By Amanda Maine, J.D.
The AICPA’s Annual Conference on Current SEC and PCAOB Developments featured a conversation with SEC Chairman Jay Clayton and Chief Accountant Sagar Teotia as its keynote address. Clayton and Teotia discussed a number of issues relevant to the SEC’s recent initiatives, including the importance of audit committees, auditor independence, and international issues.
Audit committees. Both men highlighted the work of audit committees in ensuring auditor independence. Clayton advised that the role of audit committees is sometimes taken for granted and that they undertake a lot of responsibility when it comes to auditor independence. Independence, Clayton stressed, should be at the front of audit committee members’ minds. He encouraged audit committee members not just to look at compliance with auditing standards, but also to take a step back and make sure they are getting an independent assessment of management’s work.
Clayton also said that he believes that of the Sarbanes-Oxley Act’s reforms, the biggest "bang for the buck" was the independent audit committee requirement. It is important that high-quality people sit on audit committees, he advised. Audit committee members should also have a robust relationship with the audit team to ensure that a candid dialogue is maintained, according to Clayton. One of the audit committee’s most important roles is to be proactive, Clayton stated.
Teotia noted that the staff of the Office of the Chief Accountant (OCA) frequently speaks with audit committee members. According to Teotia, if the audit committee is committed to its mandate, it can have a massive effect on the tone at the company. As a real-life example, he cited the recent standards on revenue and leases. If the audit committee was committed to challenging the company on difficult questions and judgments on the new standards, there has been a clear impact on the tone, Teotia explained.
International issues. Regarding international issues relevant to audit quality, Clayton noted that investors are more exposed to international companies and international financial reporting than they were 10 to 20 years ago. These include investors in a U.S. company with non-U.S. subsidiaries as well as investors in non-U.S. companies. Investors expect the financials to be the same, Clayton said. It is important that there be consistency in reporting as well as consistency in audit quality. Clayton acknowledged that financial reporting is not uniform, but regulators are working to get it as close to uniform as possible because many investors are not adept at making distinctions between multiple jurisdictional differences in financial reporting standards. Clayton advocated "raising everybody to a level where investors can reasonably rely."
Teotia agreed with Clayton, stating you cannot do the domestic job properly if you do not look at it through an international lens. OCA would be unable to give the right input or advice without knowing international standards, which requires a lot of the staff’s time, he said. Teotia praised the work of IOSCO’s Monitoring Group, of which he is a co-chair. The Monitoring Group requires time, effort, and meetings which are important because there are so many participants that provide input on international auditing standards and audit quality, Teotia said.
Teotia also noted that the SEC has been proactive concerning the phaseout of LIBOR, expected to happen in 2021. In July, OCA staff issued guidance on the transition away from LIBOR, he pointed out, which involved working with other divisions and offices within the Commission.
Clayton warned that the consequences and complexities presented by the phaseout of LIBOR are "greatly underestimated." The earlier stakeholders consult with the SEC and other relevant parties, the better the staff will be able to help them through the transition, he said. It will be a challenge, and the staff will be having a robust dialogue to meet that challenge. "Hope is not a strategy," Clayton cautioned.