January 6, 2020
On December 30, 2019, the Securities and Exchange Commission (the “SEC”) released a statement (the “Statement”) from Chairman Jay Clayton, Chief Accountant Sagar Teotia and the Director of the Division of Corporation Finance, William Hinman, addressing the role of the audit committee in financial reporting and highlighting key reminders regarding oversight responsibilities (available here). The Statement is intended to “assist audit committees [in] carrying out their year-end work, including promoting efficient and constructive dialogue among audit committees, management and independent auditors.”
The observations included in the Statement do not introduce new requirements for audit committees, but the Statement is a helpful reminder for audit committees, management and outside auditors about audit committee practices that help to promote healthy oversight over financial reporting. Although the Statement covers a range of topics, a theme that runs through the observations is an emphasis on active engagement by the audit committee and on the benefits of clear communication among the audit committee, management and the outside auditor.
Below are the observations and reminders highlighted in the Statement. The Statement styles the first five topics as “general observations” and the last three as “more specific observations.” Although most of the observations in the Statement speak for themselves in terms of next steps and practice pointers, we have provided some additional commentary in italicized text below on a few of the topics.
Although “tone at the top” is an amorphous concept, this is a helpful reminder for audit committees to consider the steps they are taking to reinforce effective messaging about the need to have an environment that supports integrity in the financial reporting process. For example, as audit committees go through their own annual self-assessment processes, it would be worthwhile to incorporate this topic as an element of that process and then to evaluate and implement action steps, as appropriate, based on that self-assessment.
Periodic review of processes in place at the company to monitor auditor independence matters – such as audit committee pre-approval policy and policies for hiring former audit firm personnel – is standard practice, but this is a helpful reminder to ensure those reviews take place. In light of this observation in the Statement, audit committees also should inquire of management and the auditor to make sure the committee understands the steps that are in place to communicate to the auditor about new affiliate relationships.
Here, the Statement serves as a helpful reminder that where internal control issues are “identified” for the audit committee, the committee should proactively engage in seeking to resolve the issue. Even though the Statement focuses on steps audit committees should take when a material weakness is identified, the observations about understanding and monitoring remediation plans also serve as helpful reminders to consider when significant deficiencies are identified given that management has to bring both material weaknesses and significant deficiencies to the audit committee’s attention.
This observation continues the SEC’s push to have public companies focus on managing their transition away from LIBOR and identifying relevant risks. Additionally, this reminds the audit committee that it should be involved in this process and discuss the transition away from LIBOR with management. For more information on the SEC staff’s views on the LIBOR transition, see our previous blog post.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work in the Securities Regulation and Corporate Governance practice group, or any of the following lawyers:
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, firstname.lastname@example.org)
Elizabeth Ising – Washington, D.C. (+1 202-955-8287, email@example.com)
James J. Moloney – Orange County, CA (+ 949-451-4343, firstname.lastname@example.org)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, email@example.com)
Michael A. Titera – Orange County, CA (+1 949-451-4365, firstname.lastname@example.org)
Gillian McPhee – Washington, D.C. (202-955-8201, email@example.com)
David C. Ware – Washington, D.C. (+1 202-887-3652, firstname.lastname@example.org)
Thanks to associate Rob Kelley in New York for his assistance in the preparation of this client update.
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