New Audit Standards Accompanied by Calls for Stronger Leadership

The top accountant at the Securities and Exchange Commission has had enough with auditors behaving badly, and he’s taking aim at the leadership of their firms as regulators move to tighten up auditing standards.

In a statement issued earlier this month, SEC Chief Accountant Paul Munter lectured audit firms about the “tone at the top.” He indicated that declining quality in their work can be traced back to a reluctance to hold leaders accountable when regulators dole out discipline against the firms. Munter pointedly remarked that the “tone at the top of an audit firm determines whether the culture is focused on delivering high-quality audits or is a profit-center chasing the short-term bottom line.”

Munter’s missive came on the heels of the SEC shutting down audit firm BF Borgers, which included Trump Media and Technology Group among its clients. On May 3, the agency charged the firm and its owner, Benjamin F. Borgers, with fraud related to more than 1,500 SEC filings made between January 2021 and June 2023. Specifically, Borgers and his firm got tagged with “with deliberate and systemic failures to comply with Public Company Accounting Oversight Board standards in its audits and reviews” among a laundry list of offenses, according to the SEC. As a result of the firm’s malfeasance, the SEC noted that at least 75% of its 369 clients’ filings during the 30-month period “incorporated BF Borgers’s audits and reviews that did not comply with PCAOB standards.”

The apparent communications push on audit standards likely ties in with the PCAOB’s recent decision requiring firms to beef up quality controls. The new standards include conducting evaluations of the risks entailed in implementing effective controls and developing ways to address them. The PCAOB will receive annual reports from audit firms detailing the effectiveness of such policies, certified by two members of the firms’ leadership. In its announcement of the new quality control standard, the board highlighted that the previous standard went into effect more than 20 years ago in 2002.

It’s no surprise that the auditing profession seems peeved about the new requirements. If you could sum up the tenor of a recent Wall Street Journal article on prevailing sentiments among auditors, they appear to support changes to bring standards in line with the times. Just not these changes.

The main complaint from auditors appears to be a common one whenever new regulations are proposed: too much busy work. Ultimately, though, such objections are going to fall on deaf ears when the SEC fears that investors are losing confidence in the quality of the information companies are reporting. If Munter was advising executives at auditing firms about how to convince their employees to learn to live with the new quality control standards, he’d likely remind them that the tone starts at the top.

***

The Intelligize blog is on hiatus for the Memorial Day holiday and will return on Thursday, May 30, 2024