April 11, 2024

Financial Reporting: Why are Accounting Errors on the Rise?

According to a recent Glass-Lewis blog, the number of SEC enforcement actions related to issuer reporting, audit and accounting from 70 in 2021 to more than 100 in 2023. The blog identifies a number of factors that are contributing to the increase, including the SPAC & IPO boom and the lack of qualified accountants. However, this excerpt also points the finger at audit committees:

At the same time that auditors are struggling with staffing, audit committees are being asked to take on a broader remit. As the responsibilities associated with the board expand to cover external risks stemming from new technologies and environmental and societal changes, as well as increased disclosure and reporting requirements, so do expectations around committee performance – with much of that responsibility placed on the audit committee. The core expectation of audit committees to oversee accounting and financial reporting remains, but for many companies, the scope of these expectations has grown to include oversight of issues such as cybersecurity and ESG.

A 2023 survey of 164 companies by audit firm Deloitte showed that 53% of respondents delegated cybersecurity oversight to the audit committee, with 26% delegating to the board and 11% to the risk committee. Though the margin was narrower for ESG oversight, a plurality of respondents also delegated that responsibility to the audit committee.

The blog says that the trend toward delegating cyber & ESG oversight to audit committees is understandable, given the fact that many of these committees have general risk oversight responsibilities. But it goes on to observe that absent sufficient additional resources, these new areas of oversight might also divert audit committee members’ attention from their core responsibilities for the integrity of the financial statements.

Although the blog doesn’t mention the PCAOB’s breathtaking NOCLAR auditing standard proposal, it strikes me that if that’s implemented in anything close to the form in which it was proposed, the demands on audit committees in the area of their core responsibilities are going to significantly increase.

John Jenkins