4 Regulatory Developments To Follow In 2023
Federal government regulators are taking aggressive stances to protect workers, ensure fair markets, and keep investors informed.
High levels of scrutiny and aggressive enforcement are what lawyers, executives, and regulators themselves expect CFOs will be up against in 2023.
From the Public Company Accounting Standards Board to the Federal Trade Commission to the Securities and Exchange Commission, federal agencies want to be seen as tougher watchdogs.
Speaking to an audience of auditors last December 12, Public Company Accounting Oversight Board (PCAOB) Chair Erica Williams indicated that all the challenges and uncertainties companies face now — including remnants from the pandemic — means “incentives for fraud are heightened” and auditors’ vigilance “must be higher.”
Of course, some business leaders are not happy with the regulatory pendulum Washington seems to be on in the last three presidencies. In Suzanne Clark’s state of American business address on January 12, the president and CEO of the U.S. Chamber of Commerce said Washington’s dysfunction has become a source of risk to businesses.
“We’re locked in a cycle of hyper-partisanship and political power swings,” Clark said, in which regulations “are driven by ideological agendas and imposed on business without transparency, accountability, or clarity.”
Regardless of what happens past 2023 in the White House or Congress, this year’s regulatory changes will flood the inboxes of CFOs, general counsels, and compliance personnel. CFO has written a lot about sustainability, ESG, and the related forthcoming disclosure standards from the SECs. But there are other just-as-important regulatory developments that CFOs should be monitoring in 2023. Here are four of them.
RECLASSIFYING GIG WORKERS
The DOL proposal requires workers to be considered employees, entitled to more benefits and legal protections than contractors when they are “economically dependent” on a company. A determination would factor in the skill the work requires, the permanence of the working relationship, and the worker’s investment in equipment or materials, among other circumstances.
A 2020 National Employment Law Project analysis found that 10% to 30% of employers — and potentially more — misclassify workers as independent contractors. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages,” stated Secretary of Labor Marty Walsh on October 22.
The revised rule could be costly for small businesses, though, as they would have to pay FICA, Medicare, state, local, unemployment, and worker’s compensation expenses for those reclassified as employees.
“The implicit premise of the proposed rule is that legitimate independent contracting is a poor substitute for being an employee,” wrote Marc Freedman, vice president of workplace policy at the U.S. Chamber of Commerce, which he says is wrong. Among other things, it “takes away [the] right[s] of [independent contractors] to choose and to rewrite the structure of their economic relationships,” according to Freedman.
Checks on independent contracting would seriously disrupt industries like construction, emergency medicine, financial advice, insurance, app platforms, timber harvesting, and transportation that rely heavily on it, Freedman added.
STOPPING MERGERS
In January, the FTC and Justice Department launched a public inquiry designed to result in modernized merger guidelines for detecting and preventing anticompetitive deals.
Meanwhile, though, the Federal Trade Commission, headed by antitrust scholar Lina Khan, and the DOJ are taking a more aggressive stance on M&A reviews and enforcement. The FTC is also expanding the range of conduct it considers unfair competition — going beyond an acquisition’s effects on consumer welfare. The FTC aims to examine deals based on their effects on wages and labor markets, too. Vertical market combinations, like the proposed Microsoft-Activision deal, are also being dissected.
CYBER ATTACK DISCLOSURES
Do stakeholders want more disclosure on cyber breaches and ransomware attacks? In March 2022 the Securities and Exchange Commission proposed amendments to its rules on public company reporting of cybersecurity attacks.
Issuers would have to disclose information in an 8-K about a material cybersecurity incident within four business days of determining one has occurred. Periodically, they would also have to detail their policies to identify and manage cybersecurity risks; management’s role in implementing policies and procedures; the board of directors’ role and expertise in cybersecurity; and updates about previously reported material cybersecurity incidents.
When the incident was discovered and whether it is ongoing, as well as the nature and scope of the incident, including affected business units and compromised systems
Details on whether data was stolen, altered, accessed, or used by an attacker
Whether the vulnerabilities that allowed the incident to happen have been remediated
How and which cybersecurity policies and procedures have been changed in order to prevent a similar breach
ACCOUNTING FOR CRYPTO ASSETS
In October 2020, the Financial Accounting Standards Board FASB) decided accounting guidance for cryptocurrency assets had not risen to the level of pervasiveness that called for formulating a standard. The saga and bankruptcy of cryptocurrency exchange FTX changed that viewpoint in a hurry.
In tentative decisions issued in October and December 2022, FASB determined that:
Fair value would be the primary method for measuring some crypto asset holdings, versus the current approach of holding them at cost less any impairments;
Gains and losses on crypto assets would be recorded in net income each period, presented separately from impairments or other changes to carrying amounts of other intangible assets, according to a financial reporting review from KPMG;
Cash flows received from a sale, immediately or almost immediately after acquisition, of crypto assets received as non-cash consideration would be classified in cash flows from operations; and
Both public and private companies would have to disclose this information, to be reported on an interim or quarterly basis.
To qualify for this accounting method, digital assets have to meet several requirements, among them being fungible, and not providing the asset holder with any claims on underlying goods, services, or other assets.
“Moving to fair market value for crypto asset holdings in U.S. GAAP would be a marked improvement over the current approach,” the analysts wrote. “The bottom line is that fair value provides a more accurate picture of that asset’s value which helps investors understand and incorporate any volatility into their analyses.”
Many accounting experts think FASB will finish its deliberations and scope refinements and make a decision about a proposed accounting standards update as early as February.
Unlike stock or bonds, which are typically traded on centralized exchanges, “most cryptocurrencies are decentralized, so it is common to observe discrepancies in their pricing across different exchanges,” Fang wrote in a blog post for Ledgible, a cryptocurrency accounting and tax platform.
For example, Fang said, “there is simply no standard or global price for Bitcoin at any given point [in] time.” To improve comparability across companies’ books, she said, “FASB will need to specify the fair value basis for crypto assets more clearly.”
https://www.cfo.com/risk-compliance/regulation/2023/01/2023-regulations-gig-workers-ma-cybersecurity-crypto/
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