SEC Leadership Statement on Audit Committee Responsibilities

Just before the new year, top leadership of the Securities and Exchange Commission (SEC) provided guidance to public company audit committees as to those areas that they believe need special focus during the upcoming reporting season. Chairman Clayton, the Chief Accountant and the Director of the Division of Corporation Finance, co-authored the public statement, which contained several general and several specific observations. Their purpose was to remind audit committee members of the vital role that their committees play in the financial reporting system, including through their oversight of the internal control over the financing reporting process and the independent audit process. The statement provides a checklist of areas that SEC top leadership considers to be the most deserving of consideration by audit committees, so it is well worth review and reflection by all public company audit committee members.

The following is a condensed version of the public statement.

General Observations

  • Tone at the Top – We encourage audit committees to focus on the “tone at the top” with the objective of creating and maintaining an environment that supports the integrity of the financial reporting process and the independence of the audit. In this regard, it is important for the audit committee to set an expectation for clear and candid communications to and from the auditor, and likewise to set an expectation with both management and the auditor that the audit committee will engage as reporting and control issues arise.
  • Auditor Independence – We encourage audit committees to consider periodically the sufficiency of the auditor’s and the issuer’s monitoring processes.
  • Generally Accepted Accounting Principles (GAAP) – Particularly in light of the significant new accounting standards recently implemented (e.g., the new revenue and leases standards), we encourage audit committees to engage proactively with management and auditors in the implementation process of new standards to understand management’s implementation plan, including whether the plan provides sufficient time and resources to develop well-reasoned judgments and accounting policies.
  • Internal Control over Financial Reporting – We believe audit committees are most effective when they have a detailed understanding of identified internal control issues and engage proactively to aid in their resolution.
  • Communications to the Audit Committee from the Independent Auditor – We remind audit committees of the year-end financial reporting process under PCAOB AS 1301. AS 1301 provides that the auditor should communicate matters related to certain accounting policies and practices, estimates and significant unusual transactions.

More Specific Observations

  • Non-GAAP Measures – We encourage audit committees to be actively engaged in the review and presentation of non-GAAP measures and metrics to understand how management uses them to evaluate performance, whether they are consistently prepared and presented from period to period and the company’s related policies and disclosure controls and procedures.
  • Reference Rate Reform (LIBOR) – We encourage audit committees to understand management’s plan to identify and address the risks associated with reference rate reform.
  • Critical Audit Matters (CAMs) – We encourage audit committees to engage in a substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM, the auditor’s basis for the determination of each CAM and how each CAM is expected to be described in the auditor’s report. We encourage audit committees to continue their efforts to understand the new standard and remain engaged with auditors in the implementation process.

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