Connect with us

Accounting

SEC’s evolving stance on climate disclosures has implications for auditors

Published

on

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. 

Continue Reading

Accounting

Fraud guilty plea from accountant over $1.4M mortgage loan

Published

on

In a case involving phony documents and unpaid taxes, a prominent Washington, D.C.-based accountant pleaded guilty last week for making false statements on a mortgage application after failing to file IRS returns.

A certified public accountant with expertise on tax compliance and due diligence matters, Timothy Trifilo has held partner or managing director positions at several firms for over four decades. He also taught courses in taxation and real estate as an adjunct professor, the original Department of Justice indictment said. Trifilo was hired as a managing director with consulting firm Alvarez & Marsal earlier this year. 

The fraud allegations resulted from a 2023 purchase, when Trifilo applied for a $1.4 million mortgage on a Washington property. When the unidentified issuing bank advised that they could not locate recent tax returns nor approve his application without them, Trifilo submitted copies of 2021 and 2022 IRS filings to the lender, who then originated the loan.  

Investigators later discovered that, in reality, Trifilo had neither filed returns nor paid taxes for any year beginning in 2012 despite income over the subsequent decade totaling more than $7.7 million. His annual earnings ranged between $636,051 and $948,252 during that time, amounts that required him to file individual tax returns each year.

On documentation delivered to the lender in support of the mortgage application, a former colleague of Trifilo was identified as responsible for preparing, reviewing and signing the falsified returns purportedly submitted to the Internal Revenue Service.  

“This individual did not prepare the returns, has never prepared tax returns for Trifilo and did not authorize Trifilo to use his name on the returns and other documents that Trifilo submitted,” a DOJ press release said.  

A grand jury originally indicted Trifilo in September on seven counts, including bank fraud and failure to file tax returns, as well as aggravated identity theft. His actions led to a tax loss for the IRS of $2.1 million. 

He faces a maximum sentence of three decades in prison for defrauding the lender, as well as one year for failure to file tax returns. Sentencing is scheduled for May 19. 

In addition to potential prison time, Trifilo may be required to forfeit the original loan amount and property acquired through bank fraud, the original indictment stated. He also faces a period of supervised release, monetary penalties and restitution. 

Attorneys from the DOJ’s tax division prosecuted the case, with evidence based on findings from the IRS criminal investigation unit. 

Submission of phony forms and documents have played a role in multiple fraud cases this year, pointing to a pain point in the mortgage process that could end up costing lenders. Problems in income and employment data specifically had a defect rate of 37.01% to lead all underwriting categories between March and June this year, according to Aces Quality Management. The number surged from 23.42% in the first quarter.

Aces’ report found overall defect rates of originated mortgages rising in both the first and second quarters. 

Continue Reading

Accounting

AICPA wants SEC to reject PCAOB standard on firm and engagement metrics

Published

on

The American Institute of CPAs is asking the Securities and Exchange Commission to reject the Public Company Accounting Oversight Board’s recently adopted standard on firm and engagement metrics, arguing they would drive smaller firms out of the auditing business and affect companies large and small.

The PCAOB voted to adopt the standard last month, along with a related standard on firm reporting, but the new rules still need to be approved by the SEC before they become official and take effect. Under the new rules, PCAOB-registered public accounting firms that audit one or more issuers that qualify as an accelerated filer or large accelerated filer would be required to publicly report specified metrics relating to such audits and their audit practices. The PCAOB made some changes from the originally proposed rules to accommodate some of the objections from the audit industry and public companies, but they remain far reaching in scope. The AICPA argues that the rules would affect more than just accelerated filers and large accelerated filers and could harm smaller companies and their auditors as well. Under SEC rules, accelerated filers are companies that have a public float of between $75 million and $700 million,  annual revenues of $100 million or more, and have filed periodic reports and an annual report within the past year. Larger accelerated filers have a public float of $700 million or more. The AICPA expressed caution soon after the PCAOB voted to approve the new standards, but said it was still studying it. Now it is coming out firmly against the new rules and urging the SEC to reject them.

“Alternative approaches that better balance transparency, cost, and the needs of audit committees, while continuing to support the quality of audit services and choice of audit providers available to perform public company audits and serve the public interest should be pursued, rather than introducing potentially detrimental unproven regulations,” the AICPA said in a comment letter to the SEC.

