ArticlesOrganizations
Follow

Securities Regulation Daily Wrap Up, ACCOUNTING AND AUDITING—SEC chief accountant urges accounting firm leaders to improve ‘tone at the top’, (May 15, 2024)

By Lene Powell, J.D.

Research shows that tone at the top determines ethical culture at accounting firms.

A healthy “tone at the top” is crucial for public accounting firms in maintaining culture, professional skepticism, quality control systems, and public r ...

By Lene Powell, J.D.

Research shows that tone at the top determines ethical culture at accounting firms.

A healthy “tone at the top” is crucial for public accounting firms in maintaining culture, professional skepticism, quality control systems, and public responsibility as gatekeepers of U.S. capital markets, SEC Chief Accountant Paul Munter said in a new statement. He encouraged firm leaders to instill an ethical culture by rewarding difficult stands, boosting candor and transparency, and structuring businesses appropriately, among other actions.

“[I]t is critical that leaders of public accounting firms lead by example and foster a healthy tone at the top by prioritizing integrity and professionalism over profit and growth,” said Munter.

Tone at the top matters. According to research, an audit firm’s tone at the top determines whether the firm is “focused on delivering high-quality audits or is a profit-center chasing the short-term bottom line,” he said.

Munter asked what message it sends—particularly to less-experienced staff and staff in service lines other than audit—when an audit firm downplays an SEC enforcement action and allows a partner to wait out suspension.

“Does it teach them that skirting the rules is acceptable, as long as you don’t get caught?” he asked. “And if you do get caught, is it simply the cost of doing business and the firm will take care of you until your ‘time out’ from appearing and practicing before the Commission as an accountant is over?”

Unhealthy firm culture can result from sweeping mistakes and bad behavior under the rug, he cautioned. It can also result from treating violations of law as isolated incidents or the “cost of doing business,” not holding wrongdoers throughout the firm and across service lines accountable, or changing firm structures in ways that jeopardize independence.

He pointed to recent enforcement actions involving unhealthy firm culture including a PCAOB crackdown on widespread exam cheating, the use of confidential information to sell tax avoidance services, and accounting firm leadership viewing accounting errors and the subsequent restatements as business opportunities.

Instilling healthy tone at the top. Senior partners in firm leadership must lead by example, encouraged Munter.

He offered suggestions for instilling ethical culture:

  • Make professional integrity and ethics an integral part of the promotion and compensation process. Leaders should reward individuals or engagement teams that took difficult stands and sacrificed short-term profitability in order to preserve independence and other professional responsibilities of the firm.

  • Promote candor and transparency. Employees should be able to share views and report misconduct confidentially. Anonymous survey results should be shared throughout the organization. Retaliation against whistleblowers should never be tolerated.

  • Structure business to maintain independence. Alternative practice structures may pose serious challenges for the audit firm’s future ability to comply with independence rules. For example, selling a portion of the business to an external party while retaining an equity interest or other involvement in that business, or creating alternative practice structures from the infusion of capital designed to grow the non-attest practice, can send a negative message about the firm’s priorities.

RegulatoryActivity: AccountingAuditing GCNNews SECNewsSpeeches