Securities and Exchange Commission (SEC) Chief Accountant Paul Munter said audit firms must set proper tone at the top followed by consistent action throughout the organization for them to be able to play a crucial gatekeeper role in the capital markets. And he said accounting firms could, for example, establish clawback policies for their senior leaders to that end.
He explained that this could be similar to what public companies have to do under the Dodd-Frank clawback provision. The SEC in October adopted the rules that directed national stock exchanges to require listed companies to implement policies intended to recoup bonuses paid to executives if the company is found to have misstated its financial results. Sec. 954 of PL111-203
Similar provisions could “provide for some manner of reimbursement” for professional misconduct, Munter said at the Accountants’ Liability 2024 hosted by the American Law Institute on May 16 in Washington.
“Moreover, the very existence of such clawback provisions and references to them by firm leadership would demonstrate to staff that ethics and professionalism are not abstract goals but would constitute personal expectations” to be successful in the firm, Munter said. A day before, he also issued a public statement that discusses tone at the top.
His statement comes as both the SEC and the PCAOB have instituted enforcement actions against firms for violations of quality control standards, including rampant internal test cheating at many Big Four firm affiliates or for violating independence rules in pursuit of or to maintain lucrative contracts.
Munter said that words and actions must be consistent to set a proper tone at the top.
When surveyed, almost every auditor would say that integrity in the work is important. However, if the leadership does not demonstrate in action that professionalism is important, it may erode credibility.
And the staff have observed that several accountants, including high-profile audit partners, have remained in leadership positions at their respective firms even though the SEC brought enforcement actions against them.
In some instances, the commission barred them from appearing before the commission or practice as an accountant for public companies. But the accounting firms allowed culpable personnel to remain in leadership roles while waiting for the sanction to be lifted. The firms are perhaps treating it simply as a cost of doing business, he said.
But “this approach invites an erosion of professional culture, introducing a host of problems including the potential to undermine the public trust in the accounting profession, or to potentially at worst normalize unethical or unprofessional conduct, which creates something like a feedback loop, further entrenching unprofessional norms in accounting firms,” Munter said.
Thus, he said the firm should have a process in place to evaluate whether an accountant who is suspended for professional misconduct has the requisite qualifications to continue in a leadership role.
In the meantime, an academic study also found that auditors who were subject of SEC or Public Company Accounting Oversight Board enforcement actions did not appear to suffer greatly professionally or financially.
This article originally appeared in the May 17, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.
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