I support the re-proposal of the auditing standard, "Communications with Audit Committees", that is before the Board this morning. This standard is the result of a lengthy and careful process of deliberation that began nearly two years ago when the Board first proposed a new standard dealing with communications to audit committees. In response to that original proposed standard, the Board received 35 letters of comment. Those comments were discussed with the Board's Standing Advisory Group on July 15, 2010 and at a roundtable with affected stakeholders, including audit committee members, on September 21, 2010. In order to give all interested parties the opportunity to comment on the topics discussed at the roundtable, the Board reopened the public comment period on the original proposed standard and received eight additional comment letters. In addition, in the period after this standard was first proposed, the Board adopted eight risk assessment standards that serve as a foundation for future standard-setting. In 2010, the Board was also charged with the oversight of audits of brokers and dealers registered with the U.S. Securities and Exchange Commission. Based on the results of its outreach to stakeholders and other subsequent developments, the Board has determined to re-propose the standard at this time.
The Sarbanes-Oxley Act of 2002 (the "Act") both changed and strengthened the role of audit committees in U.S. public companies. The Act amended the Securities Exchange Act of 1934 to provide in Section 10A(m)(2) that the audit committee would have responsibility for the "appointment, compensation, and oversight" of the work of any PCAOB registered public accounting firm hired to prepare or issue an audit report for the issuer. The Act also required the audit committee to pre-approve any other services provided to the issuer by a registered public accounting firm. Since the audit committee is now the supervisor of an issuer's outside auditor, robust and complete communications between the auditor and the audit committee are vital for the audit committee to be able to fulfill its statutory duties.
The proposed standard will supersede AU sec. 380, the existing PCAOB auditing standard governing communications with audit committees and will apply to auditor communications with issuer, broker and dealer audit committees. The new proposed standard does not impose new performance requirements on auditors but does expand and clarify the nature of communications that the auditor needs to have with the audit committee. It also aligns the auditor's communications more closely with other PCAOB standards governing the auditor's performance requirements.
The proposed standard now includes a number of specific matters that must be discussed with the audit committee including the structure and timing of the audit, the auditor's assessment of risk areas including fraud risks, the auditor's use of outside experts and other auditors, difficult or contentious issues that arise in the course of the audit, significant accounting policies, judgments and estimates, going concern issues and other matters. It is important to note that the enumerated items in the standard are not exclusive and any other matter that the auditor deems important should also be brought to the audit committee's attention.
One question is whether specifying particular items that must be discussed with the audit committee runs the risk of leading to "checklist" compliance where items are ticked off but not made the subject of substantive and thoughtful discussion. There are two answers to this concern. Evidence in other areas (checklists used in medicine, particularly surgical procedures, or pre-flight checklists in aviation) have shown definitively that checklists can actually reduce the risk of error in complex tasks and specifying the items that must be discussed with the audit committee in the context of an audit may have a similar, salutary effect. In addition, the proposed standard specifically warns against perfunctory compliance and encourages auditors to have a robust dialog with the audit committee.
The Board has also heard in its various outreach efforts in connection with consideration of the auditor's reporting model that many stakeholders believe that the auditor has a unique insight into the risks, particularly financial and internal control risks, faced by an audit client. Many of these stakeholders would like to see this knowledge shared more widely. While this standard does not make the auditor's knowledge on these matters public, it does insure that at least the audit committee, made up solely of independent directors, will be made aware of the nature of the auditor's work, the risk areas identified, the complex financial accounting issues addressed during the audit, and other factors that should give a good window into the auditor's thinking and experience in the course of the audit.
For highly experienced and knowledgeable audit committees some of these required communications may seem unnecessary, but experience levels among audit committees of public companies vary widely and robust communications between an auditor and an audit committee can both educate the audit committee members and assist them in performing their important oversight functions.
For all these reasons, I support the issuance of this proposed standard and look forward to the comments of interested parties. As usual, this standard represents the careful and creative work of the Offices of the Chief Auditor and General Counsel and special mention needs to be made of the work of Jennifer Rand, Jessica Watts, Hasnat Ahmed, Nina Mojiri-Azad and Bob Burns for which we are deeply grateful.