Many of our attorneys have served as General Counsel to public and private companies and other organizations. This is part of a series written by our former GCs. The series will explore issues of practical significance to GCs and others responsible for an organization’s legal affairs. Please send us your feedback and topic suggestions.

John B. Wright, II was Senior Vice President, General Counsel, and Secretary of the Triumph Group, Inc.—a NYSE-traded supplier of aerospace systems and support—for 15 years.

The Securities and Exchange Commission (SEC) issued a Statement—signed jointly by the Chairman, the Chief Accountant, and the Director of the Division of Corporation Finance—on December 30, 2019, titled, “Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities.”

The Statement opens with paragraphs reinforcing Chairman Clayton’s view 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.” Noting the approach of the 2019 calendar year-end financial reporting season, the authors state that “we are providing observations and reminders on a number of potential areas of focus for audit committees,” and further state that “[i]ssuers and independent auditors also should be mindful of these considerations with an eye toward ensuring that audit committees have the resources and support they need to fulfill their obligations.”

The Statement offers five commentary paragraphs characterized as “General Observations” and three paragraphs labeled “More Specific Observations.”

The "General Observations" include:

Tone at the Top

• Audit committees are reminded of the importance of their role in setting the “tone at the top” in ensuring the integrity of the financial reporting process and the independence of the audit.

Auditor Independence

• Audit committees are reminded that they play a critical role in independent auditors’ compliance with the independence rules, sharing that responsibility with the issuer and the auditors.

Generally Accepted Accounting Principles (GAAP)

• The Statement emphasizes the audit committee’s responsibility to promote an environment for management’s successful implementation of new accounting standards and understand management’s plan for their implementation. (The new standards on revenue recognition and lease accounting are specifically referenced.)

Internal Controls Over Financial Reporting (ICFR)

• Audit committees are reminded of their responsibility for overseeing management’s assessment of internal controls, their attestation by the auditors, and the remediation of material weaknesses or related issues.

Communications to the Audit Committee From the Independent Auditor

• The Statement reminds audit committees of the required year-end communication process with the independent auditors, particularly calling out communications relating to accounting policies and practices, estimates, and significant unusual transactions.

The “More Specific Observations” remind audit committees of their importance in assessing, as appropriate, the use of non-GAAP financial measures, the impact and risks associated with the discontinuation of LIBOR, and understanding the auditors’ determination and disclosure of Critical Accounting Methods to be communicated in the audit report.

We believe boards, management and, of course, audit committees would be well-advised to review the Statement and focus on the areas it identifies (even though the Statement expressly disclaims being a comprehensive list of relevant audit committee responsibilities). This seems particularly apt when we note that the SEC has not issued a similar statement at the advent of the calendar year-end financial statement reporting season in recent memory, if ever.

It may also be appropriate to review audit committee charters to assure that these areas are adequately addressed.

The Statement certainly illustrates the continuing importance of audit committees and the related regulatory framework affecting the reliability of the financial reporting system.