While other agencies struggle to meet deadlines and mandates established by Dodd-Frank, the Public Company Accounting Oversight Board (PCAOB) continues to make progress on its efforts to improve the financial reporting process.
On Aug. 15, the PCAOB announced the formal adoption of Auditing Standard (AS) 16: Communications with Audit Committees. Initially proposed in May 2010, it was re-proposed at the end of December 2011, following a comment period and roundtable. Receiving unanimous support at Wednesday’s meeting, AS 16 supersedes existing standards AU Sec. 310 Appointment of the Independent Auditor and AU Sec. 380 Communications with Audit Committees.
The immediate impact of the new standard is negligible. The Securities and Exchange Commission (SEC) must first approve the rule. If adopted by the SEC, the rule will go into effect for public company audits of fiscal periods beginning after Dec. 15, 2012. In the approval process, the SEC will need to determine whether AS 16 will apply to companies defined as “emerging growth” under the JOBS Act.
Despite the standard’s title, the PCAOB has no jurisdiction over the audit committee, thus the standard is applicable to external auditors. However, audit committee members will notice a difference in the communications process. AS 16 would require the external auditor to discuss several new areas, including:
- An overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;
- Information about the nature and extent of specialized skill or knowledge needed in the audit, the extent of the planned use of internal auditors, company personnel or other third parties, and other independent public accounting firms, or other persons not employed by the auditor that are involved in the audit; and
- The basis for the auditor’s determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors.
Additional areas of required communications can be found at the PCAOB’s website.
On another front, the PCAOB recently released guidance for the audit committee regarding the nature of the agency’s inspection of an audit firm. The document provides a high-level outline of an inspection report, as well as a list of possible questions audit committee members may choose to ask their audit firms about PCAOB inspections.
Also, the PCAOB is still in the process of forming rules regarding mandatory auditor rotation. In conjunction with our Audit Chair Advisory Council, NACD is in the process of developing alternative suggestions to improving audit quality and independence. To voice your opinion on the topic, please take this survey.