On April 3, 2020, the Office of the Chief Accountant (OCA) issued a statement[1] regarding the importance of high-quality financial reporting in light of the significant impacts of COVID-19.[2]  At that time, in addition to facing a number of operational and other challenges, many public companies were in the midst of their first quarter financial reporting process, working through accounting and financial reporting issues related to the impact of, and uncertainties related to, COVID-19.  In this time of unprecedented uncertainty, because of the diligent efforts of so many, our financial reporting system has continued to serve its critical function of providing much-needed information to investors and our capital markets.  We recognize and appreciate the efforts of various participants in our financial reporting system (e.g., preparers, auditors, audit committee members) to provide high-quality information to investors.

As many public companies now prepare for their next reporting cycle (e.g., second quarter financial reporting), we emphasize that the participants in the financial reporting system continue to play an important role in the functioning of our markets and in our collective national effort to mitigate the COVID-19 pandemic.[3]  We look forward to our financial reporting system continuing to provide a steady flow of timely, decision-useful information to investors and our public capital markets.

In OCA, we have long recognized that our active coordination and engagement with public companies, auditors, audit committees, other regulators, standard setters, investors and others (both domestically and internationally), is fundamental to our efforts to promote high-quality financial reporting and support the SEC’s fulfillment of its three-part mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.

We highlight below our recent engagement with stakeholders throughout the financial reporting system, including some of the significant accounting, auditing and financial reporting issues recently addressed by OCA.  Specifically, in this statement we cover the following topics:

1. OCA’s Engagement and Work Related to High-Quality Financial Reporting;
2. Engagement with the FASB and the PCAOB;
3. Engagement with International Standard Setters and Other Regulators; and
4. Engagement with and the Vital Role of Audit Committees.

I. OCA’s Engagement and Work Related to High-Quality Financial Reporting

As SEC Chairman Jay Clayton has often said, investors, and our public capital markets more generally, have a thirst for clear, high-quality, timely information regarding the financial and operating status of companies, as well as their future prospects.[4]  This thirst for decision-useful information only increases in times of heightened uncertainty.  It is thus of paramount importance that the financial reporting system remain focused on the needs of investors, consistent with the objective of general purpose financial reporting.[5]  If financial information is to be useful to investors, it must be relevant and faithfully represent what it purports to represent.[6]

Significant Estimates and Judgments; Reasonable Judgments

As we noted in our April 2020 statement, in connection with their financial reporting responsibilities, many companies have been required to make significant judgments and estimates to address a variety of accounting and financial reporting matters.  As those who engage with us well know, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.[7]  Companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.

The Importance of Disclosure Controls and Procedures (DCP) and Internal Control over Financial Reporting (ICFR)

We continue to emphasize the importance of robust internal accounting controls to high-quality, reliable financial reporting.  Public companies are required to maintain DCP and ICFR.  In addition, management is required to evaluate the effectiveness of a public company’s DCP as of the end of each fiscal quarter, and the effectiveness of its ICFR at the end of each fiscal year.  We understand preparers have adapted, or are adapting, their financial reporting processes as they respond to the changing environment.  These changes may include consideration on how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment.  In addition, changes to the business and additional uncertainties may result in additional risks of material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks.  We remind preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).[8]

Reminders about an Entity’s Ability to Continue as a Going Concern

Financial reporting pursuant to U.S. generally accepted accounting principles (GAAP) presumes a reporting entity has the ability to continue as a going concern.[9]  OCA reminds preparers that in each reporting period, including interim periods, management should consider whether relevant conditions and events, taken as a whole, raise substantial doubt about the entity’s ability to meet its obligations as they become due within one year after the issuance of the financial statements.  In instances where substantial doubt about an entity’s ability to continue as a going concern exists, management should consider whether its plans alleviate such substantial doubt, and make appropriate disclosures to inform investors.  Such disclosures should include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt.[10]  If after considering management’s plans substantial doubt about an entity’s ability to continue as a going concern is not alleviated, additional disclosure is required.[11]  We note that GAAP requires such disclosure in the notes of the financial statements and this may be incremental to other disclosure requirements in filings with the Commission.[12]

