SEC chief accountant stresses the importance of audit firm culture

We’re as sick of 2024 predictions as the rest of ’em, but let us throw one last prognosis in the mix: Expect to see heightened efforts to curb auditor malpractice in the year ahead.

It’s top of mind at the top: Securities and Exchange Commission chief accountant Paul Munter says he’s keeping his eyes and ears on the ways company culture at audit firms might breed misbehavior, according to a recent Wall Street Journal interview.

“The culture of the firm has to be one that cascades throughout the firm,” he told the Journal. “It can’t be just that the audit practice is responsible for auditor independence.”

He pointed to a number of misconduct incidents that demonstrated, in his eyes, the potential pitfalls when audit-firm culture strays from professionalism, including exam cheating at Ernst & Young in the US, as well as at Hong Kong and China outposts of PwC, and a recent incident involving Deloitte’s Canadian operation backdating audit working papers.

Munter noted to the Journal that while “someone might characterize each one of these as one-offs, but when you see a number of these happening in close proximity to one another, it’s troubling.”

That’s why the SEC “thought it was an appropriate time to reinforce messaging about the importance of firm culture and that being a question not just with the audit practice, but for the entire firm, and network for that matter,” he explained.

Beyond firm culture, Munter also considered other concerns about the ways companies and auditors currently do their work.

“One [concern] is the risk assessment process, both from an issuer and auditor perspective, to make sure that it is robust and comprehensive,” he told the Journal, noting that you can’t divorce that from financial reporting. “As you’re identifying risk, that should inform your financial reporting and auditing process.”

In some cases, this leads to audit firms not going far enough in their risk assessments, he added. Careful not to “paint an overly broad brush because there are obviously issuers and auditors that are doing the job they’re supposed to be doing and doing it at a very high level,” he pointed out that the SEC runs “into circumstances at both the issuer and auditor levels where they approach financial reporting as a bit of a check-the-box exercise.”

“We are a disclosure-based regime and it’s through the lens of what information would be useful to a reasonable investor,” he continued. “It’s something we wanted to flag for people to be focused on as we head into the year-end reporting cycle.”