The SEC’s Acting Chief Accountant Paul Munter delivered a powerful message earlier this month in a speech (available here) reminding accounting firms, along with public companies and their audit committees, of the responsibility each has for auditor independence under Rule 2-01 of SEC Regulation S-X.1 Mr. Munter’s speech specifically addressed accounting firms that provide consulting services to audit clients, noting with apparent disapproval how such firms enter into “increasingly complex business arrangements and, in some cases, … facilitate these arrangements through restructurings and the use of alternative practice structures.” He went on to criticize what he called “decreased vigilance when it comes to auditor independence” observed during the Office of the Chief Accountant’s consultation process.2 Recent media reports suggest the SEC continues to be interested in firms that may be considering whether to split their audit and consulting practices.3

Encouraging companies, their audit committees and accounting firms to consult with the SEC’s Office of the Chief Accountant in these situations, Mr. Munter warned firms in particular “to remain focused on the trusted role that public accountants play in the disclosure of high-quality financial information to the investing public and to take compliance with all aspects of the … [SEC’s] auditor independence rule very seriously.” He concluded with this statement: “[W]here independence on an audit engagement is a close-to-the-line call, firms must be willing to forego audit and review fees or potentially lucrative restructuring proposals to comply with their independence responsibilities.”

Audit committees should keep in mind that the SEC holds them directly responsible – together with senior management and accounting firms – for the integrity of the financial reporting mechanism on which the U.S. capital markets rests. Or as he put it in a previous speech: “Audit committees play a vital role in the financial systems of public companies through their oversight of financial reporting, including internal controls over financial reporting, and over the external, independent audit process.”4