SEC Issues Year-End Guidance for Audit Committees

On December 30, 2019, the SEC issued a Statement of the Chairman, the Director of the Division of Corporation Finance and the Chief Accountant to remind audit committees, in anticipation of the year-end financial reporting season, of their responsibilities and to assist them by identifying some specific areas of focus.[1]  In doing so, the Statement emphasizes the significant role of audit committees in ensuring the integrity of financial reporting of the companies they serve.  Issuance of the Statement follows the release by the Public Company Accounting Oversight Board (PCAOB) earlier in December of a summary of its conversations with audit committee chairs.[2]  The PCAOB summary covers such topics as what is working well from the perspective of audit committee chairs, the role of audit quality indicators (AQIs), the relationship and communications with auditors, dealing with new auditing and accounting standards and addressing critical audit matters (CAMs).

Among the SEC Statement’s observations are the following:

• The audit committee plays a key role in setting the appropriate “tone at the top” to support the integrity of financial reporting and the independence of the audit. This includes setting a clear expectation of candid communications with the auditors and for management and the auditors to engage with the audit committee as reporting and control issues arise.
• The audit committee has a critical role in ensuring compliance with the auditor independence rules. This includes having in place a process that identifies changes and events that could affect independence.
• The audit committee should engage with management and the auditor on implementation of new accounting standards and be satisfied that sufficient time and resources are being devoted to the transitions.
• The audit committee should oversee the effectiveness of internal controls over financial reporting and any required remediation.
• The audit committee should be aware of and alert to required communications by the auditors to the audit committee and make this a part of the committee’s dialogue with the auditors.

Specific matters identified by the SEC Statement for attention by the audit committee include:

• The company’s use of non-GAAP measures, both how and why they are used to supplement the GAAP information and how they are used in connection with internal decision making.
• Any critical issues faced by the company from the expected discontinuation of LIBOR and any material risks presented by that discontinuance.
• Engaging in a substantive dialogue with the auditors regarding the CAMs to be included in the auditor’s report, including understanding the nature of each and how they relate to the company’s own accounting concerns.

Another matter that is identified in the PCAOB summary although not addressed in the SEC’s Statement is the role of the audit committee in dealing with cybersecurity and other technology risks, particularly as they impact the financial statements.  The SEC has separately addressed the need for companies to focus on these risks in other guidance, including the oversight role of the board and the need for effective controls and procedures.[3]

The SEC Statement, as well as the PCAOB summary, provide important guidance and insights that should be brought to the attention of and considered by members of public company audit committees.

[1] Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities here.

[2] Conversations with Audit Committee Chairs: What We Heard & FAQs here.

[3] See, e.g., SEC Division of Corporation Finance Disclosure Guidance: Topic No. 8 – “Intellectual Property and Technology Risks Associated with International Business Operations” here and Commission Statement and Guidance on Public Company Cybersecurity Disclosures, Release No. 33-10459 (Feb. 26, 2018) here.

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