Remarks Before The 2024 AICPA & CIMA Conference On Current SEC And PCAOB Developments: Accounting Matters, Paul Munter, SEC Chief Accountant, Washington D.C., Dec. 9, 2024

Thank you to the AICPA for inviting me to speak with you today.[1] In my role as the SEC’s Chief Accountant, I get to see first-hand the collective efforts put forth by the accounting profession towards the goal of ensuring that our financial markets continue to be supported by high quality financial information.

Like many of you, my experience in the accounting profession has been an exciting and unpredictable journey, taking me from colleges in Texas, Colorado and Florida to auditing in Miami and elsewhere; from an academic fellowship at the SEC here in Washington D.C. to serving as a partner at a large firm in New York and London, and now back once again at the SEC, leading the Office of the Chief Accountant for the past four years. Accounting has provided me with tremendous opportunities to travel the world, work with and learn from hundreds of incredible individuals from many different backgrounds and cultures, grow personally and professionally, and engage with and mentor the next generation of accounting professionals.

The most meaningful part of my accounting career has been the opportunity and responsibility to serve in the public interest. Now, when I say serving in the public interest, I’m not referring solely to my role as a civil servant at the SEC. Don’t get me wrong—I feel fortunate to be in a position to have a meaningful impact on the quality of financial information and audit quality to protect investors and support capital formation—but when I say serving in the public interest, I am referring to what I believe makes accounting a profession and not just a job (and I’ll add, it’s certainly not an industry!). There are certain responsibilities that come along with being a member of a profession. In addition to important professional conduct responsibilities, there is a public interest aspect to being a CPA. Whether you are a civil servant, auditor, tax accountant, preparer, or other accounting professional, I urge you to always keep in mind the “Public” aspect of Certified Public Accountant.

Unfortunately, across the globe, we have observed high-profile cases of unethical behavior by accountants that were not limited to just one firm, one issuer, or one jurisdiction. The recurrence of ethical lapses has adverse consequences on the accounting profession and global capital markets, undermining public trust in both accounting professionals and financial reporting. It also raises broader concerns about the culture and governance within accounting firms and issuers.

Accountants serve as important gatekeepers to promote the integrity of our markets and protect investors regardless of whether they are internal or external auditors, preparers, tax professionals, audit committee members, or serve in other roles. The value of an accountant’s services depends on their credibility and trustworthiness. Trust is hard to gain and easy to lose, both individually and as a profession, so accountants should consider the importance of building and maintaining trust every single day.

For auditors, the foundation of this trust lies in the auditor’s required independence. Every member of an audit firm should keep this in mind, and audit firm leadership should reinforce this message by actively championing the principles in the auditor independence rules, as opposed to setting a tone of independence as a compliance exercise where independence violations and the resultant enforcement actions are merely a “cost of doing business.”[2]

For audit firms and issuers, a strong culture and tone at the top that prioritizes doing the right thing above all else empowers all accountants, regardless of their role or level of experience, to exercise professional skepticism and, where appropriate, to challenge management. In many cases, fraud is eventually uncovered by an accountant who exercises professional skepticism, refuses to stop asking questions, and doesn’t succumb to pressure, but these behaviors are also key to elevating financial reporting and audit quality.

In addition to the importance of a strong, ethical tone at the top, there is academic research that shows that behavior is driven the most by the people that are directly around you, which some refer to as the “mood in the middle” or the “buzz at the bottom.” For example, an academic study specific to auditors showed that staff auditors will be more influenced by the tone of their supervising senior than the partner when these two individuals provide conflicting tones.[3] Leaders should therefore ensure that the tone they set at the top is actually flowing through the rest of the organization. While this academic study focused on auditors, I believe the same concept holds true across all practice areas of a firm or issuer—good ethical behavior has an impact on the decision-making and integrity of professionals. Further, when less-experienced accountants’ professional experience is anchored in doing the right thing, they are more likely to become leaders with this same mindset.

With ongoing concerns in our profession about our ability to continue to attract and retain talented individuals who are dedicated to serving in the public interest, I believe we are at an inflection point.[4] That is why all of us should remember that those professionals around us are learning by our example and taking our lead—it is incumbent upon each of us to take seriously our responsibility to build and maintain public trust in our profession. In this regard, I’d like to share two examples of how we can promote public interest in our work.

