The Securities and Exchange Commission’s top accountant, Paul Munter, on Monday called on auditors to reverse the “troubling trendline” in audit deficiency rates by exercising “objective, impartial judgment and rigorous professional skepticism” during this year’s public company audits.
Munter also urged auditing firms to be aware of potential fraud by management, as some “may be under pressure to meet earnings expectations in the face of declining revenue or increased costs.” He also reminded audit committees of “their role as critical gatekeepers for investor protection through oversight of a high-quality audit.”
Munter has been supportive of the PCAOB’s proposal to require auditors to spot instances of client noncompliance with laws and regulations, including fraud. He has also agreed with most of the PCAOB that, as he put in his statement on Monday, “auditors should conduct engagements with a mindset that the investors, rather than management, are the audit client.”
Hinting at all the operational and financial risks public companies and their CFOs faced last year and expect in the year ahead, Munter said the risks may “affect the ability of an issuer’s existing financial reporting infrastructure to ensure that investors receive accurate, transparent, and complete disclosures.” He urged auditors to challenge management teams “to ensure that adequate systems and processes, coupled with a strong compliance culture, are in place.”
Auditor discussions with the audit committee “should include events that impact financial reporting and related issues, including any red flags arising from management responses."
Paul Munter
Chief Accountant, SEC
In particular, Munter said auditors should pay attention to areas that the Public Company Accounting Oversight Board found caused deficiencies during its latest round of audit inspections. The inspections discovered that insufficient audit evidence was obtained to support the auditor’s opinion in 40% of inspected audits. He singled out auditor testing of management’s review of internal controls over financial reporting (ICFR) as having the highest rate of deficiency.
As regards professional skepticism, Munter encouraged auditors to frequently engage with the audit committee, consult experts for auditing complex areas, and train engagement teams on biases that can affect auditor judgment and decision-making.
Auditor discussions with the audit committee, Munter said, “should include events that impact financial reporting and related issues, including any red flags arising from management responses. In this vein, the auditor should not agree to truncated or summary presentations of their concerns with management or management responses to audit concerns with the audit committee.”
Addressing audit committees, which many CFOs serve on at other companies, he reminded them of their role “as critical gatekeepers for investor protection through oversight of a high-quality audit.”
Munter has been critical of the workload audit committees have had to shoulder over the past few years. “Audit committees need to be continually vigilant that they have enough time to focus on their core mission — protecting investors — and don’t let other topics cloud that out,” Munter said at a Baruch College conference last spring.