On September 12, 2023, SEC Chair Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs.  His testimony touched on a wide range of issues including new rules affecting private funds, new cybersecurity disclosures and these comments about climate risk disclosures:

Climate Risk Disclosure

The SEC has no role as to climate risk itself. We, however, do have an important role in helping to ensure that public companies make full, fair, and truthful disclosure about the material risks they face.

Our federal securities laws lay out a basic bargain in our markets. Investors get to decide which risks to take, so long as public companies raising money from the public make what President Franklin Roosevelt called “complete and truthful disclosure.”

Under the securities laws, the SEC is merit neutral. Investors get to decide what investments they make and risks they take based upon those disclosures. The SEC focuses on the disclosures about, not the merits of, the investment.

Already today, issuers are making climate risk disclosures, and investors are making investment decisions based on those disclosures. Indeed, a majority of the top thousand issuers by market cap already make such disclosures, including what’s known as Scope 1 and Scope 2 greenhouse gas emissions.  Further, investors representing tens of trillions of dollars in assets are making decisions relying on those disclosures.

Thus, in fulfilling the Commission’s important role, we put out for comment a proposal about climate-related disclosure to bring consistency and comparability to such disclosures.

We are considering carefully the more than 15,000 comments we’ve received on the proposal. We greatly benefit from public input and, given the economics and the law, will consider adjustments to the proposed rule that the staff, and ultimately the Commission, think are appropriate in light of those comments.

As always, your thoughts and comments are welcome!

On July 27, 2023, SEC Chief Accountant Paul Munter issued a Statement titled “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work.”  In the Statement, Dr. Munter notes:

“Certain crypto asset trading platforms, with others in the crypto industry, have marketed to investors their retention of third parties, sometimes accounting firms, to perform some sort of review of certain parts of their business, often presented as a purported ‘audit.’”

The Commission and PCAOB have addressed the risks such “reports” present to investors.  This Investor Alertand this PCAOB Investor Advisory contain cautions about “proof of reserve reports.”

Dr. Munter’s Statement is focused on issues auditors should address if they consider performing such work.  The Statement addresses three principal areas:

The Accounting Firm’s Potential Liability for Antifraud Violations

This section addresses how a crypto company’s potentially misleading description of the scope of work and the nature of the procedures performed could affect auditors.  Dr. Munter notes:

“…any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of the Securities Act or the Exchange Act, or of any rule or regulation issued thereunder, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.”

Auditor Independence

The Statement addresses how provisions of non-audit services related to crypto assets could affect auditor independence if the firm is later engaged to provide audit services.

Potential Liability Pursuant to Rule 102(e) of the Commission’s Rules of Practice

This last section of the Statement reminds auditors that if they engage in a single instance of highly unreasonable conduct or repeated instances of unreasonable conduct, both firms and individual auditors can be censured or suspended under SEC Rule of Practice 102(e).  Providing services in a situation where a crypto company misrepresents the nature of a report could violate this rule.

In its conclusion, along with a reminder of the importance of the auditor’s gatekeeper responsibilities, the Statement notes:

“Maintaining the public’s confidence is a serious responsibility, and it requires accountants to exercise integrity in their actions and activities. This includes ensuring that the accountants’ names or services are not being used to convey a false sense of legitimacy or to mislead investors.”

As always, your thoughts and comments are welcome.