• First, companies raising money from the public are part of a basic bargain under our federal securities laws. Under that basic bargain, investors get to decide what risks they wish to take, while those companies have an obligation to provide decision-useful information to investors on a regular basis. Fundamental to the functioning of this basic bargain is that the information companies provide to investors be of high quality. To this end, I believe it’s critical that preparers view financial reporting as a communication activity, and not simply a compliance exercise. Companies benefit from a lower cost of capital when they report financial information that meets investors’ information needs.
• Second, audit professionals have a difficult job—they must sometimes make difficult determinations that potentially pit the public interest against self- or firm-interest. But that is precisely how public accountants fulfill their critical gatekeeping function to protect investors: by ensuring that issues are promptly identified and addressed. Keeping in mind the important role of the independent auditor as a gatekeeper, auditors would be well-served to view investors, and not management, as their client. This is why, by statute it is not management but the independent audit committee that is directly responsible for the appointment, compensation, and oversight of the work of the auditor.[5] Audit committees can set a proper tone by emphasizing to the independent auditor that the auditor is required to directly report to the audit committee and not to management, and also that the auditor should view investors as the auditor’s ultimate client.

Again, these are just two examples, so please remember: what you do matters, not just to the issuer you may be engaged by, but to investors and the public at large. Your work has a direct bearing on the financial well-being of the global economy and all participants in that economy.

Reflecting on the importance of working together as members of a profession in the public interest, I’m reminded of a speech I heard 35 years ago at the AICPA’s sixteenth annual National Conference on Current SEC Developments. I was sitting in the audience, much like you are today, when then-SEC Chair, David Ruder, shared his perspectives on the interaction between the accounting profession, including the Financial Accounting Standards Board (“FASB”), the business community, and the SEC in setting accounting standards.[6] I would like to expand on some of the themes included in that speech and build on the relevance of his message for standard setting in today’s environment.

Just as Chair Ruder said 35 years ago, high quality standard setting requires the cooperative efforts of all involved parties, including the standard setter, the many different stakeholders impacted by the quality of standard setting, including investors, and the Commission, which has a vital oversight responsibility. Today, we are focused on standard setting not just by the FASB as the SEC-recognized private-sector accounting standard setter for U.S. GAAP, but also by the Public Company Accounting Oversight Board (“PCAOB”), International Accounting Standards Board (IASB), and others.

Essential to the cooperative efforts of all parties involved is a continued focus on the underlying objective to provide high quality financial information, supported by high quality independent audits, for the benefit of investors. The development of high quality standards, and high quality implementation of those standards, leads to investors receiving decision-useful financial information and promotes investor confidence in our markets, which results in a lower cost of capital for issuers.

To further frame my remarks today, I’d like to highlight several points in the history of our accounting standard-setting process that are especially relevant to our activities today.

• Among other authorities, the Securities Act of 1933 gave the Commission, at its inception, broad authority to prescribe the accounting standards to be followed by issuers for the purpose of complying with federal securities laws.[7]
• In 1937, through Accounting Series Release (“ASR”) No. 1, the Commission announced that it would publish “opinions on accounting principles for the purpose of contributing to the development of uniform standards and practices on major accounting questions.”[8] Driving uniformity in standards and practices remains equally important today. I believe financial reporting that is comparable for similar facts and circumstances, both between companies and over time, should be a primary goal of accounting standard setting.
• In 1938, the Commission issued ASR No. 4, warning that “financial statements . . . prepared in accordance with accounting principles for which there is no substantial authoritative support . . . will be presumed to be misleading or inaccurate despite disclosures . . . provided the matters involved are material.”[9] To translate that prescient message for today’s environment, I would say that accounting is critical, and disclosure is no substitute for getting the accounting right on difficult or complex issues, particularly since getting the accounting right is vital to consistency and comparability for investors. That message is relevant to both preparers applying accounting standards and the standard setters themselves. In standard setting, I believe that expanded disclosures can be beneficial to investors, but should never be viewed as an alternative to developing authoritative recognition and measurement standards that accurately reflect the economic substance of a transaction.
• In 1973, the FASB was formed as an independent organization responsible for setting accounting and financial reporting standards, and the Commission formally recognized the FASB’s standards as “authoritative” in the absence of any additional or contrary determination by the Commission.[10] Almost thirty years later, in the Sarbanes-Oxley Act of 2002, Congress established statutory criteria and principles for the Commission to designate a private entity standard setter for accounting and auditing purposes and recognize the accounting principles established by such entity as “generally accepted” for purposes of the federal securities laws, which critically required an equitable shared funding mechanism with accounting support fees that foreclosed ‘voluntary’ payments by issuers in exchange for actual or perceived preferential standard-setting outcomes.[11]

