Q4 2025 Audit Committee Agenda

This newsletter includes a comprehensive overview of current business issues, risk considerations, and recent regulatory developments to keep audit committees in the know.

Contents

Current Business Issues and Risk Considerations

SEC and PCAOB Activities Update

Resources

Current Business Issues and Risk Considerations

Profession in Transition: 2025 Audit Innovation Survey

• Finance professionals value technology for its consistency, clarity, reliability, and ability to deliver transparent and trusted outcomes.
• 93% surveyed say their audit firm’s technology is progressive, up from 89% in 2024.
• Continued technological innovation requires seamless integration with the upskilling and enablement of humans.

2026 Audit Committee Priorities

• Reinforce agility in a dynamic geopolitical landscape
• Maintain focus on evolving financial reporting and disclosure complexity
• Strengthen oversight of enterprise risk management
• Build Enterprise technology fluency
• Revisit risk oversight related to transactions and fraud

Center for Audit Quality (CAQ) Audit Partner Pulse Survey

Key Themes and Findings:

• Economic Uncertainty and Business Risks: Audit partners identify inflation, interest rate volatility, and geopolitical risks as key concerns, increasing audit complexity and requiring more robust procedures.
• Corporate Governance and Board Oversight: Greater focus on board oversight and more frequent, substantive engagement with audit committees, especially regarding emerging risks and regulatory changes.
• Financial Reporting Challenges: Fair value, impairment, and revenue recognition remain difficult, with partners stressing the need for transparent, timely disclosures.
• Regulatory and Standard-Setting Developments: Partners are closely tracking new SEC and PCAOB rules, expressing concern about the pace and complexity of implementation.
• Technology and Data Analytics: Firms are investing in data analytics, AI, and automation to improve audit quality, but ongoing training and adaptation are needed.
• Talent and Workforce Issues: Recruiting and retaining skilled auditors is challenging; hybrid work models affect team dynamics but offer flexibility and broader talent access.

A Study by and Recommendation of the PCAOB Technology Innovation Alliance Working Group

The Technology Innovation Alliance (TIA) Working Group, chaired by PCAOB Board Member Christina Ho, consists of external experts in emerging technologies relevant to financial statement preparation and auditing.

The group’s main roles are to advise the PCAOB Board on how new technologies affect audit quality and to recommend how oversight programs should address these technologies

Recently posted deliverables include:

• Current State Deliverable (Aug 2023): Examines investor needs, the evolution of auditing, current technology use in auditing and financial reporting, and challenges in technology adoption
• Transforming Audit Quality Through Technology (May 2024): Suggests four strategic ways for the PCAOB to advance technology in auditing: 

1. Promoting structured data
2. Focusing on AI
3. Building regulatory innovation capacity (including an Innovation Lab)
4. Encouraging technology literacy among auditors

The Role of the Auditor: Exercising and Maintaining Professional Skepticism

CAQ & Anti-Fraud Collaboration 

Auditors should approach information with a questioning attitude, especially when evidence is contradictory or incomplete.

• Procedures: Regularly challenge management assumptions, corroborate evidence from multiple sources, and be alert to conditions that may indicate possible misstatement.
• Documentation: Clearly document how skepticism was applied, including rationale for judgments and responses to identified risks.

Common Challenges

• Pressure: Time constraints, client relationships, and confirmation bias can undermine skepticism.
• Mitigation: Firms should foster a culture that encourages skepticism, provide training, and support auditors in making objective decisions.

CAQ Audit Committee Transparency Barometer

• Across S&P 500 companies, 64% disclose that the AC is responsible for cybersecurity oversight, which is consistent with 62% of audit committees having primary oversight of cybersecurity, according to the 2025 Audit Committee Practices Report.
• The rise in AI adoption is increasing cybersecurity and fraud risks, both from internal misuse and external attacks.
• Some companies are responding by creating board subcommittees or separate technology committees focused on cybersecurity oversight.
  • 13% of S&P 500 companies have a technology committee, with higher prevalence in:
    • Financial services (22%), information technology (20%) and health care (19%)

A Practical Guide to the Board’s Oversight of Fraud

Boards play a critical role in overseeing fraud risk management, ensuring a robust framework is in place to prevent, detect, and respond to fraud. What measures should be in place?

• Fraud Risk Assessment: Ensure management conducts regular fraud risk assessments, identifying areas most vulnerable to fraud.
• Tone at the Top: Leadership, beginning with the Board, must set an ethical tone, promoting a culture of integrity and transparency throughout the organization.
• Internal Controls: Effective internal controls and monitoring are essential to mitigate fraud risk. Boards should review the adequacy and effectiveness of these controls regularly with management and auditors.
• Whistleblower Programs: Boards should oversee the implementation of confidential reporting mechanisms, such as whistleblower hotlines, and ensure reported concerns are investigated timely.
• Oversight and Accountability: Regular communication with management, internal audit, and external auditors is vital. Boards should hold management accountable for addressing fraud risks and incidents.
• Training and Awareness: Provide ongoing education for employees and directors to help maintain vigilance and awareness of fraud risks.

