On December 4, 2023, SEC Chief Accountant Dr. Paul Munter issued a Statement titled “The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors.” In his introduction Dr. Munter notes:
“Unfortunately, we have observed that preparers and auditors may not always apply the same rigor and attention to the statement of cash flows as they do to other financial statements, which may impede high quality financial reporting for the benefit of investors.”
He also discusses the importance of cash flow information to investors and that the statement of cash flows has consistently been one of the higher frequency areas of restatements.
The statement addresses several statement of cash flow considerations including:
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- Materiality;
- The importance of proper classification;
- How misclassification in the statement of cash flows can be material and lead to “Big R” restatements;
- Internal control considerations;
- The potential advantages of using the direct method to present cash from operating activities;
- The FASB’s project to make targeted improvements to the statement of cash flows; and
- Focus points for auditors as they examine cash flow information.
Dr. Munter’s conclusion makes the point:
“The statement of cash flows represents a critical piece of a complete picture of an issuer’s financial health and operations. Issuers and auditors have a responsibility, under securities laws and professional standards, to apply the same high level of care and professionalism to the preparation, review, and audit of the statement of cash flows as is required for the other financial statements.”
As always, your thoughts and comments are welcome!
My main takeaway from his statement was the overt push to have issuers prepare their SOCF using the direct method. He acknowledges this is not common practice today, but argues that perhaps the technology many companies have adopted already would better enable a more practical approach to prepare under the direct method.
I think you are spot on Christopher. And it will be interesting to see where this dicussion goes!
Very glad to see the Statement of Cash Flows being highlighted by the SEC. Accuracy in this financial statement is critical for meaningful analysis of an entity’s well-being.
Could not agree more Jeff!