally, and that would include retaining the progress policymakers made on base broadening in 2017. This can help keep tax rates lower, which is helpful for taxpayers and American families across the country.”

The Securities and Exchange Commission has been constantly revising its stance on how public companies should report their climate impact. 

These ongoing changes are keeping auditors, companies and investors confused. After proposing ambitious rules in 2022, the SEC adopted a scaled-back version in 2024. The new rules are set forth in Release No. 33-11275. However, this new regulatory environment has faced legal challenges, creating uncertainty for companies and auditors. The agency took the unexpected step of voluntarily pausing the implementation of the rules while legal proceedings were ongoing.

Both progress and setbacks have marked the SEC’s journey toward finalizing climate disclosure rules. While the initial proposal aimed to require extensive climate-related disclosures, the final rules ultimately focused on critical areas like Scope 1 and 2 emissions, financial statement disclosures, and board oversight. However, even these revised rules have faced significant opposition.

How are the 2022 proposed rules different from the final rules?

One of the most contentious areas was the treatment of Scope 3 emissions. The 2022 proposal would have required public companies to disclose Scope 3 emissions, representing indirect emissions from upstream and downstream activities. This included emissions associated with a company’s supply chain, transportation and other value chain activities.

In a significant departure from the original proposal, the SEC eliminated the Scope 3 emissions disclosure requirement in the final rules. This decision was met with praise and criticism, with opponents arguing that Scope 3 emissions are critical to a company’s overall carbon footprint.

Other significant changes include the following:

• Scope 1 and 2 emissions: While the requirement for Scope 1 and 2 emissions (direct and indirect emissions from purchased electricity) remained, it was limited to larger companies (accelerated and large accelerated filers) and only if the emissions were deemed “material.”
• Financial statement disclosures: The proposed requirement to disclose the impact of climate-related risks on financial statements was removed from the final rules.
• Board oversight: The SEC also eliminated requirements for disclosing board members’ climate-related experience and specific climate responsibilities.
• Flexibility: The final rules provide more flexibility regarding where and how companies present their climate-related disclosures.

Why did the SEC make the changes?

The SEC’s decision to scale back the initial proposal was likely influenced by a combination of factors, including:

• Complexity: Scope 3 emissions can be complex to measure and report, and some companies may have faced challenges in collecting and analyzing this data.
• Legal challenges: The SEC may have anticipated legal challenges to the Scope 3 emissions requirement and removed it to avoid potential regulatory uncertainty.
• Economic impacts: Some critics argued that requiring Scope 3 emissions disclosure could impose significant costs on businesses, particularly smaller companies.

While the final rules represent a compromise between the SEC’s initial ambitions and the concerns of various stakeholders, the issue of climate-related disclosures remains a complex and controversial topic. Ongoing legal challenges and continued uncertainty persist.

Legal battles and regulatory uncertainty

Almost immediately after the final rules were adopted, various groups, including businesses, conservative organizations and environmental activists, challenged them in court. In response, the SEC unexpectedly voluntarily paused the implementation of the rules while legal proceedings were ongoing. This decision has created a period of uncertainty for auditors and their clients. 

On April 4, 2024, the SEC voluntarily issued a stay on its climate disclosure rules, originally adopted on March 6, 2024. This decision came in response to multiple lawsuits challenging the regulations across several federal circuits. The agency said it issued the stay for several reasons, including to avoid potential regulatory uncertainty. At the same time, litigation is ongoing to allow the court to focus on reviewing the merits of the challenges and to facilitate an orderly judicial resolution of the numerous petitions filed against the rules.

Legal challenges

Multiple lawsuits have been filed challenging the SEC’s final climate rules. Business interests and conservative groups have filed challenges in various federal appellate courts. Republican attorneys general have also filed legal challenges. Environmental groups like the Sierra Club have sued, arguing the rules are too weak. These cases have been consolidated and are now pending review in the U.S. Court of Appeals for the Eighth Circuit.

SEC’s current position

Despite issuing the stay, the SEC maintains that the climate rules are consistent with applicable law and within its authority. The agency has stated that it will “continue vigorously defending” the validity of the rules in court and reiterated that its existing 2010 climate disclosure guidance remains in effect.

Where we are today

While the stay is in effect, companies subject to SEC regulations will not be required to comply with the new climate disclosure rules. However, many experts advise companies to continue their preparatory efforts, albeit on a less accelerated timeline, given the ongoing investor interest in climate-related disclosures and the potential for the rules to be upheld in court.

What does this all mean for auditors and their clients?

The evolving regulatory landscape has several implications for auditors and the companies they serve:

• Increased scrutiny of ESG claims: Even without mandatory disclosures, the SEC remains vigilant against false or misleading ESG claims. Auditors must be diligent in reviewing sustainability reports and other ESG-related communications.
• Focus on internal controls: Companies should have strong internal controls to support their ESG disclosures. Auditors may need to assess these controls for their overall audit planning.
• Preparation for potential implementation: While the SEC rules are currently on hold, companies should continue to prepare for their potential implementation. Auditors can play a valuable role in helping clients through this period of uncertainty. 

