On December 30, 2019, Chairman Jay Clayton, Sagar Teotia, the Chief Accountant, and William Hinman, the Director of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC), issued a Statement on Role of Audit Committees in Financial Reporting and Key Reminders Regarding Oversight Responsibilities (statement).

Observations and Reminders for Audit Committees

As the 2020 reporting season approaches, the statement provides helpful "observations and reminders on a number of potential areas of focus for audit committees" including the following:

• Tone at the Top. Audit committees are encouraged to focus on the "tone at the top" by, among other things, working to create and maintain "an environment that supports the integrity of the financial reporting process and the independence of the audit." Specifically, audit committees should "set an expectation for clear and candid communications to and from the auditor" and "set an expectation with both management and the auditor" that the committee will engage on reporting and control issues if and when they arise. In addition, audit committees should "proactively communicate with the independent auditor to understand the audit strategy and status," as well as ask questions regarding any issues identified during the audit and understand resolution of these issues.
• Auditor Independence. Audit committees are "directly responsible for the oversight of the engagement of the company's independent auditor." Accordingly, audit committees are encouraged "to consider periodically the sufficiency of the auditor's and the issuer's monitoring processes." For example, these processes should include, among other things, whether any corporate changes have occurred that could affect auditor independence and, if so, whether these changes been communicated to the audit firm.
• Generally Accepted Accounting Principles (GAAP). As management works to implement or transition to new accounting standards, audit committees are encouraged "to engage proactively with management and the auditors in the implementation process of new standards to understand management's implementation plan, including whether the plan provides sufficient time and resources to develop well-reasoned judgments and accounting policies."
• Internal Control over Financial Reporting (ICFR). Audit committees oversee ICFR and thus should have a thorough understanding of any identified ICFR issues and "engage proactively to aid in their resolution." In addition, if there are material weaknesses, then audit committees should "understand and monitor management's remediation plans and set an appropriate tone that prompt, effective remediation is a high priority."
• Audit Committee Communications with Independent Auditor. The statement reminds audit committees of "the year-end reporting process under PCAOB AS 1301, Communications with Audit Committees, which requires the auditor to communicate with the audit committee regarding certain matters related to the conduct of the audit and to obtain certain information from the audit committee relevant to the audit." Audit committees are also encouraged to incorporate these discussions as they carry out their responsibilities.
• Non-GAAP Measures. Audit committees are encouraged "to be actively engaged in the review and presentation of non-GAAP measures," including understanding how and why management uses non-GAAP measures, whether they are prepared and presented consistently from period to period, and the company's related disclosure controls and procedures.
• Reference Rate Reform (LIBOR). For companies that may be impacted by the transition away from the London Interbank Offered Rate (LIBOR), which is expected to occur by the end of 2021, audit committees are encouraged "to understand management's plan to identify and address the risks associated with reference rate form, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR."
• Critical Audit Matters (CAMs). Disclosure of CAMs in independent auditor reports is required for large accelerated filers and will be required for accelerated filers, non-accelerated filers, and smaller reporting companies for audits of fiscal years ending on or after December 15, 2020. It is not required for emerging growth companies. Although CAMs are prepared and communicated by the independent auditor, audit committees are encouraged to engage in "substantive dialogue with the auditor regarding the audit and expected CAMs to understand the nature of each CAM, the auditor's basis for the determination of each CAM and how each CAM is expected to be described in the auditor's report." For those companies not yet subject to this requirement, audit committees are encouraged to continue monitoring the implementation of this new requirement and "remain engaged with the auditors in the implementation process."

What to Do Now?

The overriding theme of each of these topics is active, appropriate oversight by the audit committee over areas that are within their mandate. Companies should:

• Ensure their audit committees are aware of the statement;
• Coordinate as appropriate with their independent auditors; and
• Consider addressing each of these topics in an upcoming audit committee meeting.