Reporting year-end financial results is a team effort. At Maxwell Locke & Ritter, we understand the importance of collaboration between external auditors and your company’s audit committee. We want to help you review the role that independent audit committees play in providing investors and markets with high-quality, reliable financial information.
Recent SEC statement
Under Securities and Exchange Commission (SEC) regulations, all public companies operate under audit committee requirements that state they must have an independent audit committee or have the full board of directors act as the audit committee.
Likewise, many nonprofit entities and large private companies have assembled audit committees to oversee the financial reporting process and help reduce the risk of financial misstatement.
Primary Audit Committee Requirements
SEC leadership recently issued a joint statement that highlights the following key areas of focus for audit committees:
Tone at the top. Audit committees set the tone for the company’s financial reporting and the relationship with the independent auditor. The SEC statement encourages audit committees to proactively communicate with auditors and understand how they resolve issues.
Auditor independence. This is a shared responsibility of the audit firm, the issuer, and its audit committee. The SEC statement suggests that audit committees consider corporate changes or other events that could affect independence.
U.S. Generally Accepted Accounting Principles (GAAP). A great importance of audit committees is helping management comply with existing GAAP. The SEC statement reminds audit committees to consider major new accounting standards that have been adopted in recent years, including the new revenue recognition, lease, and credit loss rules.
Internal controls over financial reporting (ICFR). One audit committee requirement is the responsibility of overseeing ICFR. The SEC statement stresses the importance of audit committees following up on the remediation of any material weaknesses.
Communications with independent auditors. Audit committees must openly communicate with external auditors throughout the audit reporting process. The SEC statement recommends discussing such issues as accounting policies and practices, estimates, and significant unusual transactions.
Non-GAAP measures. These metrics, when used appropriately in combination with GAAP measures, can provide decision-useful information to investors. The SEC statement suggests that audit committees learn how management uses these metrics to evaluate performance — and whether they’re consistently prepared and presented from period to period.
Reference rate reform. Discontinuation of the London Interbank Offered Rate (LIBOR) may present a material risk for companies with contracts that reference LIBOR. The SEC statement encourages audit committees to understand management’s plan to address the risks associated with reference rate reform.
Critical audit matters (CAMs). These are material accounts or disclosures communicated to the audit committee that require the auditor to make a subjective decision or use complex judgment. Since 2019, auditors have been required to include CAMs for certain public companies in the auditor’s report. The SEC statement reminds us of the audit committee requirement to understand the nature of each CAM, including the auditor’s basis for determining it and how it will be described in the auditor’s report.
Let’s work together
A critical importance of audit committees is a collaboration between the audit committee and external auditors, regardless of whether a company is publicly traded or privately held. Contact us with any questions you have regarding the financial reporting process.
In addition to this information regarding audit committee requirements, please review our article to help your companies or organizations decide which type of CPA report you may need: “Audit, Review & Compilation: How CPA reports differ“.