SEC Chief Accountant Reminds Lead Auditors of Supervisory Obligations

SEC Chief Accountant Paul Munter described auditors' supervisory responsibilities currently incorporated in the PCAOB standards, and provided "reminders on good practices for audit committees and issuers." In a published statement, he explained that the involvement of other auditors in an audit creates increased risk to an auditor’s independence because other firms, specifically non-U.S. members of network firms, may not understand the SEC and PCAOB independence requirements.

Lead Auditor Obligations

Mr. Munter highlighted recent enforcement actions brought by the PCAOB to demonstrate the importance of lead auditors fulfilling their responsibilities in overseeing the work of other auditors. He recounted instances involviling instances where lead auditors:

• used audit work performed by affiliated but unregistered firms, which played a "substantial role" in the audit; and
• failure to document accurate legal entity information and perform audit procedures which resulted in an auditors’ failure to (i) submit an accurate Form AP and (ii) report the audit participation of the correct legal entity and/or audit hours incurred by other accounting firms.

In pointing out the "mistaken" assumption that the level of audit quality is the same throughout member firms within the same network, Mr. Munter advised lead auditors to consider that:

• networks may have both registered and unregistered audit firms as well as the varying levels of professional training experience among auditors; and
• despite there being no requirement that network firms apply the same quality controls across the network, an adverse inspection result or enforcement action of one firm could impact the market’s perception of the whole network.

Independence Considerations for Auditors

Mr. Munter also reminded all auditors of the importance of quality control systems that include critical incremental features to ensure that lead auditors meet their supervisory obligations with respect to overseeing audits involving other auditors and mitigating associated risk. To avoid impairing an auditor’s independence, Mr. Munter advocated for a network systems approach that addresses the impact of non-audit and business relationships on audit clients while also examining potential future impacts.

Mr. Munter asserted that an audit committee and lead auditor must assess the sufficiency of their quality control system. He recommended that audit committees evaluate:

• other participating accounting firms that play a substantial role in the audit and whether they are registered; and
• how their lead auditor will (i) supervise the audit work performed by other auditors and (ii) ensure that other auditors understand and comply with PCAOB requirements.