Mr. Chairman, I support re-proposing this standard on Communications with Audit Committees for the reasons stated in the release, particularly so that brokers and dealers, and their auditors, may have an opportunity to comment on the practicality of the proposed requirements. In the time since this proposal was first released in March 2010, the Board has been given oversight responsibilities for the audits of brokers and dealers through the passage of the Dodd-Frank Act and I think it is important to hear from that constituency before we issue a final standard.
However, by the time the comment period ends on February 20, 2012, it will have been almost two years since the proposed communications requirements were first released for comment.
In my opinion this revised proposal appropriately addresses the comments the Board received and I hope that after the next comment period closes, we are able to finalize the standard in short order. To me, many of the requirements we are proposing are self-evident and auditors should be communicating this information as a matter of course to audit committees.
I believe that two of the most important communications within this proposal are the communication of significant unusual transactions of which the auditor becomes aware and the communication of the auditor's views on the ability of an issuer to continue as a going concern.
The requirement that the auditor communicate to the audit committee any significant transactions outside the normal course of business for the company — including any transactions that appear to be unusual due to their timing, size, or nature — is new in this re-proposal. The auditor also would be required to explain his or her understanding of the business rationale for such transactions.
In addition, this proposal includes a requirement for the auditor to communicate any conditions that indicate there could be substantial doubt about the company's ability to continue as a going concern. Furthermore, if the auditor's doubt about the company's ability to continue as a going concern is allayed, the proposal requires the auditor to communicate why the auditor is no longer concerned, including a discussion of management's plans to mitigate those concerns.
Investors have been clear about their support for these improved communications. For example, in its comment letter to the Board, CalPERS stated:
"With the challenges posed by financial market instability over the last 18 months, CalPERS believes the proposed standard requiring the auditor to communicate to the audit committee the company's ability to continue as a going concern [is] critical to investors. We also agree that although doubt of going concern may be mitigated, we support that the standard requires the auditor to communicate the conditions and events that… indicate there could be substantial doubt about the company's ability to continue as a going concern as well as the information that mitigates the auditor's doubts."
With respect to these particular proposed auditor communications, my views on this topic are well known. I do not believe that communication to investors of all vital information should be funneled solely through the audit committee. Investors deserve to hear directly from auditors with respect to their most significant findings and that was a central concept and fundamental objective underlying the Sarbanes-Oxley Act. This point was made by the Council of Institutional Investors in its comment letter on this proposed standard:
"We note that our general support for the Proposal does not diminish our continued support for improvements to communications between outside auditors and shareowners. While the audit committee must actively communicate with the auditor to fulfill [its] oversight responsibilities, investors also need better communications with the auditor to fulfill their ownership responsibilities…"
I note that the Board will be considering this issue in the context of the auditor's report and will also be re-visiting our standard on going concern. The issue of going concern has been on the FASB, PCAOB and SEC's agenda for over three years and I believe it is important for the PCAOB to address it from the auditor's perspective as soon as possible.
On a related topic, I would like to stress the point that the communication between an auditor and the audit committee is a two-way street. To quote from the release:
"While the new proposed standard establishes certain requirements regarding auditor communications to the audit committee, the new proposed standard does not preclude the auditor from providing additional information to the audit committee. Nor does the new proposed standard preclude the audit committee from requesting additional information from the auditor."
Today we are dealing with communications relating to that of the auditor with the audit committee. However, in the near future, we will be issuing a release relating to communications that the Board would encourage audit committees to have with their auditors, particularly about PCAOB inspections. As reflected in the Board's Strategic Plan, a thematic topic for 2012 will be the communication of "the PCAOB's contribution to improving the quality of corporate governance." This would include enhancing "audit committees'… understanding of the PCAOB's… inspection results."
I have had a number of discussions on this topic with issuers and, speaking strictly for myself, I believe audit committees should be more aggressive in asking their auditors some fundamental questions about the results of the PCAOB inspections.
For example, audit committees might consider asking their auditors the following questions about the inspection process related to their company:
- Were the company's financial statements selected for review by the PCAOB?
- Were there any comments made by the PCAOB inspectors on the quality of the audit for the company? If so, what were the comments?
- Were there any findings related to the company's audit that were included in any part of the inspection report?
- Were any of the concerns identified by the inspections process communicated to the SEC by either the firm or the PCAOB?
- How is the firm addressing the concerns identified?
- Did the firm need to do additional work in order to mitigate the concerns identified?
- Did the PCAOB ask the firm to conduct a re-review as a result of the concerns identified related to the company's audit?
- Has the firm determined the root cause of the audit quality findings related to the company? If so, what were the root causes?
- How will the firm prevent the types of audit problems from occurring in future audits of the company?
Audit committees should also consider asking the same questions of other companies within their industry, primarily for the purpose of having the audit firm confirm that the same concerns would not have been raised if their company had been selected for an inspection review by the PCAOB.
And finally, audit committees should consider asking the following questions with respect to the overall inspection results:
- Were there any audit quality findings included in the non-public portion of the inspection report? If so, what were they?
- Has the firm determined the root causes of the audit quality findings included in the inspection report? If so, what were the root causes?
- How will the firm prevent the types of audit problems and/or audit quality issues from occurring in future audits of the company?
These are just a few examples.
As Mary Hartman Morris from CalPERS said during our roundtable discussion on Auditor Communications with Audit Committees,
"We believe robust communication between the auditor and the audit committee helps promote… confidence by ensuring the audit committee has the information it needs to serve as an effective monitor."
And as the AFL-CIO points out in its comment letter on the original proposal,
"… it is ultimately up to audit committees to ask the tough questions of auditors..."
As I mentioned, the Board is preparing to issue a release in the near future concerning communications that audit committees may want to consider having with their auditors about the inspection results.
Before closing, I would like to acknowledge the work done by Jennifer Rand, Jessica Watts and Hasnat Ahmad under the direction of our Chief Auditor, Marty Baumann, as well as Bob Burns and Nina Mojiri-Azad from our General Counsel's office. I would also like to thank the staff of the SEC for their input on this proposed standard.