SEC, FASB officials stress tone at the top, new standards
June 6, 2024
Audit firms need to be seen to be prioritizing high-quality audits and staff and partner integrity, say regulators and standard-setters.
The call came from officials from the Securities and Exchange Commission and the Financial Accounting Standards Board amid discussions of some of the latest accounting and auditing standards during a conference Thursday.
"It is critical that audit firms' senior leadership embraces a culture that promotes high audit quality as a top priority for the firm," said SEC chief accountant Paul Munter during the USC Leventhal School of Accounting and Financial Executives International 42nd Annual SEC and Financial Reporting Conference. "A culture that promotes high-quality audit as the firm's top priority is a good segue to our most recent public statements, which relate to firm culture specifically, accounting firms and the tone set by senior management, when a firm's accountants have been engaged in improper professional conduct. Audit firms, of course, are private businesses and they have the same legitimate interest in making a profit that any private business has. But audit firms also have been entrusted to be essential gatekeepers in maintaining the integrity of our capital markets. And as a consequence of that, audit firms and the tone that top management sets play a central role in ensuring that professionals within the audit firm do not sacrifice integrity and professionalism for the sake of profit and growth. In fact, audit firms have, as you know, a public interest responsibility as a key part of their gatekeeper responsibility."
Munter's comments echoed a statement he wrote about tone at the top last month on the SEC's website.
Munter declined to refer to any specific matter involving a firm or its client, but he seemed to have some in mind.
"I think we have seen, unfortunately, situations where accountants, including high-profile audit partners, have remained in positions of firm leadership even following enforcement actions taken by the commission that resulted in discipline against that partner with seemingly no professional repercussions while waiting out the prescribed timeout period, effectively signaling to others in the firm that the findings of violation in the enforcement procedure are … simply a part of doing business. This approach, of course, results in an erosion of the special culture of the firm, introducing a host of problems, including the potential to undermine the public trust in the accounting profession or to normalize unethical or unprofessional conduct. Given the accounting profession's role of enhancing the public trust in corporate financial reporting for the success of our capital markets, accounting is called to be a profession that holds its members to the highest standards of ethics and integrity."
He stressed that audit firm leadership need to set the right tone at the top to be effective public watchdogs.
"Senior partners in firm leadership positions across all service lines must lead by actions and lead by examples through their actions," said Munter. "Less-experienced staff watch what their managers do. If they see managers bend the rules or make exceptions for profitable partners who engage in inappropriate conduct, less-experienced staff may assume that this behavior is the path to rise through the ranks at that firm. This is why firm leadership must make ethics and character a fundamental part of the firm's hiring, retention compensation and promotion criteria for all professionals, regardless of service line within the firm, even at the expense of a more profitable bottom line in the short term. Therefore, professional integrity and ethics should be an integral part of the promotion and compensation process. Leadership should reward individuals and engagement teams that took a difficult stance and sacrificed short-term profitability in order to preserve the firm's independence and other special responsibilities. Technical excellence and integrity should be well rewarded at least as much as billings, profitability and business development."
FASB perspective
FASB Chairman Richard Jones spoke next at the conference, in a conversation with Mark Kronforst, a partner at Ernst & Young and former chief accountant at the SEC's Division of Corporation Finance. Jones discussed some of FASB's recent projects, including one on accounting for environmental credit programs, which comes close to ESG reporting.
"We are specifically focused on financial accounting, but there were intersections with certain things we were seeing develop in the market, one of which related to ESG-linked financial instruments, which is part of our project on derivatives scope right now," said Jones. "We're hoping to get an exposure draft out before the end of the year. And the other was the emergence of the environmental credits."
That project is on FASB's technical agenda also to get an exposure draft out.
Another topic involves accounting for and disclosure of software costs. "We carved software off because from a practical matter software was probably the easiest of the intangibles for people to get their hands around," said Jones. "We had existing guidance. We have that project on our agenda. We're working toward an exposure draft on that project."
Other projects involving intangible assets are on the research agenda. "What we'll be doing with that is issuing an invitation for comment, basically laying out what is the potential issue here," said Jones. "Is there really an issue and what are the potential solutions, and that will give all of our stakeholders a chance to weigh in on that."
A project involving the statement of cash flows is an "oldie but a goodie."
"Ever since that standard was issued, there have been different calls and questions about it," said Jones. "We have one project on our technical agenda related to the state of cash flows for financial institutions. The remainder of the segment cash flow initiatives are on our research agenda."
Other standards that have come out already include digital assets, specifically crypto assets. "Digital assets was probably the only standard that I've had the privilege of working on where everyone said what the answer was," said Jones. "We had every stakeholder, investors, preparers and auditors saying it. Effectively what we had was an emerging technology or an emerging transaction that might fold into intangibles."
The standard requires an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income.
"We finalized the standard and it will reflect that and we've heard pretty positive responses from all of our stakeholders on that," said Jones.
[Accounting Today]