A Comprehensive Analysis of PCAOB and SEC Enforcement Actions: Key Themes and Lessons Learned

Anti-Fraud Collaboration

Key Takeaways

Increase in Enforcement Actions

• Both PCAOB and SEC enforcement actions related to financial reporting fraud and auditor misconduct increased in 2023 compared to prior years.
• 70 accounting and auditing enforcement actions were brought by SEC in 2023, up from 62 in 2022.

Common Types of Misconduct

• Revenue recognition fraud, improper expense recognition, and misstatements related to reserves and estimates.
• Auditor violations often involved failure to exercise due professional care, insufficient audit documentation, and lack of professional skepticism.

Individuals Held Accountable

• A significant portion of enforcement actions targeted individuals, including CFOs, CEOs, controllers, and engagement partners, emphasizing personal accountability.

Root Causes

• Weak internal controls, management override, tone at the top, and pressure to meet financial targets.
• Inadequate auditor response to fraud risks and insufficient skepticism were recurring themes.

Audit Committee (AC) Implications

• Need for ACs to strengthen oversight of financial reporting, including challenging management’s judgments, and ensuring robust whistleblower and anti-fraud programs.
• Recommend ongoing education and training for both AC members and auditors.

Proxy Advisor Policy Updates for 2026: Glass Lewis  

Updates to Glass Lewis’ (GL) U.S. Benchmark Policy Guidelines for annual shareholder meetings held on or after 1/1/2026, include:

• Mandatory Arbitration Provisions: Expanded guidance for companies who adopt mandatory arbitration provisions post-IPO or spin-offs that may trigger recommendation to shareholders to vote against election of the Nom/Gov chair, or, in certain circumstances, the entire committee unless company has a compelling rationale or/and discloses benefits to shareholders.
• Pay-for-Performance Methodology: Shifted to use a scorecard-based pay-for-performance methodology, using up to six tests, rather than a single letter grade of “A” through “F” to more transparency and nuanced assessments.
• Amendments to Governing Documents: Highlights that amendments made to bundling of governing documents that erode shareholders rights that limit shareholders’ ability to submit shareholder proposals or file derivative lawsuits and implement plurality voting in lieu of majority voting whereby GL may recommend shareholders vote against the Nom/Gov chair, or the entire committee.
• Supermajority Vote Requirements: In cases where companies have a large or controlling shareholder, supermajority vote requirements may be appropriate to protect the interests of minority shareholders and GL may oppose the elimination of these requirements. 
• General Approach to Shareholder Proposals: Noting the dynamic nature of, and impending SEC changes to the U.S. shareholder proposal process, policy language has been adjusted, including guidance around companies’ treatment of the SEC’s former no-action process. However, GL strongly believes shareholders should have the opportunity to vote on matters of material importance.

Proxy Advisor Policy Updates for 2026: ISS  

Changes to Institutional Shareholder Services’ (ISS) U.S. Benchmark Policy Guidelines for annual shareholder meetings held on or after 2/1/2026, include: 

• Problematic Capital Structures: Eliminate inconsistent treatment of capital structures with unequal voting rights considered problematic regardless of whether superior voting shares are classified as “common” or “preferred.”
• E&S-related Shareholder Proposals: Adopt case-by-case approach for shareholder proposals on diversity, political contributions, human rights, and climate change, reflecting varied proposal scope, shifting investor sentiment, regulatory changes, and evolving practices.
• Long-term Alignment in Pay-For-Performance Evaluation: Use quantitative screens – e.g., Relative Degree of Alignment and Financial Performance Assessment tests - to assess pay alignment and performance ranking over a five year period instead of three years. Also, modify assessment of Multiple of Medium test to over one- and three-year periods instead of over prior FY.
• Time-based Equity Awards with Long-term Time Horizons: Favor time-based equity awards with extended vesting periods, adjust equity mix to align with ISS’s evolving qualitative review standards.
• Board Responsiveness to Low Say-On-Pay Support: Eliminate requirement to show specific shareholder feedback, if company states it was unable to obtain feedback, and provides adequate disclosure of its outreach attempts and compensation program changes beneficial for shareholders. Significant board turnover may also be a mitigating factor after low support in connection with a merger or proxy contest.
• Excessive Nonemployee Director Compensation (NED): Flag and challenge problematic NED pay practices, even if patterns occur over non-consecutive years; enforce adverse vote recommendations in egregious cases
• Enhancements to ISS Equity Plan Scorecard: Introduce new elements to evaluate shareholder proposals to approve new or amended equity-based compensation plans.

Keeping a Pulse on Sustainability Reporting

Examples of a few key regulatory drivers to be watching include the following and ACs are advised to pay close attention to how these regulations progress:

• U.S. State-Level: California Climate Accountability Package (SB 253 & SB 261)
• EU Corporate Sustainability Reporting Directive (CSRD)
• EU Corporate Sustainability Due Diligence Directive (CSDDD)
• EU Deforestation Regulation (EUDR)
• EU Omnibus Proposal

NOTE: This is not an all-inclusive list. 

