CURRENT MONTH (February 2024)

SEC Chief Accountant Emphasizes Importance of Professional Skepticism and Audit Quality in Audit Oversight

By Thomas W. White, Retired Partner, WilmerHale

Securities and Exchange Commission (SEC) Chief Accountant Paul Munter recently provided a regulatory perspective on the importance of high-quality external audits of financial statements to investor protection. In a wide-ranging statement issued in February, entitled “An Investor Protection Call for a Commitment to Professional Skepticism and Audit Quality,” Munter addressed the roles of both the independent auditor and the audit committee. The statement does not break major new ground, but it does provide insight into the regulator’s views on audit quality and emphasizes investor protection as the paramount objective of the financial reporting oversight process.

Noting recent trends in audit deficiencies identified by Public Company Accounting Oversight Board inspections, Munter “remind[s] auditors that their fundamental responsibility to protect the investing public can be fulfilled only by commitment to high-quality audits.” This requires auditors “to exercise objective, impartial judgment and rigorous professional skepticism” in audits. Munter also stresses that “auditors should conduct engagements with a mindset that the investors, rather than management, are the audit client.”

Management’s Role and Auditors’ Exercise of Professional Skepticism in Response to Changing Conditions

Munter states that both management and auditors must recognize and respond to changing external conditions and new risks that can affect a company’s financial reporting infrastructure, including internal control over financial reporting (ICFR). He also emphasizes areas in which auditors must exercise professional skepticism, including obtaining and evaluating audit evidence in areas such as ICFR and fraud detection. He lists several “strong practices in the exercise of professional skepticism” that audit firms should follow:

  • Frequently and proactively engage with the audit committee;
  • engage and effectively integrate specialists and other experts into the engagement team to assist in auditing complex areas or where specialized knowledge is needed;
  • ensure that engagement teams are appropriately trained on biases that can affect auditor judgment and decision-making; and
  • ensure that the audit staff are empowered to exercise their professional skepticism and challenge the judgments of management.

Concluding this part of the discussion, Munter observes that “[a]pplying professional skepticism can sometimes come at a cost,” but “the audit engagement is not a standard business relationship between service provider and client, with profit as the primary goal and indicator of success.” Rather, the auditor’s responsibility to the investing public “both transcends the relationship with management of the audit client and elevates the importance of its proper functioning to produce the high-quality audits focused on the auditor’s responsibilities to investors that are a critical piece of a fair, orderly, and efficient capital markets system.”

The Importance of the Audit Committee in Prioritizing and Promoting Audit Quality

Munter’s most notable observations about audit committees are his implications that audit committees may be too “cozy” with management. He cites academic studies that highlight the risk that, in some cases, “audit committees may look to protect the interests of the issuer and its management over the interests of investors” and states that this risk “can arise out of an audit committee’s association or coziness with the issuer or its management or through management’s influence over the audit committee’s supervision of the auditor.” He “remind[s] audit committees of their role as critical gatekeepers for investor protection through oversight of a high-quality audit and the benefit of having an audit committee that is independent of management.”

Munter provides lists of matters that the audit committee should consider in monitoring the auditor’s performance and actions the committee should take to support the auditor’s independence and facilitate the auditor’s exercise of professional skepticism.

SEC Implements Enhanced Rules for SPAC IPOs and De-SPAC Transactions

By Beau Raymond-Iaquinto, J.D. Candidate 2024, University of St. Thomas Law

On January 24, 2024, the SEC adopted new rules to bolster disclosures and investor protections in special purpose acquisition company (SPAC) initial public offerings (IPOs) and subsequent business combinations.

These rules mandate several additional disclosures, including regarding conflicts of interest, SPAC sponsor compensation, dilution, and others. Additionally, target companies must provide more comprehensive information to assist investor decision-making in de-SPAC transactions.

Significantly, the regulations align disclosure requirements and legal liabilities in de-SPAC transactions with those in traditional IPOs. Notably, certain blank check companies, including SPACs, will no longer be eligible for liability protection for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Moreover, the rules introduce requirements for disclosures related to projections and update guidance on their utilization in SEC filings, which applies broadly, not just to SPAC and de-SPAC transactions. The SEC intends for these rules to help protect investors by “addressing information asymmetries, misleading information, and conflicts of interests in SPAC and de-SPAC transactions.”

The regulations will become effective 125 days after publication in the Federal Register, with compliance for structured data requirements mandated 490 days after publication.

The SEC’s Fact Sheet on the new rules is linked here.


Rani Doyle

Rani Doyle

Managing Editor, Securities Law

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