I support re-proposal of the new auditor-audit committee communications standard. A fundamental objective of the Sarbanes-Oxley Act is to put the audit committee, rather than management, in the driver's seat of the relationship between a public company and its auditor. This standard-setting initiative will further that objective by strengthening and clarifying the ground rules that specify what auditors should be telling the audit committees of their public company clients.
We have been working on this project for nearly two years, including Standing Advisory Group discussions, a public comment period, and a 2010 public roundtable. In light of the importance of the subject matter, it might be argued that it would be better to move directly to adoption of the new standard, rather than to expose it for comment yet again. In my view, however, re-proposal is the right course for three reasons.
First, in the summer of 2010, after the publication of the original proposal, Congress passed the Dodd-Frank Act, giving the Board authority over the audits of SEC-registered broker-dealers. Accordingly, this June, the SEC proposed to require that Board standards govern broker-dealer financial statement audits and examinations of broker-dealer compliance reports. As a result, the proposed communications requirements will apply to a type of nonpublic company not envisioned at the time of the original proposal. Because of the diversity in the size and form of organization of the roughly 5,000 registered broker-dealers, I think it is important that we invite comment that focuses specifically on how the new standard would function in that industry. Many broker-dealers are small, closely-held companies that do not have an audit committee, or even an independent board of directors. We need to make sure that these communications requirements will be workable in that environment.
Second, while the re-proposal standard is not fundamentally different than the original proposal, there have been some significant changes. For example, one of the center-pieces of the original proposal — the requirement that auditors evaluate the two-way communications process between the auditor and the audit committee — has been deleted. Further, the requirements concerning auditor communications regarding management's critical accounting estimates have been streamlined. And, perhaps most importantly, a new requirement that the auditor communicate with the audit committee regarding significant transactions not in the ordinary course of business has been added. Before the standard is finalized, the Board should give investors, preparers, and auditors the opportunity to consider these changes and to let the Board know what they think the impact will be.
Third, another round of comment is appropriate because the proposed standard touches on an area in which there is a risk that overly detailed standard-setting could do more harm than good. The relationship between the auditor and the audit committee needs to be flexible and free-flowing. At the 2010 roundtable, the Board was warned not turn auditor-audit committee communications into a sterile, check-the-box, compliance exercise. I know that is not the Board's intent, but, before we set the new communications requirements in concrete, it is prudent to give those who are on the frontlines of the dialogue between audit committees and auditors one more opportunity to let the Board know whether we have struck the right balance.
More broadly, I see this re-proposal is a step toward a more robust Board focus on what we can do to support the work of audit committees. The Board and audit committees have a common interest in strengthening audit quality and in bolstering public confidence in audited financial reporting. Because of that fact, one of the strategies highlighted in the 2011-2015 Strategic Plan approved by the Board last month is to "enhance audit committees' * * * understanding of the PCAOB's work, including inspection results." Conversely, we need to make sure that we understand how our work affects audit committees. As the Strategic Plan provides, I hope that opening new lines of communication between the Board and audit committees will be a priority during the coming year.
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I want to close by recognizing the staff members who contributed to reviewing the comments received on the original proposal, organizing the 2010 roundtable, drafting the re-proposal, and moving the new standard to this near-final stage. I particularly want to acknowledge the efforts of three Office of the Chief Auditor staff members — Deputy Chief Auditor Jennifer Rand, Associate Chief Auditor Jessica Watts, and Assistant Chief Auditor Hasnat Ahmad. They have been ably supported with advice and counsel from OCA's Counsel, Karen Burgess, and, in the Office of the General Counsel, by Bob Burns and Nina Mojiri-Azad. Thanks to all of you for your hard work and commitment to this important project.