SEC Chief Accountant Releases Statement on Importance of “Healthy Tone at the Top” at Audit Firms

SEC Chief Accountant Paul Munter has released a statement on establishing “a proper tone at the top” at audit firms. Mr. Munter pointed out that a key function of the accounting profession is to act as a “public watchdog” and that, in performing this function, “audit-firm leadership must set the right tone at the top by always placing the public-interest obligations of our profession ahead of business interests and profits.” He further noted that setting an appropriate tone at the top is essential both for allowing auditors to exercise professional skepticism and for achieving effective quality controls.

While Mr. Munter acknowledged that an audit firm’s written policies (e.g., a code of ethics or conduct) are important, he stressed that “establishing a strong tone at the top requires more than just words, codes of conduct, and compliance checklists.” That is, audit-firm managers are called upon to “lead by example, through their actions.” According to Mr. Munter, actions that management can take to ensure that a healthy tone at the top is being set include:

• Ensuring that “professional integrity and ethics [is] an integral part of the promotion and compensation process” by, for example, rewarding “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.”
• Instilling a firmwide culture of “candor and transparency” (e.g., making sure that employees are able to “share their views confidentially on the company’s culture and climate” or “report misconduct when they’re aware of it”).
• Periodically reinforcing the message that an audit firm’s highest priorities should always be “complying with professional standards, providing high-quality audits, and fulfilling its public watchdog role.”