I support the standard we have been presented today, Auditing Standard No. 16, Communications with Audit Committees, Related Amendments to PCAOB Standards and Transitional Amendments to AU Sec. 380 (AS 16).
The Sarbanes-Oxley Act of 2002 (“the Act”) enhanced oversight of public company auditing by, among other things, amending the Securities Exchange Act of 1934 to place responsibility for the appointment, compensation, and oversight of public company auditors with independent audit committees of public companies’ boards of directors. We have heard much in the past year through discussions with many audit committee members about how they carry out their role and what information they find useful. We have a number of audit committee members on our Investor Advisory and Standing Advisory Groups and they actively participate in our meetings. We invited several audit committee members to our recent public meetings on our Concept Release on Audit Independence, Objectivity and Professional Skepticism. I have also had many one-on-one discussions with audit committee members. It is clear that many audit committee members are taking their role seriously and performing with great diligence.
AS 16 is intended to help audit committee members by providing both auditors and audit committees with information they need to discharge their respective responsibilities. I believe this will improve the conduct of public company audits. We also recently issued the release Information for Audit Committees Concerning the PCAOB Inspection Process to assist audit committees in understanding the significance of PCAOB inspections of public company auditors and by suggesting questions to ask their auditors about our inspection results. I believe that the PCAOB should share as much as possible its insights into public company auditing with audit committees to help them more effectively carry out their oversight responsibilities, and I am committed to seeking ways to do more of this.
Auditors have been required to communicate information to audit committees for many years. AU Sec 380 has been effective since 1989 and provides the foundation on which AS 16 is built. Our staff has highlighted the significant changes established by AS 16, so I won’t repeat them all. However, I want to emphasize one aspect of the new standard. AS 16 has in its title the words “Communications With Audit Committees.” “With” is an important word to highlight since the standard is about effective communication, not simply a directive for the auditor to comply with a checklist of requirements. We heard cautions in comment letters and our public meetings to not let this standard become a boilerplate checklist exercise. We agree and drafted the proposed standard with those comments in mind. While the items required to be communicated are important, it is the responsibility of both the auditor and audit committee to ensure timely, effective communication about the most important matters affecting the audit and financial statements.
As I noted above, the new requirements build on what the auditor is already required to do. Each communication requirement is anchored to an existing requirement for a communication or an audit procedure. Many auditors already communicate most of what is in AS 16. We expect this standard will raise the performance of all auditors and provide all audit committees necessary information to do their best work.
The timetable to implement AS 16 is short. After we issue the standard, an additional process and approval is required by the United States Securities and Exchange Commission (SEC). I encourage all firms to move quickly to revise their tools, sample letters and other guidance to reflect the new requirements. Audit teams will need training on the new requirements. I recognize the challenges associated with balancing the time demands between now and the end of 2012 when important audit planning and interim testing will take place. However, we felt it was important to make AS 16 effective in 2013 to provide all audit committees the information they need. Nothing precludes an auditor from “early adopting” the communications required by AS 16, and we have heard some may do so. Further, an audit committee may certainly request discussions about matters covered by the new standard even if its auditor does not adopt AS 16 early.
The Jumpstart Our Business Startups Act ("JOBS Act") was signed into law on April 5, 2012. The JOBS Act provides that any additional rules adopted by the Board subsequent to April 5, 2012, do not apply to the audits of "emerging growth companies" ("EGCs") unless the SEC "determines that the application of such additional requirements is necessary or appropriate in the public interest, after considering the protection of investors and whether the action will promote efficiency, competition, and capital formation." Our staff, assisted by the SEC staff, has devoted substantial time and attention the question of whether AS 16 should apply to EGCs. It has been a challenging learning experience and I support the recommendation to the SEC. It is clear to me that we have much work to do to assess the economic consequences of other pending standard-setting projects to support making similar recommendations on those projects, when appropriate. We also have a significant task in front of us to evaluate how to incorporate more robust economic analysis in our standard-setting process more generally, including how we begin with a clear articulation of each problem, how we prioritize the problem, and how we assess possible solutions.
In closing, I would like to add my appreciation to that already expressed by my fellow Board members for the hard work on this project by members of the Office of the Chief Auditor, Office of Research and Analysis and Office of General Counsel. I appreciate your patience with the many questions and comments I provided. I would also like to thank the staff of the SEC who took time to provide input, as well as all of the individuals and organizations who provided their thoughtful comments on the original proposed standard as well as the reproposed standard. Please keep them coming.