Auditors also have responsibility to evaluate an entity’s ability to continue as a going concern based on their knowledge of relevant conditions that exist at or occurred prior to the date of the auditor’s report.[13]  Although a review of interim financial information is not designed to identify conditions or events that indicate substantial doubt about an entity’s ability to continue as a going concern, an auditor may become aware of such conditions or events in the course of performing review procedures.[14]  In such cases, auditors should inquire with management and consider the adequacy of the relevant disclosures’ conformity with GAAP.  OCA reminds auditors that after performing such procedures, to the extent the auditor determines the relevant disclosure is inadequate such that it represents a departure from GAAP, the auditor should extend the procedures, evaluate the results and communicate as appropriate with the issuer and its audit committee.[15]

Addressing Complex or Emerging Issues in Financial Reporting; Extensive Consultation with OCA

There were, of course, a number of complex financial reporting issues that arose during the first quarter 2020 reporting cycle.  Based on our consultation process and outreach with public companies, auditors and others, we believe that as a general matter, these issues were addressed effectively and timely through our existing, robust financial reporting structure.

OCA has processes in place to provide staff views on the application of U.S. GAAP and International Financial Reporting Standards (IFRS) to complex, unique or novel issues.  During the first quarter reporting cycle, many preparers, auditors and others worked to apply the existing guidance and comply with professional standards, and raised important questions, including on unique or emerging issues.  Many of these matters were resolved through the OCA consultation process.  Issues OCA addressed over the quarter included the financial reporting ramifications of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), debt modifications, hedging, consolidation, business combinations, lease concessions, revenue recognition and income taxes.

With first quarter financial reporting now complete for most calendar year-end U.S. public companies, preparers, auditors, standard setters, audit committees, regulators and others continue to respond to the impact on company operations and financial reporting activities due to the COVID-19 pandemic.  As we enter the upcoming financial reporting season (e.g., the second quarter), we expect our financial reporting system will continue to provide the framework necessary to address financial reporting issues as they arise during this challenging period, supporting the continued flow of timely, decision-useful financial information to investors.  As always, we remain available for consultation and encourage stakeholders to contact our office with questions they encounter as a result of COVID-19 or other emerging issues.[16]

In addition to accounting and other financial reporting consultations, we take this opportunity to remind all stakeholders that auditor independence is foundational to the credibility of the financial statements.  Auditor independence is a shared responsibility among audit committees, management and their auditors.  We believe that when each of these groups work together, it fosters the most effective environment to achieve compliance with the independence rules and we remain available for consultation on these matters.[17]

II. Engagement with the FASB and the PCAOB

OCA also continues to be actively engaged with standard setters, other regulators and related groups, both in the U.S. and internationally, to address issues related to COVID-19 and other emerging issues.  In the U.S., we have been in constructive dialogue with the FASB and PCAOB regarding their respective efforts to address emerging issues and promote high-quality financial reporting.

Work with the FASB; FASB Chairman Transition

High-quality, reliable financial statements form the bedrock of our U.S. capital markets, and the FASB plays a critical role in promoting effective financial reporting to investors by setting accounting and reporting standards for U.S. companies.[18]  We commend the FASB for its focus on monitoring the financial reporting landscape to identify emerging issues due to the impact of COVID-19, including being open and responsive to feedback from investors and other stakeholders regarding issues that affect the FASB’s standard-setting agenda.  In support of the Commission’s oversight of the FASB, OCA continues to work closely with the FASB on issues related to the impact of COVID-19, providing feedback on standard-setting projects, observing FASB meetings and sharing our recent experiences on a wide range of other topics.

