Statement on Auditing Standard Related to Communications with Audit Committees

The standard we are issuing today (Auditing Standard No. 16, Communications with Audit Committees; Related Amendments to PCAOB Standards; and Transitional Amendments to AU Sec. 380) will improve the audit process by fostering constructive dialogue between the auditor and the audit committee about significant audit and financial reporting matters. The audit committee plays a key role in the governance process that oversees financial reporting and auditing, a role that was enhanced by the Sarbanes-Oxley Act of 2002.

In its recent projects and outreach efforts, the Board has received hundreds of comments that emphasize the importance of the role of audit committees and support for Board efforts to facilitate effective communications between auditors and audit committees. Indeed, the PCAOB and audit committees have mutual interests in strengthening audit quality, increasing reliability and public confidence in audited financial statements, and protecting investors. Within this framework, the Board is seeking to support the work of audit committees in carrying out their oversight roles and focusing auditors’ attention on significant matters in each audit that should be discussed with audit committees.

Both the auditor and the audit committee benefit from a meaningful exchange of information regarding significant risks of material misstatement in the financial statements and other matters that may affect the integrity of the company's financial reports. Communications between the auditor and the audit committee allow the audit committee to be well-informed about accounting and disclosure matters, including the auditor's evaluation of matters that are significant to the financial statements. An informed and engaged audit committee will be better equipped to execute its oversight responsibilities. Auditing Standard No. 16 supports the audit committee in that it requires the auditor to communicate key issues about the overall audit strategy, timing, and significant risks, as well as audit results surrounding critical accounting policies and estimates, an evaluation of the quality of the company’s financial reporting, difficult and contentious issues encountered during the audit, among other areas.

Likewise, the auditor benefits from effective two-way communications with the audit committee through the insights gained in discussing matters about the audit and the company's financial reporting process. Specifically, Auditing Standard No. 16 requires the auditor to inquire of the audit committee about whether it is aware of matters relevant to the audit, including, but not limited to, violations of laws or regulations. These auditor inquiries will supplement and enhance the current requirements under Auditing Standard No. 12 for the auditor to inquire about the audit committee’s knowledge of the risks of material misstatement, including fraud risks.

Auditing Standard No. 16 is based on the practical, common sense approach of leveraging the work already performed during an audit and targeting the communications to cover areas that are significant to the financial reporting process. The standard does not impose new auditor performance requirements, other than the required communications themselves. Auditing Standard No. 16 also provides an update to the previous standard, AU sec. 380, to take into consideration updates in other auditing standards^[1] and legal requirements and rules surrounding the content and timing of auditor communications with audit committees.^[2] The standard also aligns the auditor’s communications with the audit committee’s oversight of the audit as set forth in the Sarbanes-Oxley Act. Bringing the requirements for auditor communications together in this standard should promote the auditor's compliance with relevant statutory and regulatory requirements, facilitate audit planning, and help inform the auditor’s scoping of the audit.

Auditing Standard No. 16 recognizes the importance of the auditor's communications with the audit committee in today's business and regulatory environment by substantially improving the previous standard. Under the previous standard, which had been in effect since January 1989, audit committee communications were treated as incidental, and were not required prior to the issuance of the auditor's report. Auditing Standard No. 16 requires the auditor to communicate the audit strategy and results of the audit to the audit committee in a timely manner and prior to the issuance of the auditor's report to provide an opportunity for the audit committee and the auditor to take appropriate action to address the matters communicated.

Adoption of the standard is in the public interest and protects investors by establishing requirements that enhance the relevance and quality of the communications between the auditor and the audit committee. The enhanced relevance and quality of communications should facilitate audit committees' financial reporting oversight and promote audit quality and the reliability of financial reporting. The audit committee also plays an important role in protecting the interests of investors by assisting the board of directors in fulfilling its responsibility to a company's shareholders and others to oversee the integrity of a company's accounting and financial reporting processes and audits.

For all of the above reasons, I support the adoption of Auditing Standard No. 16 and the related and transitional amendments to existing standards.

I would like to thank the Office of the Chief Auditor, the Office of General Counsel, and the Office of Research and Analysis for their excellent work on this project, particularly Jennifer Rand, Jessica Watts, Hasnat Ahmed, Karen Burgess, Bob Burns, Vincent Meehan, and Nina Mojiri-Azad.

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