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SEC stresses quality amidst economic uncertainty

Commissioner Hester Peirce and Acting Chief Accountant Paul Munter set the tone at the 2022 AICPA & CIMA Conference.


SEC representatives set the tone of the Conference during Monday morning remarks by Commissioner Hester Peirce and Acting Chief Accountant Paul Munter, followed by a panel of professionals on Munter’s OCA staff. Peirce and Munter grounded their remarks in the SEC’s three primary missions: protect investors, promote capital formation and maintain fair, orderly and efficient markets. The overriding emphasis by Munter and the staff however in their remarks was protecting investors through increased transparency in financial reporting and providing decision-useful information. In fact, this theme permeated all of the Day 1 speeches and panels.

Companies are facing a convergence of issues that will impact their financial reporting this year-end. Just the economic uncertainty alone – with inflation and interest at rates not seen in a generation – may affect accounting judgments and estimates. In the face of this uncertainty, the transparency of disclosures is going to be as important as ever.

Robert Malhotra

KPMG Chief Accountant

Transparent disclosures in a complex environment

Munter stressed not just the need for compliance when preparing financial statements, but also the importance of communicating with stakeholders through those statements. He described effective communication as depicting transactions and events – many of which involve complex accounting – in a way that is understandable to investors. He stated that accounting is a communication activity, the language of business.

Munter stressed that there is nothing precluding the disaggregation of disclosures now. Effective communication could include voluntarily providing the type of information investors have been asking for – such as providing certain components that are a part of a statement of cash flows presented under the direct method, and providing disaggregated financial information in areas like income tax reporting and income statement line items.

Munter also remarked on financial reporting in the current environment, which is dominated by uncertainties. His main concern from a preparer perspective is transparency, and he stressed the importance of disclosures about estimation uncertainties and the underlying basis for critical judgments in the financial statement notes.

The complex crypto landscape

On the heels of the SEC staff publishing its sample letter with crypto asset disclosure requirements, the accounting for crypto assets was touched on by Munter, with more depth being provided by Jonathan Wiggins (OCA staff). While acknowledging the lack of specific guidance and diversity in practice, both Munter and Wiggins made the point that existing guidance can usually be applied by analogy to determine the appropriate accounting for the economics of the arrangement.

They reminded the audience of the unique risks associated with crypto assets, along with the requirements of SAB 121, which lays out the accounting by custodians of crypto assets, under both US GAAP and IFRS® Accounting Standards. Read more about the application of SAB 121 here.

The bigger news was crypto asset lending arrangements. Wiggins laid out the expectation that a crypto lending arrangement that has the economics of a traditional lending agreement be accounted for using similar accounting as traditional lending – including the recognition of a valuation allowance under ASC 326 to reflect counterparty credit risk. While mentioning the need for disclosures under the lending standards, he also referred to ‘additional’ disclosures that adequately describe the nature of the crypto arrangement.

Quality audits is a shared responsibility

Although OCA remarks about audit quality were primarily directed at the auditor community, there was a clear message that quality audits, including auditor independence, is a shared responsibility between auditors and the companies they audit. We expect this issue to be a topic of discussion with audit committees this year-end.

During these challenging times, applying a fresh lens with a heightened focus on ethics, professionalism, and skepticism, including on fraud risks, is critical for all stakeholders in the financial reporting ecosystem – including preparers, audit committee members and auditors. These are the bedrock of our commitment to the capital markets and are even more important in the face of the current, unprecedented levels of macro challenges.

Doug Besch

KPMG Chief Auditor


It was clear that the heightened risk of fraud in the current economic environment is top of mind at the SEC. Peirce introduced the topic and emphasized the need for professional skepticism and heeding red flags.

Munter emphasized the need to incorporate the identification of fraud risks into audit plans. Anita Doutt (OCA staff) suggested that auditors evaluate the ‘tone at the top’ by looking beyond what’s simply required. In addition to the company’s ethics code and its mechanisms for reporting inappropriate activity, she suggested that auditors consider a company’s culture surveys and related processes and follow-ups.

Auditing crypto companies

Doutt spoke about auditing companies involved in the crypto markets. She emphasized the need for both management and auditors to evaluate the need for specialized skills and expertise in this area.  She also focused on the critical and unique aspects of risk assessment, including the potential for heightened risks of fraud. These may relate to the susceptibility of crypto assets to misappropriation, management override of controls over private keys, and the susceptibility to related-party risks. These unique characteristics make the importance of understanding the role of third-party service providers and management’s internal controls a key component of a robust risk assessment and in responding to the identified risks.


The SEC views auditor independence as a hallmark to audit quality and continued to emphasize its importance at this year’s Conference. OCA staff encouraged auditors to focus on their ethical responsibilities rather than just focusing on compliance with the specific SEC rules and regulations when thinking about independence.

Diana Stoltzfus (OCA staff) noted that compliance with the requirements in Reg S-X Rule 2-01(c) is necessary but not sufficient on its own. Auditors must also comply with the SEC’s general standard in Rule 2-01(b) to consider whether the auditor would be viewed as objective and impartial by a reasonable investor with knowledge of all relevant facts and circumstances. In recent years, the SEC has pursued enforcement cases related to auditor independence, citing both Rules 2-01(b) and (c).

Read more about the rules.


Quality oversight at multiple levels

Munter spoke about the importance of audit committees considering management bias and understanding what both management and their auditor are doing to fulfill their respective responsibilities around accounting estimates.

OCA staff also spoke about the activities of the PCAOB and FASB. Doutt praised the PCAOB for its strategic plan, including its robust standard-setting agenda, and the PCAOB’s stakeholder engagement with this process. Further, Munter praised the FASB for refocusing its technical agenda to be more investor-focused through projects like improvements to income tax disclosures and disaggregation of income statement line items. FASB representatives are speaking on Day 2 of the Conference.

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