Statement on Auditing Standard Related to Communications with Audit Committees

The new standard on auditor communications with audit committees will become PCAOB Auditing Standard No. 16.  This standard has benefited from an enormous amount of public outreach about how to enhance investor protection by providing for relevant and timely communication between the auditor and an issuer’s audit committee.

The Board first proposed an earlier version of the standard in March 2010 and received several rounds of comment, including comment at a public roundtable in September 2010.  Then we reproposed the standard in December 2011.
Through this process, the Board received a wealth of advice about real situations where a robust dialogue between the auditor and an audit committee made a difference.  We also received advice on situations where more robust discussion could have made a difference, where a better understanding of matters known to the auditor could have armed an audit committee with critical information to probe areas that presented risk to investors.
 
Indeed, in my own experience as a counselor to boards, many an audit committee has wondered, with regret, why didn’t the auditors tell us about this?  Financial reporting failures can lead to enormous legal fees, fines, ruined careers and damaged investor confidence. Perceived constraints on auditor communication with audit committees do nothing to avoid these risks.  AS 16 should eliminate perceived constraints and foster robust communication of auditor to audit committee.

AS 16 supports the critical role of auditors and audit  committees in financial reporting and corporate governance. U.S. securities markets serve a purpose that is fundamentally different from many others in the world.  Our markets provide for formation of capital, and ownership, by dispersing minority interests widely, among millions of individual savers who are dependent on the preservation and growth of their investments for their savings and retirement. 

This system has fueled unprecedented, lasting and distributed economic growth for three-quarters of a century.  But minority ownership bears the obvious and inherent risk associated with entrusting an agent with other people’s money.  It would be enormously expensive for minority investors directly to monitor management’s use of funds, not to mention inefficient, and counterproductive given the expected expertise of management and likely lack of expertise of the average share owner. 

Instead, investors rely on auditors and audit committees, as intermediary agents, to attend to that risk.  The audit committee directly oversees management’s reporting of the company’s financial position and results to investors.  Auditors validate.  Naturally, both agents should support each other’s work with an open dialogue about how to protect investors from misleading or inadequate management reports.

The PCAOB has no authority over audit committees, and through this standard we exercise no such authority.  But I do believe that the standard appropriately describes the best auditor practices that we have learned from experience and advice. 

I believe the standard moves the auditor’s communication with the audit committee away from compliance checklists, and decisively in the direction of meaningful, effective interchange.

We have taken care to avoid miring both the auditor and the audit committee in minutiae.  If salient information is buried in abstruse detail, it would be a circumvention of the standard.

But as I said when we reproposed it, 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 not a mere compliance exercise.  Any process can be reduced to a compliance exercise.  Auditors should make use of the new AS 16 to accomplish the standard’s stated purpose of enhancing audit committee efficiency and effectiveness.