PCAOB Expands Lines of Communication Between Auditors and Audit Committees

The Public Company Accounting Oversight Board (PCAOB)’s new accounting standard, Accounting Standard No. 16, seeks to bolster the relationship between audit committees and outside auditors, especially by encouraging ongoing, two-way tailored communications, as opposed to after-the-fact or boiler-plate notices. Auditing Standard No. 16, adopted August 15, 2012, was issued in light of requirements in Sarbanes-Oxley and the Dodd-Frank Act that relate to oversight and accounting, and replaces interim standards AU section 380 and AU section 310. The SEC is expected to approve the new rule, which could become effective as early as December of this year depending on the timing of SEC approval.

The new standard pushes audit committees and auditors to begin discussions early, and address areas that arise prior to the issuance of the auditor’s report. These discussions should cover a variety of topics, including, the responsibilities of the auditor, the terms of the audit, the information required by the auditor and audit committee to conduct their investigation, the strategy and timing of the audit, and real-time observations about the progress of the audit while it is still ongoing. Notably, this new guidance rejects the earlier standards set in AU sec. 380 that minimized the importance of auditor-audit committee communications.

Auditing Standard No. 16 also promotes proactive disclosure to auditors, and pushes audit committees to disclose what knowledge they may have of potential audit issues, including possible violations of laws or regulations. Auditors are also encouraged to share what they learn with the committees, disclosing not only the results of the audit, but also any controversial accounting areas, unusual transactions, assessments of the company’s accounting policies and practices, and any disagreements with management, among other topics.