SEC acting chief accountant: Ethical culture key to auditor independence

Paul Munter stressed in his remarks that “[i]t is of paramount importance that public accounting firms foster a culture of ethical behavior with respect to all aspects of their professional responsibilities, including auditor independence.” Munter noted the Office of the Chief Accountant’s (OCA) observation of firms taking a “checklist compliance” mentality toward the auditor independence framework under Rule 2-01 of Regulation S-X when instead they should be considering independence in all aspects of an audit engagement. Compliance with the SEC’s rules is “necessary but not sufficient,” he said.

Audit firms, Munter said, should “prioritize auditor independence and a culture of ethical behavior in all professional activities, and where independence on an audit engagement is a close-to-the-line call, the firms must be willing to forego audit and review fees or potentially lucrative restructuring proposals to comply with their independence responsibilities.”

Another recurring issue Munter cited included potential conflicts of interest arising from nonaudit services provided by firms. Even when these services aren’t being provided to the client being audited, their reach and perceived impact could “make it difficult for a reasonable investor to conclude that the accountant could exercise objective and impartial judgment in its audit. In such circumstances, the accounting firm risks not being in compliance with the general standard of auditor independence,” he said.

The SEC is reportedly investigating whether it should prevent audit firms—namely, the Big Four—from cross-selling consultancy services to audit clients to preserve audit independence. The Wall Street Journal recently reported both EY and Deloitte are exploring splitting their consulting practices from their audit businesses in potential anticipation of action by the regulator.

The final problem area Munter noted was increasing engagement by firms in complex business arrangements. A footnote included in his statement signaled TowerBrook Capital Partners’ investment in EisnerAmper announced in August 2021 as a potential example.

“We caution firms to carefully consider the implications for auditor independence when considering alternative practice structures, as will the OCA,” he said.

Munter’s statement also included a note regarding the validity of citing historical staff positions in consultations with his office.

“We … strongly discourage accountants from placing undue reliance on any historical OCA staff positions, which are necessarily limited to the particular circumstances of the consultation,” he said. “We instead actively encourage accounting firms, registrants, and audit committees to consult with OCA staff on current auditor independence issues and questions on their own terms. We caution that developments, including risk to investors, may affect the applicability of prior OCA staff positions and note that prior OCA staff positions may not apply to your particular set of facts and circumstances—even if you think they may appear similar.”