On 30 December 2019, the SEC's Chairman, Chief Accountant and Director of the Division of Corporation Finance issued a public statement on the role of audit committees in financial reporting and key reminders regarding their oversight responsibilities. The general observations discussed in the statement include, among others:
- Tone at the top—Audit committees are encouraged to focus on the "tone at the top" with the objective of creating and maintaining an environment that supports the integrity of the financial reporting process and the independence of the audit. In this regard, it is important for the audit committee to set an expectation for clear and candid communications to and from the auditor, and likewise to set an expectation with both management and the auditor that the audit committee will engage as reporting and control issues arise. It is similarly important for audit committees to proactively communicate with the independent auditor to understand the audit strategy and status, and ask questions regarding issues identified by the auditor and understand their ultimate resolution.
- Auditor independence—Audit committees are encouraged to maintain appropriate oversight over the company's and the auditor's processes for monitoring factors that may affect the auditor's independence. Among other items, these processes should address corporate changes or other events that could affect auditor independence (e.g. changes or events that may result in new affiliates or business relationships) and facilitate the timely
- Generally accepted accounting principles (GAAP)—With regard to the implementation of new accounting standards, audit committees are encouraged to engage proactively with management and the auditors in the implementation process to understand management's implementation plan, including whether the plan provides sufficient time and resources to develop well-reasoned judgments and accounting policies. It is also important for an audit committee to understand management's processes to establish and monitor controls and procedures over adoption and transition.
- Internal control over financial reporting (ICFR)—Audit committees should have a detailed understanding of identified ICFR issues and engage proactively to aid in their resolution. If material weaknesses exist, it is important for audit committees to understand and monitor management's remediation plans and set an appropriate tone that prompt, effective remediation is a high priority.
The statement also reminds audit committees of their oversight responsibilities in respect of:
- Non-GAAP financial measures—Audit committees should ensure they understand how management uses such measures to evaluate performance, whether they are consistently prepared and presented from period to period and the company's related policies and disclosure controls and procedures.
- LIBOR transition—Audit committees are encouraged to understand management's plan to identify and address the risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.
- Critical audit matters (CAMs)—Starting in 2019, the auditors of certain public companies will be required to include CAMs in the auditor's report. Audit committees are reminded that the discussion of the CAM in the auditor's report should capture and be consistent with the auditor-audit committee dialogue regarding the relevant matter.
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