Insight

SEC stresses high-quality standards, application, audits

SEC Chief Accountant Paul Munter emphasized risk assessments and transparency at the 2023 AICPA & CIMA Conference.


SEC representatives set the tone of the Conference during Chief Accountant Paul Munter’s Monday morning remarks, which were followed by a panel of staff from the Office of the Chief Accountant (OCA). Munter emphasized the profession’s commitment to the public interest and how risk assessment is the beginning of the financial reporting process and influences every step to the end product – what is communicated to the public.   

"Companies should continue to provide connectivity between their business circumstances, the environments in which they operate, and their communications to investors. Transparent disclosures go beyond regulatory requirements – they need to deliver meaningful information to investors, empowering them to make decisions in the face of risk and uncertainty.”

 

 

— Bob Malhotra, KPMG Chief Accountant


High-quality financial reporting is critical to investor trust

OCA touched on many topics, but they all fall within three buckets:  high-quality accounting standards, high-quality application of those standards and high-quality independent audits. 

High-quality accounting standards

Munter highlighted notable initiatives led by the FASB, including substantial strides in segment reporting (as evidenced by the recently released ASU 2023-07), income tax disclosures and the disaggregation of income statement expenses. The common thread between these projects is the aim to elevate transparency, ultimately catering to the evolving needs of investors seeking robust financial reporting.

Read more about these projects on KPMG Financial Reporting View:

Application of high-quality accounting standards

Gaurav Hiranandani, Senior Associate Chief Accountant, focused on fair value measurement under ASC 820, emphasizing its significance and the need for judgment in its application. 

  • The anticipated ASU on accounting for crypto assets, expected by year-end, will mandate that crypto assets be subsequently measured at fair value under ASC 820, with changes recognized in the income statement; read more about the forthcoming ASU here. Hiranandani highlighted one of the challenges the SEC staff foresees in applying the fair value standard to crypto assets: identifying the principal or most advantageous market for each crypto asset a company holds when crypto markets are evolving so rapidly.
  • Hiranandani also spoke about the role of fair value in measuring collateral-dependent loans and their allowances for credit losses. A practical expedient under ASC 326 is available for some collateral-dependent loans, which allows a loan’s net carrying amount – and therefore its allowance for credit losses – to be determined based on the fair value of the collateral. Hiranandani noted that it can be challenging to determine fair value in difficult economic times or when the collateral is illiquid.

Read more about the application of ASC 820 in our handbook, Fair value measurement.

High-quality independent audits

Munter and his staff emphasized the importance of an audit firm’s culture. Only by having a strong culture can an audit firm and its clients be confident that the audit engagement team is exercising the proper professional skepticism. Munter stressed that a firm’s culture should cascade throughout the organization, including across functions and a firm’s global network.

Anita Doutt, Senior Associate Chief Accountant, mentioned that audit firm leadership can promote professional skepticism by ensuring its auditors are properly trained and understand the firm’s cultural values. Doutt also encouraged a company’s audit committee to actively engage directly with the auditor both formally and informally, instead of through management, to promote and encourage the auditor’s exercise of professional skepticism. 


Emphasis on risk assessment

“We’re operating in an incredibly dynamic economic period, both domestically and globally. That makes it incumbent upon both issuers and independent auditors to focus on risk assessment – including understanding uncertainties and the risks inherent in them – and to critically evaluate the transparency and understandability of related disclosures."

 

— Laurel Hammer, KPMG Deputy Chief Auditor


From Munter’s perspective, risk assessment is a foundational element of the financial reporting process, for both companies and their auditors. These parties need to understand how risks and uncertainties impact this process – including today’s risks related to interest rates, exchange rates, supply chain disruptions and geopolitical issues. This understanding will affect how the company and auditor evaluate a myriad of accounting issues, many of which rely on estimates that are influenced by these economic conditions.

Communication is key in a rapidly evolving environment

Accountants collectively are in the communications business according to Munter, who emphasized that disclosures are not just a compliance exercise but also a communications exercise. An important element of this communications exercise is providing appropriate context regarding the risks and uncertainties a company faces.

As noted above, properly assessing risks is a foundational element of the financial reporting process, and properly communicating those risks is the end product of that process. Investors rely on robust disclosures when making investment decisions, including what risks they are willing to take and how to price those risks. 

Munter’s remarks highlighted the SEC’s focus on the completeness and transparency of disclosures. Carlton Tartar, Associate Chief Accountant, provided some specifics by emphasizing the need in this uncertain economic environment to:

  • transparently disclose the assumptions and uncertainties in key accounting estimates; and
  • rethink the reliability of previous assumptions.

We expect to hear more details from SEC officials on Day 2 of the Conference about this focus on completeness and transparency.

Auditor independence a recurring theme

Auditor independence was a recurring topic on Day 1 of the Conference, where its critical role in high-quality audits and investor confidence in those audits was underscored. Doutt emphasized that auditor independence is a shared responsibility between an external auditor and the issuer (i.e. management and the audit committee) when determining whether a reasonable investor would conclude that the auditor is impartial and objective.

Doutt mentioned some ways in which management and the audit committee can fulfill their shared responsibility.

  • Business relationships are becoming ever more complex. Doutt highlighted consultations regarding the application of the business relationship considerations in Rule 2-01(c)(3) of Reg S-X as audit firms expand their professional service offerings. Doutt urged auditors, management and audit committees to evaluate the intent of a transaction when considering whether it meets the ‘professional services’ or ‘consumer in the ordinary course of business’ exceptions to the independence rules.   
  • Careful consideration of whether non-audit services will be subject to audit. Doutt cautioned auditors about applying a narrow view about what’s subject to audit, and encouraged them to carefully consider all aspects of their non-audit services when evaluating whether those services may be subject to audit in a subsequent period, including if the audit firm acted in the capacity of management. Doutt also reminded stakeholders that materiality is not a consideration when making this determination. 

Statement of cash flows raised in Q&A

During the Q&A session at the end of the day, Munter highlighted the statement released today, The Statement of Cash Flows: Improving the Quality of Cash Flow Information Provided to Investors. Munter emphasized that the statement of cash flows is just as important as other statements. Munter noted anecdotal evidence that not all registrants have the same rigorous processes and controls around preparation of the cash flow statement as other statements – and reinforced that classification errors in the statement should be evaluated with the same thoroughness as other errors.