The Securities and Exchange Commission recently released a Statement highlighting eight areas that audit committees should focus on this reporting season.

Penned by SEC Chairman Jay Clayton, Division of Corporation Finance Director William Hinman and Chief Accountant Sagar Teotia, the succinct Statement acknowledges the “vital role” that audit committees play in the financial reporting system and emphasizes that “[e]ffective oversight by strong, active, knowledgeable and independent audit committees significantly furthers the collective goal of providing high-quality, reliable financial information to investors and our markets.”

The Statement specifically encourages audit committees to:

General Observations

• Tone at the Top – focus on the “tone at the top” to create and maintain an environment that supports the integrity of the financial reporting process and the independence of the audit, including through clear and proactive communication with the auditor and management. 
• Auditor Independence – periodically evaluate the sufficiency of the auditor’s and the company’s processes for monitoring compliance with auditor independence rules, including whether such processes account for corporate changes or other events that could affect the auditor independence determination.¹ 
• Generally Accepted Accounting Principles (GAAP) – proactively engage with the auditor and management regarding new accounting standards to understand management’s implementation plan, assess whether such plan allows sufficient time and resources for management to develop well-reasoned judgments and accounting policies, and understand management’s approach to establishing and monitoring controls and procedures around new standard adoption and transition. 
• Internal Control over Financial Reporting (ICFR) – if ICFR issues are detected, understand and monitor management’s remediation plans, making clear that prompt, effective remediation is a high priority.
• Communications to the Audit Committee from the Independent Auditor – incorporate into the audit committee’s ongoing duties any insights from the committee’s required dialogue with the auditors under PCAOB AS 1301, Communications with Audit Committees. 

Specific Observations

• Non-GAAP Measures – actively participate in the review and presentation of non-GAAP measures and metrics, which includes understanding from management why such measures and metrics are used and how they are being presented over time. 
• Reference Rate Reform (LIBOR) – engage with management to understand the company’s plan for identifying and addressing risks related to the expected discontinuance of LIBOR and transition to an alternative reference rate.
• Critical Audit Matters (CAMs) – remain engaged with the auditors through the CAMs implementation process, which includes having substantive discussions about the audit, the nature of each expected CAM and how the auditor is addressing such CAMs in the audit. 

The Statement is the latest in a long line of guidance from the SEC over the past few years that is directed toward public company boards, such as the 2018 Commission Statement and Guidance on Public Company Cybersecurity Disclosures and the Division of Corporation Finance staff’s statements in Staff Legal Bulletin Nos. 14I, 14J and 14K concerning expectations for board analyses regarding the exclusion of certain shareholder proposals under Rules 14a-8(i)(5) and (7). These types of statements indicate that the current Chairman and Commission staff expect directors to have a prominent role in a number of matters related to the securities laws. Generally speaking, it is constructive when the SEC offers such transparent insights regarding matters of importance to corporate boards while at the same time recognizing that corporate governance is a matter of state law.