The road ahead

The future of climate-related disclosures remains uncertain, but this issue will remain a significant focus for regulators, investors, the courts and the public. Auditors must stay prepared to adapt their practices to meet the needs of their clients during this period of uncertainty and beyond. 

Ernst & Young is leveraging its $1 billion investment in talent and technology to expand the use of artificial intelligence and machine learning over the next four years. 

EY began using older technology over a decade ago for online detection analytics, but new forms of AI are enabling it to spot unusual outliers in audit data. “We started with Excel and went into business intelligence solutions, but we were dependent on our auditors basically spotting the outliers based on tables and charts,” said Marc Jeschonneck, EY’s global assurance digital leader. “The next frontier that we are now embarking on is really to use AI to detect anomalies.”

EY has been using a general ledger anomaly detector and is now embedding AI capabilities in its GL analyzer. “The one that is most used around the audit, with more than 800 billion line items of general ledger data analyzed per year, is actually the general ledger analyzer that we use in most of our audits,” said Jeschonneck. “In that tool, we’re now embedding online detection with time series regression to really go to the next step.”  

Online detection analytics is just one of the ways the Big Four firm is employing AI technology. It’s also using AI for workflow recommendations. “All the firms have their own platforms, and so do we with EY Canvas, with more than 500,000 users in total clients as well as EY professionals,” said Jeschonneck. “We really embed with Canvas AI a recommendation engine into this platform.” It can help when identifying risks, harvesting news alerts and looking into ratios and KPIs of various sectors. 

AI in the EY Canvas recommendation engine shows auditors which risks other audit teams have seen with clients in similar sectors with similar profiles. “It really focuses their attention on what we think matters most,” said Jeschonneck. “Instead of starting from scratch based on the broader knowledge of the team just by themselves, it’s really harvesting from all of the other engagements here to spot those risks that matter most to the engagement.”

Another area where AI and machine learning are leveraged is document intelligence. AI is still limited in its mathematical ability, however, so the technology is mostly using older forms of machine learning for right now. “There is research in our pipeline to move the document intelligence to the next level, even using generative AI capabilities,” said Jeschonneck. “But to be fair, currently we don’t do that.”

Instead EY is using machine learning to craft models to identify any deviations from expectations in tables and disclosure notes. “The first thing that we are planning to use generative AI is when we help our people to improve their experience in summarizing comprehensive documents about accounting and auditing and to improve search results,” said Jeschonneck. “We are very much conscious that the quality of the respective results is highly 

dependent on the quality of the underlying data.”

Search and summarization capabilities will bring knowledge from the broader accounting and auditing teams to EY’s people in a more digestible format. 

EY is careful to balance the risk that comes with applying new technology compared to using more mature tools. 

“Exploring the benefits of the new technology, and making sure that you know about the respective risks, the guardrails that need to be put in place here, is essential for us, and you can expect that regulators and stakeholders around the world carefully observe how auditors explore these new technologies,” said Jeschonneck. 

Firms have to be careful about potentially exposing the data received from clients. “That’s one key consideration when using AI, that we not expose anything beyond the respective data privacy agreements with our clients,” said Jeschonneck.

The firm is careful when certifying solutions and working with regulators, making sure it does robust testing and has the documentation at hand, especially with new technology like generative AI. 

“We always distinguish between what our teams use to really generate audit evidence and what they use as technology to support the broader process,” said Jeschonneck. 

Auditors still have to do many routine administrative tasks, he noted, and they are able to use AI technology like Microsoft Copilot to boost their productivity.

EY works closely with Microsoft, using technology such as Power BI for business intelligence, as well as Microsoft Azure. 

The firm can also use AI technology to uncover fraudulent documents. “When we see falsified documents that were manipulated by people, AI is tremendously helpful for us,” said Jeschonneck. “As it gets easier for generative AI technology to potentially manipulate documents, the response here must be more comprehensive than just how these documents were altered.”

Machine learning and AI tools can help spot such anomalies in some cases more easily than a human being. “Even if you go for a monthly or daily time series, and you’ll have people spotting anomalies by comparing it to their expectation in simple line charts, we’re still dependent on things like the resolution of the screen, or people spotting the outlier by manually going and drilling down into tables,” said Jeschonneck. “But when the algorithms help you to detect those, at least your attention is focused on these first. Then we rely on the talent of our professionals here to really deep dive into those and further investigate.”

EY firms across the globe are leveraging such technology. “Many of the innovations that we have are actually harvested from our member firms from around the world,” said Jeschonneck. “Yes, we have a central team developing it, but we always rely on innovation coming also from the ground, from the people that work directly with our clients.”

The general ledger analyzer, for example, came from the U.S. firm, while time series regression analysis comes from a collaboration of people in Europe and the U.S. The general ledger anomaly detector started in Japan.

EY also provides training in AI to its people. “What we have here is the technology enabling our people, in the hands of professionals who are skilled and have access to the right training making the best use of the technology that we have,” said Jeschonneck. “Technology really gives new opportunities to the people.”