Thought Leadership

SEC Chief Accountant Releases Statement on Audit Firm Culture: Tone at the Top Matters

Client Updates

The integrity and independence of public accounting firms is at the cornerstone of our capital markets and is a well familiar concept. Last week, the Securities and Exchange Commission’s Chief Accountant, Paul Munter, released a statement emphasizing the vital role audit firm leaders play in fostering integrity and high ethical standards within the profession. In his remarks, Munter underscores that, “[t]o be an effective public watchdog, audit-firm leadership must set the right tone at the top by always placing the public-interest obligations of [the] profession ahead of business interests and profits.”

Munter explains that tone at the top matters for at least two reasons:

  • First, “setting a proper tone is critical in supporting auditors’ ability to exercise professional skepticism—having an attitude that includes a questioning mind and a critical assessment of audit evidence at all times.” Here, Munter’s message is that an accounting firm’s professional audit staff must feel empowered to gather additional audit evidence and conduct further procedures where appropriate in support of an audit opinion. Munter advises that audit firm leadership “should shield” the audit team from any “client pressure” that may compromise the thoroughness of the audit process and opinion.
  • Second, tone at the top is “critical for having an effective quality control system.” Munter states effective leaders promote quality control where they dedicate themselves to “protecting the interests of investors through adherence to professional ethics, values and attitudes.” Audit firm leaders must instill these values in their employees.

While written ethic policies and codes of conduct are essential for any audit firm, Munter stresses that “words and policies can easily be diluted or undermined by leadership’s tone, which is exhibited by actions.” Munter raises concerns involving situations where audit firm employees witness leadership “bend[ing] the rules or mak[ing] exceptions for profitable partners who engage in inappropriate conduct.” Instead, audit firm leadership must disavow unethical behavior, even at the expense of the bottom line, at all levels of the organization. To infuse integrity and ethics within an audit firm, Munter suggests:

  • Factoring integrity and ethics as part of the promotion and compensation process (“leadership should reward individuals or engagement teams that took difficult stands and sacrificed short-term profitability in order to preserve independence and other professional responsibilities of the firm”);
  • Promoting candor and transparency within the audit firm (“employees should be able to share their views confidentially on the company’s culture and climate.”)

Key Takeaways

1. Auditor Enforcement is a Commission Priority: Although Munter’s statement in his capacity as the SEC’s Chief Accountant does not necessarily reflect the views of the Commission, there is no doubt that audit firm independence and integrity remain top of mind at the SEC. We highlight recent examples of settled enforcement actions involving audit firms below—and we believe this trend will continue.

  • Matter of BF Borgers CPA PC, et al., File No. 3-21926, May 3, 2024: (sanctioning audit firm and lead audit partner for falsely certifying that they had conducted company audits in accordance with Public Company Accounting Oversight Board (“PCAOB”) standards, including falsifying required audit documentation and failing to obtain engagement quality reviews of interim financial information).
  • Matter of Clark Schaeffer Hackett & Co., File No. 3-21876, Feb. 29, 2024: (sanctioning audit firm for falsely certifying that it had conducted an independent audit where record established that audit firm also provided non-audit services, including bookkeeping services, to client in violation of PCAOB standards and Rule 2-01 of Regulation S-X).

2. Actions Speak Louder than Words: If nothing else, the SEC is paying close attention to the decision makers at audit firms and whether their actions embody the ethics policies and procedures of their firms. Where an investigation by a regulator unveils a disconnect between the firm’s stated ethics policies and the actions of firm leadership, the regulator will undoubtedly dig deeper to understand the root cause of the underlying compliance failure.

3. Self-Policing Misconduct: The SEC is also paying attention to how audit firms self-police wrongdoing. Munter’s remarks strongly suggest that the SEC expects those who engage in misconduct to be appropriately sanctioned internally within the audit firm. Sweeping “an incident under the rug” and allowing a wrongdoer, for example, to pursue “non-audit business development …while waiting for a prescribed reinstatement period to pass” may be viewed with suspicion by the Commission. The SEC also appears to expect firm leadership to address wrongdoing “head-on”, and to use it as a teaching moment to “openly discuss among its personnel what went wrong” and reaffirm the firm’s commitment to “professional integrity, ethics, and serving the public trust.”

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