Tag: Acting Chief Accountant Paul Munter

SEC Acting Chief Accountant cautions again about auditor independence concerns, especially the “checklist compliance mentality”

Auditor independence—or rather the potential absence of same—is apparently still a cause of significant agita at the SEC’s Office of Chief Accountant.   In October last year, Acting Chief Accountant Paul Munter issued a statement regarding the importance of auditor independence—a concept that is “foundational to the credibility of the financial statements.” That statement was prompted largely by the trend at that time toward the use of “new and innovative transactions” to access the public markets, such as SPACs, together with the potential effect on independence of increasingly complex tangles of business relationships among audit firms, audit clients and non-audit clients. (See this PubCo post.)  But that caution seems not to have been enough to slay the dragon. In this June statement, Munter again addresses auditor independence. The SEC, he observes, “has long-recognized that audits by professional, objective, and skilled accountants that are independent of their audit clients contribute to both investor protection and investor confidence in the financial statements.” This time, Munter focuses his statement on the critical importance of the general standard of auditor independence and recurring issues in recent auditor independence consultations.  He also addresses the value of firms’ treating accounting as a profession, one that fosters “a culture of ethical behavior in all their professional activities, but especially with respect to auditor independence.” Munter appears to be especially concerned about the “decreased vigilance” and “ethical deterioration” that may arise out of  “checklist compliance mentality,” an unfortunate state of mind he highlights in several contexts. It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.

SEC’s Acting Chief Accountant discusses materiality assessments in connection with restatements

In this statement from the SEC’s Office of the Chief Accountant, Acting Chief Accountant Paul Munter discusses materiality assessments in the context of errors in financial statements. As he summarizes the issue, the “determination of whether an error is material is an objective assessment focused on whether there is a substantial likelihood it is important to the reasonable investor.” And when an error in historical financial statements is determined to be material, a “Big R” restatement of the prior period financial statements is required. On the other hand, if the error is not material, “but either correcting the error or leaving the error uncorrected would be material to the current period financial statements, a registrant must still correct the error, but is not precluded from doing so in the current period comparative financial statements by restating the prior period information and disclosing the error,” known as a revision or “little r” restatement. In either case, Munter observes, “both of these methods—reissuance and revision, or ‘Big R’ and ‘little r’—constitute restatements to correct errors in previously-issued financial statements as those terms are defined in U.S. GAAP.” According to a review by Audit Analytics, “while the total number of restatements by registrants declined each year from 2013 to 2020, ‘little r’ restatements as a percentage of total restatements rose to nearly 76% in 2020, up from approximately 35% in 2005.” Should we attribute this change to improvements in audit quality or internal control over financial reporting, or could it be that some companies are not being entirely objective in making their materiality determinations? In the event of error in the financial statements, Munter emphasizes, companies, auditors and audit committees must “carefully assess whether the error is material by applying a well-reasoned, holistic, objective approach from a reasonable investor’s perspective based on the total mix of information.”

SEC Acting Chief Accountant urges scrutiny of auditor independence in current environment

This week, Acting Chief Accountant Paul Munter issued a statement regarding the importance of auditor independence—a concept that is “foundational to the credibility of the financial statements.”  The responsibility to monitor independence is a shared one: “[w]hile sourcing a high quality independent auditor is a key responsibility of the audit committee, compliance with auditor independence rules is a shared responsibility of the issuer, its audit committee, and the auditor.”  That has long been the case.  But what is happening in the current setting to prompt this statement?  It is the recent trend toward the use of “new and innovative transactions” to access the public markets, such as SPACs, together with the continued expansion by audit firms of business relationships with non-audit clients. That is, gatekeepers must be especially vigilant to prevent an audit firm from unwittingly losing its independence in the event of a transaction by an audit client with a non-audit client, a risk that is enhanced as audit firms engage in consulting relationships with more non-audit clients. This environment, Munter cautions, requires audit committees to be especially attentive in considering “the sufficiency of the auditor’s and the issuer’s monitoring processes, including those that address corporate changes or other events that potentially affect auditor independence.” And it requires audit firms to consider “the impact of business relationships and non-audit services on existing and prospective audit relationships.”  It is important for companies to keep in mind that violations of the auditor independence rules can have serious consequences not only for the audit firm, but also for the audit client. For example, an independence violation may cause the auditor to withdraw the firm’s audit report, requiring the audit client to have a re-audit by another audit firm. As a result, in most cases, inquiry into the topic of auditor independence should certainly be a recurring menu item on the audit committee’s plate.