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!