The SEC’s Chief Accountant is a watchdog, among those who ensure high quality auditing in the complex world of financial reporting. For years, this role has admonished auditors to be skeptical and audit committees to be independent, as the Sarbanes Oxley Act of 2002 mandated. Paul Munter, current SEC Chief Accountant, recently gave an important speech that briefly, but powerfully, reaffirmed these basic rules. All directors should pay attention, especially audit committee members.

As the legal supervisors of a company’s auditor, audit committees have a crucial role in promoting audit quality and protecting investors, Mr. Munter said. Audit quality is necessary for making financial reporting reliable and useful, which in turn affects investor trust and market efficiency. However, audit quality can be impaired by various factors, such as management preferences, auditor optimism, or audit committee supineness, Mr. Munter noted.

To do their duties and protect investors, audit committees should follow these guidelines, Munter said, which I have restated as a kind of ten commandments for audit committees:

  • pick an auditor based on its ability and skill to perform a high-quality audit with professional skepticism, considering the auditor’s industry expertise and its record in professional inspection reports
  • pay and oversee the auditor to focus on and improve audit quality and protect investors
  • avoid close ties with the company or its management that may impair audit quality or investor interests
  • review the auditor’s performance regularly using relevant measures and feedback, including engagement hours and staffing mix and audit judgments
  • back the auditor’s independence and help it use professional skepticism
  • build a strong professional relationship with the auditor, separate from management
  • have regular, candid and thorough conversations with the auditor on financial reporting and internal control issues
  • ask the auditor tough but reasonable questions to check audit quality
  •  talk directly with the audit team and show the audit committee’s support
  • observe and assess the tone and quality of the auditor’s interactions with management
  • intervene when necessary to present or resolve any conflicts or disputes between management and the auditor    

These guidelines are not new, and they can be stated in different ways. But they are worth repeating, remembering and upholding, especially in times of uncertainty and rapid change, which create significant challenges and risks for financial reporting and auditing. While all audit committee members are and must be financially literate—and all committees include at least one accounting expert—they all must also remember that they too are watchdogs.