Matthew Jacques, chief accountant in the SEC’s Enforcement Division, warned accountants and auditors not to get creative in following the commission’s independence Rule 2-01 of Regulation S-X. And he emphasized that the commission has always been active in pursuing auditor independence violations, and he expected the efforts to increase in the coming years.
“I regularly tell people ‘well, creativity is generally encouraged in life. Accounting and auditing are often not the best places for creative thinking, and auditor independence is certainly not a place to creatively apply the rules or push the limits of the rules,” Jacques said at the annual Conference on Banks and Savings Institutions hosted by the AICPA and CIMA on September 20, 2021.
He said that since he has begun telling people not to get creative on financial reporting matters, some have asked what he means exactly.
“I will summarize it like this: If it takes a 15-page memo to explain why the auditor is independent, are they truly independent in fact and appearance?” Jacques said. “You know, maybe. But I think that’s a complicated enough situation that heightened scrutiny should be placed in addressing that independence question.”
He made his remarks while discussing an enforcement action the SEC brought against Ernst & Young LLP, a current partner, two former partners, and a large public company’s then-chief accounting officer in early August. The SEC alleged EY violated the rules when trying to land the engagement with the public company.
“EY’s misconduct in connection with the audit pursuit, the order finds, would cause a reasonable investor to conclude that EY and its partners were incapable of exercising objectivity and impartiality once the audit engagement began,” the SEC said. (See SEC Charges Ernst & Young, Partners for Independence Violations in the August 3, 2021, edition of Accounting & Compliance Alert.)
Jacques pointed to a preliminary note in Rule 2-01, Qualification of accountants, which says that the rule “is designed to ensure that auditors are qualified and independent of their audit clients both in fact and in appearance.”
If auditors, companies, audit committees are not sure about whether a certain engagement will create independence problems, he said the SEC’s Office of the Chief Accountant (OCA) is always available for consultation.
“We actually have in Rule 2-01 essentially a statement that says, ‘look because everything in this space is facts and circumstances dependent, a one checklist does not solve all the independent questions that auditors should be asking themselves or issuer or an audit committee,’” Jacques said.
In his opinion, the OCA has a strong consultation process in providing thoughtful responses.
However, he warned that companies and accountants must present clear and correct facts and circumstances to OCA staff.
“Auditor independence, it’s just not an area where begging forgiveness is better than asking for permission,” Jacques said.
He also said that the consultation must be transparent.
“Misrepresenting the facts and situation or omitting key information—I repeat omitting key information—during a consultation … with the Office of the Chief Accountant is not something we take lightly when we are considering potential enforcement actions,” he said.
This article originally appeared in the September 22, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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