On October 26, 2021, SEC Acting Chief Accountant Paul Munter released a Statement titled “The Importance of High Quality Independent Audits and Effective Audit Committee Oversight to High Quality Financial Reporting to Investors.”  In the Statement, Mr. Munter focuses on the responsibilities of audit committees, management, and of course auditors, in assuring auditors are independent of clients.

He discusses the importance of auditor independence to our capital markets, the shared responsibility for auditor independence, and the importance of gatekeepers in this process, saying:

“The independence of the auditor, in both fact and appearance, is foundational to the credibility of the financial statements.   While sourcing a high quality independent auditor is a key responsibility of the audit committee,  compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor.

As we near the twentieth anniversary of SOX, it is critical for all gatekeepers to continue to vigilantly maintain the independence of auditors, in both fact and appearance. In this regard, auditors and audit clients must carefully consider the scope of their audit and any permissible non-audit engagements that have been pre-approved by the audit committee to guard against impairments of independence. As part of this responsibility, all gatekeepers in the financial reporting ecosystem should be especially mindful of the nature and the scope of any other services provided by the independent auditor.”

The Statement highlights the four guiding principles in Regulation S-X behind the SEC’s auditor independence rules.  Regulation S-X Article 2.01 states:

“In considering this standard, the Commission looks in the first instance to whether a relationship or the provision of a service:

• Creates a mutual or conflicting interest between the accountant and the audit client;
• places the accountant in the position of auditing his or her own work
• results in the accountant acting as management or an employee of the audit client; or
• places the accountant in a position of being an advocate for the audit client.

These factors are general guidance only, and their application may depend on particular facts and circumstances.”

This auditor independence enforcement case involving an audit firm, three of the firm’s partners, and a public company’s former chief accounting officer, illustrates Mr. Munter’s key point that auditor independence is a shared responsibility of companies, audit committees and auditors.  In this case, the audit firm paid a penalty of $10 million, three partners in the firm paid penalties and were barred from SEC practice, and the former chief accounting officer of the company involved paid a fine and was barred from SEC practice.

As always, your thoughts and comments are welcome!