Legal Alert

GC Insights: SEC Office of Chief Accountant Issues Statement Reminding Management, Auditors, and Audit Committees of Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19

by the Securities and Capital Markets Group
June 26, 2020

The Securities and Exchange Commission (SEC) issued a Statement of the Chief Accountant of the SEC, Sagar Teotia, outlining activities and concerns of the Office of the Chief Accountant (OCA) in responding to the impacts of the COVID-19 pandemic. Of the four topics covered, two merit the attention of reporting company boards, audit committees, management and outside auditors: (1) OCA’s engagement and work related to high-quality financial reporting; and (2) OCA’s engagement with and the vital role of audit committees. As the Statement expressly notes that many public companies are now preparing for their next reporting cycle, the OCA clearly expects reporting companies to keep these concerns in mind in their upcoming financial reporting.

A. High-Quality Financial Reporting

The first section of the Statement reemphasized the importance of “clear, high-quality, timely information regarding the financial and operating status of companies, as well as their future prospects,” which “only increases in times of heightened uncertainty.” The Statement specifically addressed four related aspects of the financial reporting process:

1. Significant Estimates and Judgments; Reasonable Judgments. While noting that the OCA “has consistently not objected to well-reasoned judgments that entities have made,” the Statement emphasizes that reporting 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.”

2. Disclosure Controls and Procedures and Internal Control over Financial Reporting (ICFR). The Statement reiterates the importance of “robust internal accounting controls.” Acknowledging that in the current circumstances preparers have adapted or may adapt their financial reporting processes—especially in a “telework environment”—the Statement reminds preparers that “if any change materially affects, or is reasonably likely to materially affect, and 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).”

3. Reminders About an Entity’s Ability to Continue as a Going Concern. The Statement reminds preparers that, in each reporting period, 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.” If so, “management should consider whether its plans alleviate such substantial doubt, and make appropriate disclosures to inform investors.” The Statement also emphasizes the responsibilities of the company’s independent auditors to make a going concern evaluation even during a quarterly review process, so management should expect that their auditors may put additional focus on related issues during their review.

4. Consultation with OCA. The Statement noted a number of pandemic-related issues the OCA has addressed with preparers, auditors and others through the consultation process during the first quarter reporting cycle, and going forward encouraged stakeholders to contact their office with questions arising from COVID-19 impacts or other emerging issues.

B. Audit Committees

The Statement reemphasized the important role played by audit committees in the financial reporting system through their oversight of financial reporting, including ICFR and the external, independent audit process, reiterating the belief that they represent “some of the most effective financial reporting enhancements included in the Sarbanes-Oxley Act.” The Statement declares that in these times of change and uncertainty “the need for the oversight role that audit committees play is as critical as ever.” The OCA noted its “ongoing two-way dialogue with audit committee members and related organizations” and its importance to its efforts to promote high-quality financial reporting. Clearly, audit committees would be wise to familiarize themselves with the areas of concern identified by the OCA in the Statement and entertain a robust discussion of those issues where appropriate.

The Statement provides a strong reminder that the SEC remains sensitive to the significant risks and uncertainties that persist in the financial reporting system due to COVID-19 and its impacts. Boards, audit committees, management and auditors are well-advised to consider each of the Statement’s enumerated concerns early in their financial reporting process for the upcoming quarter and thereafter.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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