Category Archives: Role of the Audit Committee

Tone at the Top for Auditors and Companies and a Next Step

Hot Topic, Role of the Audit Committee

On May 3, 2024, the SEC announced a settled enforcement case against an audit firm and its owner charging them with “deliberate and systemic failures to comply with Public Company Accounting Oversight Board (PCAOB) standards” in more than 1,500 SEC filings.

In June 2023, the SEC announced a settled enforcement case against another audit firm for accepting so many new SPAC clients that it overloaded its underlying quality control process.  “[I]n hundreds of SPAC audits, [the firm] failed to comply with audit standards related to audit documentation, engagement quality reviews, risk assessments, audit committee communications, engagement partner supervision and review, and due professional care.”

Over the last several years the PCAOB has enforced against nine audit firms and the SEC has enforced against two other firms for creating environments that encouraged and even required cheating on CPE and ethics exams.

Addressing what appears to be a common theme in all these cases, on May 15, 2024, Chief Accountant Paul Munter issued a Statement titled “Fostering a Healthy ‘Tone at the Top’ at Audit Firms.”  In the Statement Dr. Munter starts by acknowledging that audit firms, like other businesses, have a legitimate interest in earning a profit.  He then emphasizes an overriding issue for auditors:

“But audit firms have also been entrusted to be essential gatekeepers in maintaining the integrity of our capital markets. The leaders of audit firms, and the tone that they set, play a central role in ensuring that professionals within audit firms do not sacrifice integrity and professionalism for profit and growth.”

The Statement discusses a hypothetical situation focused on how a firm might handle a partner who has violated the profession’s independence requirements and the implications alternative treatments may have on firm culture and personnel.  He then discusses why tone at the top matters for public accounting firms and ways of instilling a positive tone at the top.

Tone at the top is an important issue not just for auditors but also for company directors and managers.  As an example financial reporting case, you can read Item 9A of this Chemours Form 10-K which states:

“We did not design and maintain an effective control environment as senior management failed to set an appropriate tone at the top resulting in a material weakness.”

When financial reporting and auditing problems are discovered, tone at the top weaknesses are almost always a root cause.  For audit firms and companies that are focused or want to focus on tone at the top considerations, this assessment tool from the Anti-Fraud Collaboration can be helpful.

As always, your thoughts and comments are welcome!

Chief Accountant Address Responsibilities of Lead Auditors

Reporting, Role of the Audit Committee

On March 17, 2023, Chief Accountant Paul Munter issued a Statement titled “Responsibilities of Lead Auditors to Conduct High-Quality Audits When Involving Other Auditors.”  In the Statement, Mr. Munter notes that:

“In 2021, for example, 26 percent of all issuer audit engagements and 57 percent of large accelerated filer audits involved the use of other auditors by the lead auditor.”

The Statement begins with a summary of shortcomings the Office of the Chief Accountant has observed in audit engagements where another auditor is involved.  These include using other auditors who are not registered with the PCAOB, failure to communicate the correct legal entity name of other firms, and providing audit committees incomplete information about network firms.  The Statement then addresses:

    • The importance of quality control processes when other auditors play a role in an engagement,
    • Roles of network firms,
    • Independence considerations, and
    • Good practices for audit committees and issuers.

In his conclusion, Mr. Munter states:

“The relevant risks should be considered and the appropriate PCAOB standards must be applied in order to strengthen lead auditors’ supervision over the work of other auditors, within and outside of network firms, to help enhance audit quality.”

As always, your thoughts and comments are welcome!

PCAOB Proposes New Audit Firm Quality Control Standards

Reporting, Role of the Audit Committee

On November 18, 2022, the PCAOB issued a proposed auditing standard designed to modernize and improve audit firm quality control standards.  The current standards were developed by the AICPA and were part of the interim standards adopted at the time the PCAOB was originally formed in 2002.

The proposed standards incorporate feedback from advisory groups and a 2019 concept release.   According to the PCAOB’s News Release, the proposed quality control standards are “grounded in proactively identifying and managing risks to quality, with a feedback loop from ongoing monitoring and remediation designed to drive continuous improvement.”  In addition, the proposed standards would require that firms annually evaluate their quality control system and report the results on a new Form QC.

The Board has asked for comments by February 1, 2023.

As always, your thoughts and comments are welcome!

Acting Chief Accountant Addresses Auditor Independence and Ethical Cultures in Audit Firms

Reporting, Role of the Audit Committee, SEC Hot Topic

On June 8, 2022, Acting Chief Accountant Paul Munter issued a Statement titled “The Critical Importance of the General Standard of Auditor Independence and an Ethical Culture for the Accounting Profession.”