Audit Committee Considerations: 

• ACs and boards should ensure management is monitoring cross-border regulations and compliance requirements in all jurisdictions where their organizations operate, sell goods and services, or participate in cross-border supply chains. 
  • This should include conducting various impact scenarios as regulations are finalized, including contemplating potential supply chain challenges in addition to compliance efforts. 

SEC and PCAOB Activities Update

SEC Statement: Division of Corporation Finance’s Role in the Exchange Act Rule 14A-8 Process for the Current Proxy Season

• Limited No-Action Responses: For the 2025-2026 proxy season, the Division of Corporation Finance will not respond to no-action requests for nor express views on companies’ plans to exclude shareholder proposals under Rule 14a-8, except for requests based on Rule 14a-8(i)(1).
• Exception for Rule 14a-8(i)(1): Due to recent changes in how state law and Rule 14a-8(i)(1) apply to precatory proposals, the Division believes there isn’t enough guidance for companies and shareholders. Therefore, the Division will keep reviewing and providing opinions on no-action requests under Rule 14a-8(i)(1) until enough guidance is available to help companies and proponents make informed decisions.
• Notification Still Required: Companies must still notify the SEC and proposal proponents at least 80 days before filing their definitive proxy statement if they intend to exclude a proposal. This notification is informational only; companies are not required to seek SEC staff views, and no staff response is required.
• Optional Response for Other Exclusions: If a company wants a response for excluding a proposal on grounds other than Rule 14a-8(i)(1), it must include an unqualified representation in its notice that it has a reasonable basis for exclusion, based on Rule 14a-8, published guidance, or judicial decisions. The Division will then issue a letter stating it will not object, but will not evaluate the merits of the exclusion.

Note: This announcement applies to the current proxy season (October 1, 2025 – September 30, 2026) as well as no-action requests received before October 1, 2025, to which the Division has not yet responded. 

SEC to Review Auditor Independence Rules

• The SEC is considering changes to independence rules that limit which companies accounting firms can audit according to SEC Chief Accountant Kurt Hohl, as reported by the Financial Times.
• Hohl warned that long-standing independence rules may no longer be ‘fit for purpose’ as technology and AI companies form increasingly complex partnerships.
• Since large accounting firms now sell software and AI tools from companies such as Microsoft and OpenAI, they are often barred from auditing those same firms, which could leave major tech companies with effectively no auditor choice.
• The SEC aims to ensure companies retain meaningful auditor options.

Source: Governance Intelligence

PCAOB Staff Guidance: Insights for Auditors

Examples of Evaluating the Reliability of External Information Provided by the Company in Electronic Form

• The guidance emphasizes the importance of professional skepticism and the need for auditors to critically assess the reliability of external information. 
• Auditors should consider the following when assessing reliability:
  • Is the information from a reputable, independent third party?
  • Was the information reviewed [by the auditor] transmitted securely and directly from the external source to the client?
  • Could the information have been modified before the auditor received it?
  • Does the company have controls to prevent or detect modification of external information?
• Other Resources: Adoption release and the Board policy statement on paragraph .10A

PCAOB Data Points: Financial Restatements and Auditor Turnover

Key Findings:

• Big R Restatements Rate: From 2005 to 2024, “Big R” financial restatements occurred at an average rate of about 3% per year among public companies.
• Auditor Change and Restatements: On average, 29% of companies that announced a Big R restatement had changed auditors in the year prior to the restatement, which is higher than the average annual auditor-change rate of 11% across the broader population of companies (including those without Big R restatements).

Audit Committee Considerations: 

• As Big R restatements often signal material weaknesses in internal controls, (re)prioritizing a strong ICFR structure with management and auditors is critical.
• Understanding of the root cause for the restatement – roles of predecessor, successor auditor and management – to mitigate further risk in the future.
• Evaluate effectiveness of communication and coordination of auditors during transition to ensure no unresolved issues remain.
• Understand views of regulators about audit quality, independence, and integrity to enhance vigilance of the financial accounting and reporting process. 

Board Member Christina Ho to Leave the PCAOB

• On December 2, 2025, the PCAOB Board announced that Board Member Christina Ho will conclude her service on the Board effective the earlier of January 31, 2026, or the date the SEC appoints a successor for her position as Board Member. 
• Her term on the Board expired on October 24, 2025.
• Board Member Ho was sworn in on November 9, 2021, after her appointment by the SEC in November 2021. 
• During her PCAOB tenure, she chaired the Technology Innovation Alliance Working Group, which brought together professionals from outside of the PCAOB with expertise in emerging technologies.
• For more information, visit Board Member Ho’s biography page and read her statement on her departure from the PCAOB. 

“In her time at the PCAOB, Christina has championed innovation as a driver of improvement in audit quality.”

 - PCAOB Acting Chair George R. Botic

PCAOB Updates Standard Setting Projects

Recently Completed or Effective Standard Setting Projects

Short-term Standard-setting Projects

Mid-term Standard-setting Projects

Research Projects

Rulemaking Projects