SEC Chief Accountant Shines Spotlight on Audit Committees
SEC Chief Accountant Wesley Bricker spoke before the Baruch College Financial Reporting Conference on May 3, 2018. As in recent presentations, Mr. Bricker commenced these remarks by addressing briefly several hot button corporate accounting and disclosure obligations. This discussion included specific mention of the proper application of recently operative revenue recognition rules and the pending adoption of lease and credit loss standards, which will take effect in 2019 and 2020, respectively. Mr. Bricker then reserved a significant portion of his remaining commentary to emphasize the importance and responsibility of one particular group of professionals in advancing the quality of financial reporting: audit committee members.
Mr. Bricker’s initial reference to audit committees arose in the context of non-GAAP financial measures which, as he has stated previously, should be used as a supplement but not a substitute for financial reporting in conformity with generally accepted accounting principles. Mr. Bricker noted further that, when public companies intend to rely upon non-GAAP, it is imperative that they adopt “appropriate governance practices regarding the measures and policies and controls that prevent error, manipulation, or mischief with the numbers.” As to the particular importance of audit committees in the review and presentation of non-GAAP measures, he interjected:
Audit committees that clearly understand non-GAAP measures presented to the public – and who take the time and effort in their financial reporting oversight role to review with management the preparation, presentation, and integrity of those metrics – are an indicator of a strong compliance and reporting culture. Audit committees can review the metrics to understand how management evaluates performance, whether the metrics are consistently prepared and presented from period to period, and the related disclosure policies. Audit committees that are not engaging in these processes should consider doing so. A demonstration of strong interest in these issues can have a positive effect on the quality of disclosure.
Next, Mr. Bricker discussed the “positive effect on the quality of disclosure” that members of an audit committee provide in the context of market and other risk information. By way of illustration, he pointed to current economic variances, such an interest rate increases, which could materially impact corporate performance, adding that:
[S]ome businesses’ balance sheets, results of operations, and cash flows are particularly sensitive to changes in economic and market conditions such as changes in the liquidity in the markets, the level and volatility of market prices and rates, including for debt and equity investments, market indices, or business and other sentiments that affect the markets. I encourage those involved in the disclosure preparation and oversight process to be attentive to disclosures regarding changes in market risks.
Lastly, Mr. Bricker dedicated the final segment of his presentation to the importance of corporate governance, which he described as “intertwined with tone and culture – the understanding of ethical values, risks, and desired behaviors.” Again, he crafted his message to focus principally on the unique role that audit committees fulfill in the corporate structure:
Another lesson regulators and leaders in the profession have learned is the importance of independent, diverse thinking on corporate boards, and particularly, audit committees, brought by independent directors as an element of strong corporate governance. In addition to bringing valuable external perspective to board deliberations, these directors take on roles and responsibilities with substance and credibility because the directors are independent. Examples include resolving disputes between management and the external auditor as well as oversight of complex and sensitive investigations. Also, independent directors are often in the best position to deliver candid, sometimes tough, but critically important messages to management and other board members without fear of retribution. The strengthening of corporate audit committees with independent members is one of the most prominent, recent enhancements to the corporate governance scheme.
Viewed individually, none of Mr. Bricker’s comments qualify as groundbreaking statements from a high-ranking SEC official. Nonetheless, his repeated points of emphasis on the audit committee function during these prepared remarks appear noteworthy, given that his immediate audience, as he expressly recognized, consisted of a broader spectrum of professionals, including “investors,… auditors, preparers, standard setters, and academics [who are all] critical to advancing the quality of financial reporting.” The coming months may offer a better indication whether Mr. Bricker’s speech is simply a specific point of emphasis from the Office of the Chief Accountant or is perhaps intended to foreshadow a contemplated or ongoing enforcement initiative.