Audit Conduct

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SEC statement reminds audit committees of their critical governance role

On December 30, 2019, the SEC Chairman, Director of Division of Corporate Finance and Chief Accountant issued a statement reminding audit committees about the vital role they play in the financial reporting system through their oversight of financial reporting, including internal control over financial reporting (ICFR) and the external, independent audit process. The two areas heading up the list were: 

  • setting an appropriate tone at the top
  • ensuring compliance with independence rules

The statement notes that, "As the 2019 calendar year-end financial reporting season approaches, we are providing observations and reminders on a number of potential areas of focus for audit committees. Issuers and independent auditors also should be mindful of these considerations with an eye toward ensuring that audit committees have the resources and support they need to fulfill their obligations."

General Observations (excerpts): 

Tone at the Top – Because audit committees of public companies have financial reporting and independent auditor oversight authority and responsibility, they are instrumental in setting the tone for the company's financial reporting and the relationship with the independent auditor. We encourage audit committees to focus on the “tone at the top” with the objective of creating and maintaining an environment that supports the integrity of the financial reporting process and the independence of the audit. In this regard, it is important for the audit committee to set an expectation for clear and candid communications to and from the auditor...

Auditor Independence – Compliance with auditor independence rules is a shared responsibility of the audit firm, the issuer and its audit committee. The audit committee plays a critical role in auditors’ compliance with the auditor independence rules, in part because the Sarbanes-Oxley Act mandates that audit committees be directly responsible for the oversight of the engagement of the company’s independent auditor. We encourage audit committees to consider periodically the sufficiency of the auditor’s and the issuer’s monitoring processes. Among other items, these processes should address corporate changes or other events that could affect auditor independence (e.g., changes or events that may result in new affiliates or business relationships) and facilitate the timely communication of these events and changes to the audit firm.

Communications to the Audit Committee from the Independent Auditor – We remind audit committees of the year-end financial reporting process under PCAOB AS 1301, Communications with Audit Committees, which requires the auditor to communicate with the audit committee regarding certain matters related to the conduct of the audit and to obtain certain information from the audit committee relevant to the audit.

Other areas commented on included Generally Accepted Accounting Principles (GAAP), ICFR, non-GAAP measures, reference rate reform (LIBOR) and critical audit matters (CAMs).