February 6, 2024

SEC’s Chief Accountant On Rise in Audit Deficiencies

Yesterday, the SEC’s Office of Chief Accountant Paul Munter released this statement on the recent increase in deficiency rates found in audit inspections and the role of the auditor and audit committee in ensuring high-quality audits. The statement first addresses the role of auditors and suggests that auditors do more of the following:

– frequently and proactively engage with the audit committee, including on events that impact financial reporting and red flags arising from management responses;
– not agree to truncated or summary presentations with the audit committee regarding concerns with management or management responses;
– include specialists and other experts to assist in auditing complex areas or where specialized knowledge is needed to ensure adequate expertise;
– ensure engagement teams are trained on biases that affect auditor judgment and decision-making and undermine professional skepticism; and
– ensure that audit staff are empowered to exercise professional skepticism and challenge judgments of management by supporting audit staff in exploring areas of heightened risk and red flags, insulating audit staff from pressure to accept less than persuasive audit evidence and refusing management requests to replace audit team members.

Then the statement turned to the role of audit committees. First, it describes the importance of the committee’s role in assessing auditor performance, and suggests committees evaluate whether and how they consider the following:

– results of the auditor’s PCAOB inspections, the firm’s internal monitoring programs, or other firm audit quality reporting;
– whether the engagement team has appropriate industry expertise, and whether the engagement partner is sufficiently engaged and provides leadership to the engagement team;
– the engagement team’s total hours and staffing mix (such as, the use of specialists, the composition of experience within the engagement team, or portions of the engagement performed by other auditors); and
– significant changes (or the lack thereof) in hours or staffing mix from previous audits.

It also encourages audit committees to build a strong professional relationship with the auditor independent of management and makes suggestions to further that goal.

Chief Accountant Munter has been sharing thoughts with the corporate and auditor communities regularly in recent months, having recently addressed the importance of the statement of cash flows, with consistent commentary at the Northwestern Securities Regulation Institute. He also recently joined this Q&A with KPMG where he highlighted the risk of what he called the “SALY” (same as last year) mentality, noting that audit committees need to pay attention to emerging risks, which are often communicated first outside of the financial statements, in risk factors or MD&A, and be thinking through what those risks mean for the financial reporting process.

– Meredith Ervine