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SEC Chief Accountant: Auditors Need to Keep Improving

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SEC Chief Accountant: Auditors Need to Keep Improving

Public company audits are improving, according to SEC

Thursday, November 19, 2015

By Daniel Hood,

Public company audits are improving, according to Securities and Exchange Commission Chief Accountant James Schnurr -- and they need to keep on doing so.

"Overall, I think audit quality is getting better," Schnurr said, "but there's room for improvement, and it's important that firms stay committed to continuing to improve."

Noting that there has been an increase in inspection comments for large and even second-tier firms over the past six to seven years, he said, "Somebody looking at that out of context may think, 'The firms don't get it; audit quality is getting worse,' but my conversations with the PCAOB inspections staff and the board members would say that that's not the case."

He ascribed some of the increase to greater sophistication on the part of inspectors. "Kudos to the PCAOB from an inspection standpoint," he said. "As they've been around longer, they've deepened their expertise, their inspection process has matured, and I think that's part of the reason for the increase in inspection comments. Also, the bar for audit quality continues to move up."

Schnurr noted that some firms have started to see fewer inspection comments, but warned, "As their inspection results get better, they can't take their eye off the ball."

Among the areas he urged auditing firms to be aware of is the growth of consulting and advisory practices, particularly at big firms. "I think there are advantages and disadvantages to those consulting practices being part of the large firms. ... Given the size and depth of those consulting practices, sometimes they start a consulting project that is a permitted service but they have scope creep and they find themselves providing services that are prohibited. Our message to the firms is that it's very important for them to have systems in place to approve non-audit services. ... I think there's generally pretty good compliance there, but we do see from time to time where somebody has crossed the line."

On the other hand, he pointed out that consulting practices can help supply expertise to a firm's audit practice -- in the area of valuations, for instance, or actuarial estimates -- and they can be a source of funds to make investments in audit quality.

"It's a little bit of a two-edged sword, and making sure the culture is right and the processes are right is important," he said. Given that the commission had over 400 consultations with firms on independence issues, "It's an area that we need to pay attention to, to make sure that there are no conflicts that violate professional standards around the independence of the auditor... . It's important that we continue to send the message that it's very important for professionals to meet their professional obligations."

The year in review

Speaking in an interview with Accounting Today in advance of the release of the commission's annual report, Schnurr took the opportunity to praise the SEC's staff after his first year as chief accountant.

"The breadth and depth of expertise of the staff at the commission is very impressive," he said. "I'm interacting with a variety of people across the commission, including enforcement personnel in the regional offices, and they're laser-focused on protecting investors. When you have an organization the size of the commission, it's impressive to see just how each of the individuals is dedicated to that mission of protecting investors."

He then discussed some of the achievements of the Office of the Chief Accountant during his first year. Among the accomplishments he noted:

  • The completion of the analysis of the IFRS alternatives, with the goal of making a recommendation to SEC Chair Mary Jo White. "I believe that the status of the use of IFRS for U.S. companies is better understood today, not only in the U.S. but outside the U.S.," he said.
  • Helping to facilitate the identification of key implementation issues surrounding the new revenue recognition standards. "I personally see this as a very important standard, and getting the implementation right in the U.S. and globally is very important to the credibility and reliability of financial reporting," he said.
  • Working on the development and issuance of the concept release on the changes to audit committee disclosures. "Getting that document out and receiving feedback has been one of the key objective that I was focused on when I came into the job," he explained.
  • Working with the Public Company Accounting Oversight Board, in particular to help advance their transparency proposal. "The PCAOB is getting very close to getting that standard issued, hopefully by the end of the year," he said. "I think most of the big issues appear to have been addressed."

Schnurr noted that his office had conducted more than 100 consultations with startups and other companies about cutting-edge accounting issues, including revenue presentation for emerging business models: "We are constantly looking at ways to improve the financial reporting model, and ... as we see different business models or different transactions, it's important for my staff to understand them and then, to the extent that there are interpretive issues (and there typically are), as to how to account for those different models or transactions, to try to get on the front end of that."

And he added that, though the original convergence process was winding down, he would be encouraging the Financial Accounting Standards Board and the International Accounting Standards Board to continue to "work collaboratively together toward the objective of a single set of global standards."

The year ahead

Looking to 2016, Schnurr outlined some of the items on his office's agenda:

  • Working closely with preparers, auditors and the PCAOB on management's assessment and the independent auditor's audit of the effectiveness of internal control over financial reporting.
  • Working with the PCAOB to help accelerate their standard-setting. "There are a number of projects that my staff is working on with them to try to improve the timeliness of their getting those standards out for public comment and ultimately adopted," he said.
  • Helping to identify implementation issues on the forthcoming credit impairment standard.

Finally, he noted that the Office of the Chief Accountant would continue working with the commission's Division of Enforcement to hold auditing firms accountable.

"It's important to send the message that people need to meet their professional obligations, and we are going to continue to monitor compliance and take action when we find people that are not complying with the professional standards," he said.

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