We continue to be engaged with the Board of Trustees of the Financial Accounting Foundation (FAF) in support of their important responsibility for the oversight, administration and finances of the FASB.  We have also been working closely with the current FASB Chair Russell (Russ) Golden, and incoming FASB Chair Richard (Rich) Jones to support the transition of leadership at the FASB, with Rich succeeding Russ as Chair of the FASB upon Russ’ completion of his term on June 30, 2020.  We express our appreciation for Russ’ efforts over the past 16 years at the FASB to promote effective accounting standard setting for the benefit of investors.  In both his service with the FASB as Chair and his previous work as a board member and the FASB technical director, Russ’ commitment to high-quality financial reporting, coupled with his extensive accounting expertise and strong leadership, have been the hallmark of his years of service.

Work with the PCAOB; Focus on Audit Quality

In this very challenging environment, the PCAOB continues to focus on its mission to oversee the audits of public companies and SEC-registered brokers and dealers in order to protect investors and further the public interest in the preparation of informative, accurate and independent audit reports.[19]  We applaud the PCAOB’s swift transition to remote operations to prioritize the health and safety of its employees and those with whom they interact, while continuing to make progress on its important programs, including registrations, inspections, standard setting and investigations of potential misconduct.  Among other examples demonstrating its flexibility and commitment to its mission, the PCAOB granted a 45-day relief period from inspections, which ended on May 11, 2020, to afford registered firms the time, resources and flexibility to work through their own significant matters.  The PCAOB also published information with important reminders for auditors engaged in audits nearing completion.[20]  We commend the PCAOB for providing transparent, timely and useful information to its stakeholders throughout this unprecedented time.[21]

In addition to the measures taken to respond to the immediate challenge, OCA continues to coordinate closely with the PCAOB as it seeks to execute its strategic plan.[22]  The PCAOB continues its important work to drive improvement in audit quality, including its continued proactive engagement with stakeholders.  For example, PCAOB staff published a request for comment on its interim analysis of critical audit matter requirements associated with the auditor’s reporting model.[23]  The PCAOB has also recently issued certain inspection reports under its new format and a guide for stakeholders in reading the new inspection reports.[24]  We recognize and thank the PCAOB for its continued commitment to its strategic plan and its continuing efforts to promote audit quality.

III. Engagement with International Standard Setters and Other Regulators

Our financial markets are global and interconnected—for example, U.S. investors hold in excess of $11 trillion of foreign debt and equity securities[25]—so international accounting and audit-related standards are therefore also of paramount importance to the strength of the financial reporting system, global capital markets and investor protection.  As a consequence, we actively engage in the activities of a number of international organizations.

Work with the IASB; Monitoring Board

Many public companies and investors continue to have a very high interest in the quality of IFRS, as they produce and use financial information prepared in accordance with IFRS on a regular basis.  For example, more than 500 foreign private issuers prepare their financial statements in accordance with IFRS for their filings with the SEC.[26]

We actively participate in the development of high-quality IFRS standards and their application.  We work within the International Organization of Securities Commissions’ (IOSCO) Committee 1 on Issuer Accounting, Audit and Disclosure (Committee 1),[27] to develop comment letters in response to IASB proposals and we also participate in multi-lateral discussions with the IASB.  Additionally, we engage in direct dialog with members of the IASB and its staff on topics of mutual interest such as application of the IFRS leasing standard[28] to rent concessions made as a consequence of COVID-19.[29]

The IFRS Foundation Monitoring Board includes a broad group of international capital markets authorities.  Through the SEC’s participation in the Monitoring Board, we monitor the governance of the IFRS Foundation and the IASB.  We look forward to our continued engagement with the IFRS Foundation as the Trustees continue their important oversight and talent acquisition and development activities.  We also look forward to continued interaction with the IASB as part of our engagement with standard setting by the IASB.