The AICPA argues the new rules would hurt U.S. capital markets as well as the investing public, in addition to auditing firms of all sizes. 

“We believe these rules will have unintended negative consequences, including driving small and medium-sized firms out of the public company auditing practice,” said AICPA comment letter. “This would result in fewer firms performing audits which are critically important for smaller and medium size companies seeking to access the U.S. capital markets. Consequently, companies will face greater challenges and higher costs in meeting necessary audit requirements to access to the U.S. capital markets. The PCAOB acknowledges that mid-sized and smaller accounting firms serving small to mid-sized public companies will incur substantial, if not prohibitive, costs in complying with the proposed amendments. The final rules reaffirm the PCAOB’s belief that the rules will disproportionately affect smaller firms.”

The AICPA contends it’s overly simplistic to believe the impact of the rules would mostly fall within the market for large accelerated filers. “Smaller audit firms often serve clients of varying sizes, and their departure from the broader public company audit market could result in a substantial loss of audit firm options, particularly for smaller, less complex accelerated filers,” said the AICPA. “The loss of competition and the reduction in available audit firms could lead to higher costs and less favorable engagement terms for these smaller issuers. A landscape in which smaller issuers have fewer options contradicts the PCAOB’s goal of promoting fair competition.”

The AICPA disputes the claim by proponents of the new rules that competition may increase in the non-accelerated filer audit market as firms exit the accelerated filer and large accelerated filer markets. “This fails to account for the fact that non-accelerated filers often rely on firms with specific expertise and resources,” said the AICPA comment letter. “Further, the firms exiting the accelerated filer space may not be able to effectively redeploy their capacity to the non-accelerated filer market. In fact, their exit could lead to a loss of specialized services and a further concentration of resources in the larger end of audit firms, making it harder for non-accelerated filers to secure high-quality, affordable audits.”

The AICPA disagrees with predictions that profitable firms in the larger audit markets could expand their market share against the Big Four. “The resources required to absorb and integrate such capacity are substantial, and many firms may not have the operational flexibility to do so without significant strain on their existing clients and resources,” said the AICPA comment letter. “This further risks driving up audit costs for smaller and mid-sized issuers, which are often less agile and unable to absorb such change without significant disruption.”

The Institute is also concerned about the use of performance metrics within the PCAOB’s inspection and enforcement program, and how they might drive up the risk of enforcement for minor, unintentional reporting errors. It said the PCAOB rejected calls for a threshold based on the severity of reporting errors. The PCAOB declined a request for comment.

Continue Reading

Accounting

Aiwyn raises $113M in funding from KKR, Bessemer

Published

on

Aiwyn, a provider of technology solutions for accountants and CPA firms, has closed a $113 million funding round.

The money will help the company continue its evolution from its original focus on payments and collections for accounting firms into a more comprehensive tool for practice management.

Among other things, that will include building a universal client experience portal, where accountants can access all of their engagements in one place.

Justin Adams, CEO of Aiwyn

Aiwyn CEO Justin Adams

The funding will also be used to accelerate product development on both the company’s practice management platform, and on a tax solution that it is working on.

“Aiwyn is committed to empowering CPA firms to elevate their operations and client relationships,” said chairman and CEO Justin Adams, in a statement. “With this investment, we are poised to redefine how firms manage their operations from the CRM to the general ledger, while setting a new benchmark for client experiences. For too long, firms have had to decide between a legacy vendor or modern point solutions. We are proud that Aiwyn is a trusted platform for CPA firms.”

The round was led by global investment firm KKR and Bessemer Venture Partners. KKR is funding this investment primarily from its Next Generation Technology III Fund.

“The accounting industry represents a large market that has long been served by legacy players. Aiwyn is solving a clear functionality gap in the market with a solution that is easily adopted and rapidly delivers tangible enhancements to the customer experience, most noticeably through significant reductions in days sales outstanding,” said Jackson Hart, a principal on KKR’s technology growth team, in a statement.

“Aiwyn’s product suite is already quite impressive, but the company is really just getting started on its quest to deliver compelling technology to the accounting industry,” added Bessemer partner Jeremy Levine, in a statement.

Cooley LLP served as legal advisor to Aiwyn; Latham & Watkins LLP served as legal advisor to KKR; and Arnold & Porter Kaye Scholer LLP served as legal advisor to Bessemer.

Continue Reading

Trending