Back in 1989, then SEC Chair Ruder remarked that, “While the formation of the FASB was a response to criticisms, it was not intended to end criticism. Because of the controversial nature of standard setting, ongoing criticism was to be expected.”[12] He went on to describe Congressional criticism of the SEC when it decided to continue looking to the private sector for authoritative accounting standard setting. However then-SEC Chair Ruder also noted a 1977 Congressional report that cited the accounting profession’s desire and willingness to respond to criticism and take initiatives for improvement as a factor that weighed in favor of private independent standard setting.[13] I believe that desire and willingness to address today’s accounting standard-setting challenges is very much present within today’s accounting profession, and I encourage all stakeholders to engage in the standard-setting process through constructive engagement and cooperation. Engagement with the accounting and auditing standard-setting process is more constructive when it includes suggestions on how to improve a standard rather than simply criticizing a proposal.

As I mentioned in a recently published statement regarding the significance of the FASB completing its comprehensive updates to the Conceptual Framework for Financial Reporting, I believe a focus on the Conceptual Framework by the FASB and all stakeholders involved in standard setting can facilitate effective collaboration.[14] Feedback from stakeholders that is grounded in the Conceptual Framework, including a focus on financial statements being relevant and faithfully representing the underlying economics, effectively ensures that such feedback is, in fact, constructive. I also encourage FASB Board members to clearly articulate the basis for their individual standard-setting decisions and to explain the reasons for any deviation from the principles laid out in the Conceptual Framework to help stakeholders better understand both the standard in question and its application.

I encourage all of you to provide thoughtful feedback to the FASB as part of its current agenda consultation process. One accounting topic that is currently on the FASB’s research agenda in response to calls by investors for improvements is the statement of cash flows.[15] A clear and accurate depiction of the nature and quality of an issuer’s cash flows can serve as an important tool for investors to make informed judgments regarding an issuer’s ability to generate positive future net cash flows, meet its financial obligations, and pay dividends or otherwise return cash to investors. I am supportive of the FASB continuing to evaluate approaches to improve this critical component of high quality financial reporting for investors, including ways to improve consistency and comparability in cash flow classification, transparency of the relationship between the statement of cash flows and the balance sheet and income statement, and more information about non-cash transactions. Given the importance of cash flow information for investors, I also remind preparers and auditors to ensure that the statement of cash flows and related cash and non-cash disclosures are provided the same quality focus as other components of the financial statements. I also think that discussions concerning statement of cash flows provide a good reminder that when considering investor input to the FASB, it is important to dig deeper into that input and better understand what investors are telling us about their informational needs. For example, I have heard some investors say they either do not want or need a direct method cash flow statement. Instead, some investors say they want more information about things like cash collected from customers, cash paid to employees, cash paid to suppliers and other creditors, etc., all of which sounds like direct method cash flow information without the label!

Turning now to the Commission’s oversight role with respect to auditing standards, much like the comments then-SEC Chair Ruder made 35 years ago related to accounting standards, audit standard setting requires the desire and willingness to respond to input and undertake initiatives for improvement. The development of new auditing standards fundamentally changed with the passing of the Sarbanes-Oxley Act of 2002, which led to the establishment of the PCAOB. The Commission has responsibilities defined by statute related to oversight of the PCAOB’s standard-setting and rulemaking process. Once the Board adopts an audit standard or rule, the Commission publishes the new standard or rule in the Federal Register for public comment. Thereafter the Commission considers any comments received and determines whether the PCAOB’s new standard or rule is consistent with Title I of SOX, is in the public interest, and serves an investor protection purpose. As demonstrated with the Commission’s recent approval of several PCAOB standards and rules, including the PCAOB’s update to the general responsibilities of the auditor in conducting an audit[16] and the PCAOB’s standard regarding the quality control systems of audit firms,[17] overseeing the PCAOB’s audit standards is an important statutory responsibility of the Commission because those standards and rules are the basis for trust in the audited financial statements on which investors make investment and voting decisions. My earlier comments about engaging constructively in the standard-setting process are equally applicable to the PCAOB’s standard-setting and rule-making process as well as to the Commission’s consideration of those standards and rules.

In closing, I wish to reiterate my firm belief that accounting and auditing matter and our profession is vital to capital formation and capital flows. Our financial markets and our economy rest on the bedrock confidence of investors in financial reporting, which in turn relies upon the collective efforts of all accounting professionals involved in our financial reporting system. Every accountant has a professional responsibility to conduct our work in a manner consistent with applicable standards, rules, and ethical obligations. When you maintain a focus on investors and the public interest in every decision you make, the broader objective of providing high quality financial information can be achieved, ensuring that what you do matters. Thank you for your dedication to advancing our profession and I look forward to your questions.