SEC chief accountant calls for safeguards for independent audits

By Jim Tyson for CFODive.com

• Securities and Exchange Commission (SEC) Acting Chief Accountant Paul Munter underscored the importance of independent audits as an investor safeguard at a time of record deal-making and innovations in raising capital.

• “An auditor that provides extensive non-audit services to an entity that has an active mergers and acquisitions business model must continually monitor the impacts of all such transactions, and potential transactions, on its audit engagements to ensure that the auditor remains, in fact and appearance, independent of all of its audit clients,” Munter said in a statement.

• Audit committees and management should remain vigilant for any changes to auditor independence, especially now “as companies seek to access public markets through new and innovative transactions,” Munter said.

SEC Chair Gary Gensler is shaking up oversight of auditors, having ousted William Duhnke as chair of the Public Company Accounting Oversight Board (PCAOB) in June. The board supervises the accounting firms that audit public companies and was established after the Enron accounting scandal under the Sarbanes-Oxley Act of 2002.

Gensler underscored his aim to put the board “on a path to better protect investors by ensuring that public company audits are informative, accurate and independent.”

“I don’t think that the PCAOB was living up to its potential or mission,” Gensler said in a Wall Street Journal interview after removing Duhnke, adding he supports “taking a new direction and reinvigorating” the board. He said the PCAOB has fallen short in enforcement against accounting firms, setting audit standards and its contacts with investors.

Gensler appointed Duane DesParte, a PCAOB board member, as acting chair. Since then the SEC has indicated it is seeking applicants for the board’s four other seats.

The board said in a report this month that flaws persist in the auditing of U.S. companies, especially in auditor independence, internal control over financial reporting, reporting on revenue, accounting estimates and inventory tracking.

“We observed frequent deficiencies related to the design and performance of audit procedures to identify and address assessed risks of material misstatement related to revenue,” the U.S. audit watchdog said after an inspection of 510 audits conducted by 114 U.S. audit firms and 107 audits by 39 audit firms outside the U.S. during 2020.

“Not all audits are created equal,” Munter said. “It is critically important for all gatekeepers to continue to vigilantly maintain the independence of auditors, in both fact and appearance.”

Record-low interest rates, high equity prices and abundant capital have stoked deal-making and initial public offerings, while drawing attention to the importance of independent audits for investors.

The value of mergers and acquisitions during the third quarter surged worldwide to $1.1 trillion, eclipsing the previous high during the fourth quarter of last year, according to S&P Global.

IPOs — including special purpose acquisition companies (SPACs) — are also running at a high rate, although slowing since the first three months of 2021.

U.S. “IPOs had their busiest third quarter in 20 years,” with 170 transactions valued at $43 billion during the July-to-September period, according to PwC. “Investor interest in IPOs is likely to remain strong into the end of the year, with more than one in five IPOs doubling the market return.”

Auditors need to continually affirm the independence, professional skepticism and personal integrity that undergird audit quality, Kelly Grier, U.S. chair and managing partner at EY, said during an Oct. 13 webcast hosted by the Center for Audit Quality and the U.S. Chamber of Commerce.

“We need to continue to challenge ourselves to raise our own bar in executing high-quality audits,” Grier said.

“We owe it to each other and to our stakeholders to do whatever it takes to reimagine the path forward to sustainable audit quality built on a strong foundation of independence and objectivity,” she said. “Simply put, you don't earn trust by telling people you're trustworthy — you earn it by proving it every day.”