October 17, 2023

SEC’s Chief Accountant Stresses the Need for Holistic Risk Assessments in Financial Reporting

By Daniel Laidlaw, Senior Manager, Assurance Services

SEC’s Chief Accountant Stresses the Need for Holistic Risk Assessments in Financial Reporting Capital Markets

The Securities and Exchange Commission (SEC) is highlighting the critical role a comprehensive risk assessment plays in financial reporting and maintaining robust internal controls over financial reporting (ICFR).

In late August, Paul Munter, the SEC’s Chief Accountant, released a statement shedding light on a concerning trend: the tendency of auditors and management teams to hone in exclusively on risks directly affecting financial statements, often overlooking broader, entity-level issues that bear significant implications on financial reporting and internal controls.

Such a narrow perspective, Munter warns, can be a disservice to investors. Overlooking potential macro-level risks could lead to significant pitfalls, with unaddressed and undisclosed threats potentially marring the quality and integrity of financial information.

Munter outlined a threefold directive for management:

  1. Approach risk assessment holistically, steering clear of biases that might downplay overarching issues as isolated incidents, thereby ensuring timely risk identification.
  2. Design and implement processes and controls that address and mitigate these identified risks.
  3. Ensure comprehensive identification and communication of information issuers must convey to investors.

Furthermore, the statement underscored the vital role auditors play. They aren’t just tasked with evaluating financial information, but they also bear the responsibility of acting as gatekeepers, ensuring management remains transparent and accountable to the public’s best interest.

As the financial landscape evolves, Munter’s statement is a timely reminder of the importance of a comprehensive approach to risk assessment, ensuring both transparency and trustworthiness in financial reporting.