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.
