The Securities and Exchange Commission (SEC) is paying close attention to the culture of audit firms, which need to commit to auditor independence and place the public interest at the center of operations, rather than making the audit practice solely responsible for its quality, SEC Chief Accountant Paul Munter said at a conference in Washington this week, The Wall Street Journal reported.
“The culture of the firm has to be one that cascades throughout the firm,” he said. “It can’t be just that the audit practice is responsible for auditor independence.” He stressed the importance of audit-firm culture in maintaining professionalism throughout organizations, mentioning the recent cases of exam cheating at PwC China and PwC Hong Kong, among other issues in an interview with the Journal.
One area of emerging concern is the “risk assessment process, both from an issuer and auditor perspective, to make sure that it is robust and comprehensive,” he said. “You can’t think about that separate and apart from financial reporting because obviously financial reporting is trying to inform investors about your business and what the risks are and obviously what the financial consequences of the business are. … As you’re identifying risk, that should inform your financial reporting and auditing process.”
In response to a question about the SEC’s review of how companies determine whether errors made in the cash-flow statement are material to investors, he said, “The cash-flow statement has the same degree of importance as the other financial statements and therefore issuers and auditors should be putting the same amount of time and attention to detail—effectiveness of controls, audit processes—with respect to the cash-flow statement as they do to the other financial statements,” before detailing the comment and enforcement process.
He added that the SEC’s Division of Enforcement, not his office, determines if a company’s incorrect judgment around a cash flow-related restatement rises to the level of enforcement.
Munter also said that his office is still thinking about the SEC’s Investor Advisory Committee 2022 recommendation to set up another advisory committee to ensure that the Financial Accounting Standards Board remains independent and focuses on investor views.
When asked a question about the ways in which audit firms and companies are not going far enough in assessing risk, Munter first noted that “there are obviously issuers and auditors that are doing the job they’re supposed to be doing and doing it at a very high level.” He then said that “we run into circumstances at both the issuer and auditor levels where they approach financial reporting as a bit of a check-the-box exercise. We are a disclosure-based regime and it’s through the lens of what information would be useful to a reasonable investor. It’s something we wanted to flag for people to be focused on as we head into the year-end reporting cycle.”