SEC Staff Urges Vigilance on Maintaining Auditor Independence

In a recent speech, the acting chief of the SEC’s Office of the Accountant advised auditors and audit clients to ensure that the auditor remains, “in fact and appearance, independent of all of its audit clients.” Paul Munter stated that audit committees, audit firms, company management and clients each have a responsibility to proactively inform themselves of events that could impact auditor independence, including monitoring M&A transactions and the auditors’ relationship with counterparties. Proactive monitoring, Munter said, requires parties to consider “the potential effects of the auditor’s existing business and service relationships with other companies on the auditor’s ability to remain independent of the issuer if a contemplated transaction is consummated.” Board audit committee oversight of the independent auditor is critical, Munter added, calling for  “strong, active, knowledgeable independent audit committees.” Munter listed several key qualities that can steer audit committees toward effectiveness. For example, Munter said an effective audit committee:

  • facilitates communications among the board of directors, management, internal auditors, and independent auditors;
  • enhances auditor independence from management by exercising its responsibilities in appointing, compensating, and overseeing the work of the independent auditors; and
  • are instrumental in setting the tone at the top for the quality of the issuer’s financial reporting to investors.