Monitoring Group and International Audit-Related Standard Setting; Significant Progress Is Being Made by the Monitoring Group

International audit-related standard setting[30] currently is facilitated by the International Federation of Accountants (IFAC)[31] with oversight provided by the Public Interest Oversight Board (PIOB).[32]  The quality of these standards is relevant to U.S. investors and public companies for a number of reasons including that many hold, manage or otherwise invest in foreign equity or debt securities of companies whose financial statements are audited in accordance with international audit-related standards.

The Monitoring Group[33] is a global organization composed of regulators and others dedicated to advancing the public interest in audit-related standard setting and improving audit quality.  For several years, the Monitoring Group has been working to develop important reform recommendations to strengthen the international audit-related standard-setting system.  Currently, Ana Martinez[34] and I are Co-Chairs of the Monitoring Group, and in working with the other Monitoring Group members, the Monitoring Group has actively led the development of reform recommendations and we hope to very soon help in the transition to and implementation of the recommendations.  The reforms are aimed at making the standard-setting system more responsive to the public interest by using a multi-stakeholder approach to the development of standards with the expectation that doing so will lead to improvements in audit quality around the world.

In addition to the development and implementation of reforms to the international audit-related standard-setting system, the Monitoring Group continues to fulfill its other responsibilities under its charter, including multi-lateral discussions relating to international audit quality, regulatory and market developments that have an impact on auditing and oversight of the PIOB.  Simply put, our leadership role within the Monitoring Group has been a significant focus for OCA and it will continue to be in the future as we move to the transition phase of implementing the recommendations.

Involvement with IOSCO; Recent IOSCO Statement

Securities regulators around the world are having to be responsive to the effects of COVID-19.  Through our staff’s involvement as Vice-Chair[35] of IOSCO’s Committee 1, we have been actively engaged with other regulators.  We have worked within IOSCO to support continued high-quality, faithful application of accounting and auditing standards so that investors continue to receive high-quality financial information during these uncertain times.  Consistent with our messaging, IOSCO issued a statement on May 29, 2020, that emphasized the importance of complying with accounting and auditing standards as well as providing investors with complete, transparent and entity-specific disclosures that enable investors to better understand the risks that public companies are facing in the current environment of heightened uncertainty.[36]  OCA’s contributions and work with IOSCO will continue to be a key priority area for the office.

IV. Engagement with and the Vital Role of Audit Committees

We have stressed many times in the past the key role that audit committees of companies play in the financial reporting system through their oversight of financial reporting, including ICFR and the external, independent audit process.[37]  We reiterate our strong belief, which continues to be highly relevant today, that the measures related to audit committees have proven to be some of the most effective financial reporting enhancements included in the Sarbanes-Oxley Act.

In these times of rapid change and increased uncertainty, the need for the oversight role that audit committees play is as critical as ever.  The most effective audit committees are engaged, executing their responsibilities with diligence, and this engagement significantly enhances the financial reporting output.   We continue to emphasize the important role of the audit committee throughout our interactions with participants across the financial reporting system and we welcome continued feedback directly from this important stakeholder group.

Our ongoing two-way dialogue with audit committee members and related organizations is a crucial component of our efforts to promote high-quality financial reporting.  We will continue to be proactive in engaging with audit committee members to understand current market developments as well as to solicit their perspectives on improving the oversight of financial reporting.

Closing

As we navigate this period of economic stress and heightened uncertainty, it is of critical importance that our financial reporting system continues to provide investors with high-quality, decision-useful financial information that complies with the applicable standards (e.g., GAAP, IFRS, and PCAOB auditing standards).  We thank the financial reporting community (e.g., preparers, auditors and others), who are instrumental to the provision of this type of high-quality information to investors, for their efforts to date.  We expect that the financial reporting community will continue to provide investors with such high-quality information.  As always, all stakeholders have a role to play in achieving this objective, from accounting and auditing standard setters, to preparers, auditors and regulators, each of which have critical roles in the overall financial reporting process.

OCA is committed to supporting preparers, auditors and others in fulfilling their critical financial reporting responsibilities and we continue to be open for discussion and consultation.

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