A Conversation with Paul Munter from the SEC's Office of the Chief Accountant

This article was originally posted on the SEC Professionals Group community.

We sat down with Paul Munter, the OCA’s Acting Chief Accountant, to get the inside scoop on recent statements and future plans during the SEC Professionals Group Q3 Meeting.

During our interview with Paul Munter, he stated “any views I express here are my own and don’t necessarily represent those of the Commission, any commissioners, or other members of the SEC staff.”

Materiality assessments. Auditor independence. The Financial Accounting Standards Board (FASB) agenda. The latest statements from the SEC’s Office of the Chief Accountant (OCA) certainly have made a statement—raising several questions from the SEC community.

As Acting Chief Accountant for the OCA, Paul Munter and his team play a pivotal role in ensuring investors have decision-useful information. While a few statements may have come as a surprise to some, for Paul, it all comes back to the investor. In fact, the investor perspective has been a theme in his work at the SEC over the past 18+ months.

During our conversation with Paul, his passion for what he does was immediately clear. From his staff’s role in supporting the standard setting process to helping registrants better understand and apply accounting principles, he is working to empower investors through the delivery of timely, transparent information.

“Our focus is on what we can do to support higher-quality information to investors that is transparent, that is accurate, that is complete,” Paul said.

The OCA supports the SEC’s three-part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation by focusing on:

• High-quality accounting standards and rules
• High-quality application against the standards and the rules to a registrant’s specific fact pattern
• High-quality audits—to the extent that information is subject to audit

Paul said it circles back to what financial reporting is really about: clear communication of business’ finances and operations.

“It's really important to remember that financial reporting is, at its heart, a communication activity,” Paul said. He said the companies need to communicate in a fair and transparent manner to investors.

Let’s dive in to see what Paul had to say about materiality, the climate disclosure proposal, engaging with the SEC, and more.

Materiality: A reminder to look through the lens of the reasonable investor

Out of all the OCA statements since Paul joined in February 2021, the statement on materiality may have been the most shocking to the SEC community, begging the question: why did he make the statement? Paul said it was created to highlight the importance of addressing materiality from the investor point of view.

“The statement was trying to remind all participants in the ecosystem that materiality is grounded in the perspective of the reasonable investor,” Paul said. “The evaluation of materiality has to be through the lens of a reasonable investor, number one. And number two, it has to be an objective and unbiased assessment with respect to that issue.”

For instance, he mentioned that in recent conversations, some companies have made what he called “assertions” on what a reasonable investor does or does not find important. It seemed to him and his office that the analysis was working backwards to achieve a desired outcome.

“So I think [the statement] was responsive to a lot of the conversations we’ve had, which didn't appear to us to meet that requirement,” Paul said. “The discussion seemed to be the other way around—I have an outcome I want to get to and here's the reason why I'm going to get to that outcome—as opposed to thinking about the totality of the fact pattern.” 

With both quantitative and qualitative factors, there's no “formulaic outcome” when it comes to materiality, which is why looking at the fact pattern holistically is crucial.

“As we engage in registrant-specific questions about materiality, we're going to have in mind the viewpoint of the reasonable investor and go about the analysis in an objective and unbiased fashion.”

SEC climate disclosure proposal: What’s next?

With 14,000+ comment letters flooding into the SEC, timing on the climate disclosure proposal is a question on everyone’s mind. When will there be an update? When will potential new rules go into effect? While Paul didn’t have an exact timeline to share with us, he emphasized the “great engagement” they received from stakeholders during the comment period.

“The good news is a lot of people are interested in this and want to provide feedback to us, which is very helpful to us. What that also means is that it takes us a while to get through all of the input and evaluate it, and think about what that means in terms of next steps in timing,” Paul said.

While still up in the air, especially with the extended timeline to comment or resubmit comments on the proposal due to a technological issue, Paul pointed out a couple of climate-related items already in place that could be helpful to teams:

1. The Commission issued guidance on climate disclosures in 2010, which is still applicable today. Additionally, the Division of Corporation Finance (DCF) issued a sample letter with a few items for management to consider.
2. There are some existing financial statement issues that can arise—for example, severe weather events—that could be material under IFRS or US GAAP as applicable. There are a couple of helpful resources available on this topic:
   1. The FASB’s educational paper
   2. The IAASB’s alert

Aside from the climate disclosure proposal, Paul said there are a lot of ESG items on the rulemaking docket, some of which have been recently adopted or proposed or are still under development, including:

• Pay versus performance
• Clawback provisions
• Stock buybacks
• Cybersecurity

He said as items progress, the OCA is actively supporting these ESG initiatives across divisions and the Commission.

High-quality audits: A core pillar to the SEC’s mission

Another recent OCA statement on auditor independence also has the SEC community talking, so we asked Paul for his take.

“A culture of professional ethics has to be ingrained in the DNA of the firm, first and foremost, regardless of what kind of engagement you’re talking about,” Paul said.

Again, this ties to putting the investor first. In addition to complying with 2-01(c) of Regulation S-X, which has a long list of impermissible non-audit services, financial relationships, and more, Paul referenced the importance of complying with 2-01(b), which is the general standard for auditor independence.

“You have to be in compliance with 2-01(c). That's a necessary condition, but not sufficient,” Paul said. “If the reasonable investor knew all of the facts and circumstances of the audit firm's broader relationship with the audit client, what would the reasonable investor think about the audit firm's ability to act with integrity and objectivity?”

