I am pleased with the proposal on auditor communications with audit committees before the Board today. Comments received in the initial comment period were helpful to my thinking on this topic, and I look forward to additional public comment on this proposal.
In developing this proposal, the PCAOB has benefited from the comments of audit committees themselves, investors, preparers and auditors. One of the points that nearly every commenter made is that the enhanced role of the audit committee is one of the most important reforms advanced by the Sarbanes-Oxley Act. In my view, therefore, it is important that the PCAOB's standards on audit conduct strengthen, not undercut or weaken, the effectiveness of the audit committee.
In particular, what investors have found disquieting about the lessons learned in the financial crisis is that audit committees and boards may have lacked the information necessary to assess whether better financial reporting and disclosure would have been appropriate. It is not necessarily a question of access to information, or volume, but of relevance and quality.
One of the reasons that investors think that the audit committee is so important is that it is in a position to influence better financial reporting by demanding better practices, more responsible business judgment and improved conduct from management. But to do so, the audit committee must be well-informed about the salient facts and issues relating to accounting and disclosure matters. An audit committee that is well-informed is in a better position to make sure that such matters are resolved in the best interest of investors.
The new proposed standard is designed to benefit investors by enhancing the relevance and quality of the communications between the auditor and the audit committee. It should also help auditors perform their job by fostering thoughtful and engaged discussions between the auditor and the audit committee that, over time, arm the audit committee with the information it will need when a tough issue arises and the time comes to champion investor interests.
The standard should also avoid burdening the audit committee with minutia. But the audit committee and auditors themselves play more of a role than the PCAOB, or any audit standard, can in ensuring that their relationship is engaged and not a mere compliance exercise. Any measure can be reduced to a compliance exercise if not thoughtfully undertaken. I expect auditors — and investors expect audit committees — to do everything they can not to let that happen.
This proposal, I believe, moves the auditor's communication with the audit committee away from compliance checklists, and decisively in the direction of meaningful, effective interchange. I am going to be very interested in the comments. (The comment period runs through February.)