The Statement:

  • Reviews the principles in the SEC’s auditor independence framework,
  • Summarizes OCA’s approach to independence questions,
  • Lists recurring issues in independence consultations, and
  • Discusses the importance of an ethical culture to accounting firms.

The auditor independence framework section begins with a review of the foundational principles in S-X Rule 2.01:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement. In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.

The discussion emphasizes that a simple “checklist compliance exercise” with the detailed requirements in Regulation S-X will not assure that an auditor is independent.  All “relevant circumstances” must be considered when assessing independence.

The discussion of OCA’s approach to independence questions briefly reviews the staff’s process and emphasizes several considerations, including:

  • Consultations should include all information relevant to an independence determination, and
  • Companies and their auditors should not place undue reliance on previous independence consultations as circumstances, legal or regulatory requirements may be different.

The discussion of recurring issues in independence consultations begins with a discussion of concerns by the OCA staff that they are observing “loosening attitudes” about the general independence standards.  It also focuses on the “checklist mentality,” non-audit services, including providing non-audit services to affiliates, and risks in alternative practice structures.

The concluding section about ethical culture issues begins with this statement:

“It is of paramount importance that public accounting firms foster a culture of ethical behavior with respect to all aspects of their professional responsibilities, including auditor independence.”

Included are discussions of how firms should be willing to forgo engagements that are “close-to-the-line” for independence and the importance of quality control systems.

As always, your thoughts and comments are welcome!

Audit Committees and Financial Reporting 2017: Recent Developments and Current Issues

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The role of the audit committee is constantly changing. Recent regulations from the SEC and guidance from the PCAOB impact how audit committees, their advisors and those who prepare public company disclosures function. If you are a member of an audit committee, advise audit committees, or are responsible for corporate reporting on financial reporting and controls, you need to have the latest information and stay on top of current updates that occurred over the past year including SEC and PCAOB developments. Register today for PLI’s June 12th live program and webcast, Audit Committees and Financial Reporting being held in New York City.

http://www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z10o1a?fromsearch=false&ID=306520

Audit Committee Evolution – Some Next Steps

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Over the last two months we have done a series of posts about the evolution of the role of the audit committee and related disclosures:

Part One – Overview and Some History seciblog.pli.edu/?p=447
Part Two – Independence Oversight seciblog.pli.edu/?p=450
Part Three – Audit Fee Disclosures –A Few Common Problem Areas in This Independence Disclosure  seciblog.pli.edu/?p=456
Part Four – The SEC’s Concept Release seciblog.pli.edu/?p=462
Part Five – Voluntary Disclosures in the News   seciblog.pli.edu/?p=486

 
In this last post in the series we discuss two resources for audit committees:

  1. The PCAOB’s outreach to audit committees, and
  2. Our PLI programs for audit committee members

 

PCAOB Outreach to Audit Committees

Recognizing the importance of audit committee oversight of the audit process, the PCAOB has included information for audit committees on their webpage to help audit committees in their oversight role. They have also begun a regular newsletter, “Audit Committee Dialogue”. The newsletter is on the same webpage, along with a number of other resources.
pcaobus.org/Information/Pages/AuditCommitteeMembers.aspx

 

PLI Programs for Audit Committee Members

And, lastly, here are some of our PLI programs that will help audit committee members and other directors build and maintain the knowledge and expertise to appropriately fulfill their responsibilities. Most of these programs are available via web archives, webcast and live attendance. You can learn more about all our programs at www.pli.edu.

Audit Committees and Financial Reporting 2016: Recent Developments and Current Issues
www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z11i36?fromsearch=false&ID=259781

Audit Committees and Financial Reporting 2015: Recent Developments and Current Issues www.pli.edu/Content/OnDemand/Audit_Committees_and_Financial_Reporting/_/N-4nZ1z129aq?ID=221250

Corporate Governance — A Master Class 2016

www.pli.edu/Content/Seminar/Corporate_Governance_A_Master_Class_2016/_/N-4kZ1z11ij4?fromsearch=false&ID=259397

 
Directors’ Institute on Corporate Governance (Thirteenth Annual)www.pli.edu/Content/OnDemand/Directors_Institute_on_Corporate_Governance/_/N-4nZ1z129if?fromsearch=false&ID=221435

 

As always, your thoughts and comments are welcome!