Paul said this goes well beyond the outright prohibitions in 2-01(c) and needs to consider things like whether or not there’s mutuality of interest or adversity of interest. It comes back to the guiding principles in 2-01(b), which are core to the independence requirements. Under 2-01(b), “the Commission looks in the first instance to whether a relationship or the provision of a service: creates a mutual or conflicting interest between the accountant and the audit client; places the accountant in the position of auditing his or her own work; results in the accountant acting as management or an employee of the audit client; or places the accountant in a position of being an advocate for the audit client.” In addition, in determining whether an accountant is independent, the Commission will consider all relevant facts and circumstances.

With non-audit services on the rise, Paul said firms need to ensure they are always putting professional ethics and independence first.

“As firms have changes in their business model or changes in the composition of their business model, they have to be continually vigilant that their priorities remain, as a firm, focused on maintaining a culture of professional ethics and maintaining audit independence,” Paul said.

The FASB agenda: Prioritization and timeliness

In June 2021, the FASB undertook an agenda consultation project to “to assist the Board in deciding where to focus its standard-setting efforts going forward.”

During that time, there was a lot of proactive outreach, and in return, a lot of engagement from stakeholders. Paul said the OCA’s recent statement was issued in part to encourage additional engagement with stakeholders as they completed the process.

“This process took quite a bit of time because they did a lot of proactive outreach to a variety of stakeholders, but particularly to the investor community to understand some of the key issues investors are most focused on,” Paul said.

Now that the FASB has completed its agenda consultation process, Paul said the statement was also meant to address the question of “What happens now?”—stating two main considerations for FASB as it moves forward:

1. Focus on the “issues that investors have top of mind”
2. Is the case for change strong enough? First, does it warrant the issues that come with adopting a new standard? Second, will it result in meaningful improvement to the information investors are receiving?

“I think the board has done a really good job in terms of taking the information it received through the consultation process and thinking about what that means in terms of their agenda. I also think that they have done a very good job of trying to scope projects in a fashion so that you have an achievable standard setting.”

In fact, Paul describes the consultation project as a critical juncture for FASB—a point where the board can complete its due diligence in the standard-setting process while also moving forward in a more timely manner.

Many know that historically standard-setting has been a lengthy process. Paul said that while some bigger projects by nature are going to take time, the FASB is now in a stage to move more quickly on focused projects. These projects are not necessarily focused on creating new accounting standards, but rather on providing more information and context around existing accounting requirements.

“I think FASB has an opportunity, if it keeps focused on what are really achievable processes in their standard-setting agenda, that they can actually make some really important progress on these things in a much more timely fashion, while obviously still abiding by their due process responsibilities,” Paul said.

As far as engaging with the FASB in oversight efforts, Paul mentioned it’s an ongoing balance. 

“Oversight is a bit of a delicate balance because oversight is not a passive activity. It's a substantive activity that requires ongoing engagement while at the same time respecting the independence of the standard setters and their responsibilities,” Paul said.

For his office, it’s critical to maintain an ongoing dialogue with the FASB while supporting the board on its priorities and how it can move forward in a more efficient manner.

While discussing standard-setting, we had to ask one final question: What happened to the goodwill project that was removed from the FASB’s technical agenda after four years? It comes back to the case for change, Paul said.

“When you think about the case for change, given the division of thought, is there a case for change there? And if not, in terms of the accounting, are there other things the board could explore?” Paul said.

Engaging with the SEC: Collaboration between the OCA and DCF

The OCA has a longstanding consultation process on both registrant-specific matters and more general matters.

With increasing complexities in new and emerging transactions and difficult judgments in the application of many accounting standards, Paul said the OCA is always available to help registrants. “We are here ready and able to engage with management, their independent auditors, and audit committees to help them think through application of GAAP in their specific fact pattern,” Paul said.

“We have somebody on call on an ongoing basis to answer the phone and make sure that the question gets routed to our appropriate subject matter experts. Because at the end of the day, investors are going to be far better off if management gets it right in the first place.”

Outside of engaging with the OCA, there is close collaboration between the OCA and the DCF. To give more clarity on responsibilities, Paul explained the roles like this:

• Think of the OCA as the Commission’s subject matter experts with respect to accounting, auditing, internal control over financial reporting (ICFR), and auditor independence
• The DCF is in charge of the filing review programs and responsible for filing review of issuers, whether a registration statement or periodic filings, which under SOX, is a requirement at least once every three years

During a consultation with a registrant, Paul said there is a team of SEC professionals and it’s likely that the team will include professionals from both the OCA and DCF. In addition, both offices collaborate to educate the marketplace. 

Last year, the OCA and DCF issued a joint statement on SPACs, and more recently with the uptick in crypto-related activities, OCA staff have been working closely with DCF on a number of cryptocurrency questions.

“We are working collaboratively with them to make sure we are educating the marketplace on some of the issues we're seeing and maybe directionally where some changes in practices need to be moved,” Paul said.

XBRL® requirements: What’s on the regulatory agenda?

While Paul notes there is nothing on the existing regulatory agenda from a broader XBRL perspective, there are tagging elements embedded in individual proposals, including the climate disclosure proposal. 

“XBRL is something we think about pretty proactively in all that we're doing because I think we have seen—and there's a lot of academic evidence as well—that having tagged information makes information much more accessible to investors,” Paul said.

Short take: The SEC will continue to think about ways to improve the quality of information, and consistent tagging is an avenue to do this. While there are no current activities, Paul said it is always in consideration.

Want to know more about what Paul Munter had to say on materiality, the climate disclosure proposal, XBRL requirements, and audits? The full conversation covers all of this and more! If you’re a financial reporting professional, head on over and sign up for the SEC Pro Group to watch the interview here.

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