In my pre–Sarbanes-Oxley days, I worked with companies where it was tough to get audit committee members to attend meetings, and many of those meetings were check-the-box exercises without real value. The Sarbanes-Oxley Act changed the landscape significantly. Among other things, SOX clearly laid the responsibility for overseeing external audits on the shoulders of the audit committee—and now we are seeing increased focus on how the audit committee manages the external auditor.
Two documents recently issued by the SOX-created Public Company Accounting Oversight Board, which oversees the audits of public companies, focus on one aspect of that management: communication. The first, AS 16, Communications with Audit Committees, is aimed at increasing the relevance and quality of communication between audit committees and external audit firms. The second, Release No. 2012-003, Information for Audit Committees about the PCAOB Inspection Process, provides guidance on conversations that audit committees may wish to have with their external auditors.
A little background may be helpful. Each year, the PCAOB conducts inspections of audit firms. These inspections ascertain how the firms under review conducted their audits—in essence, whether their audit opinions were sufficiently supported by the facts. They also determine how committed the firms are to quality control—basically, whether they meet professional standards.
Release No. 2012-003 suggests some questions for an audit committee to ask its external auditor, including the following:
- Has my audit been selected for a PCAOB review?
- Have other companies similar to my business been selected for review?
- What issues did these reviews raise?
- What were the review findings?
- If deficiencies were uncovered, how is the audit firm remediating them, and how will those efforts affect our company?
Be skeptical if your external auditor suggests that an issue identified was a documentation problem or a matter of professional judgment. You may find it difficult to imagine that your auditor did not gather sufficient evidence to form an opinion when your management team feels like it’s being audited to death—but perhaps this is an opportunity for some candid discussion. A benefit of talking with your auditor about the PCAOB inspection results is to gain more insight about issues the PCAOB is seeing across the profession, and to learn how you might be impacted by those issues and ways to get a leg up on proactively addressing them.
Audit committees are becoming more proactive in managing relationships with external auditors and in evaluating auditor performance—think quality of services and adequacy of resources. Ensuring the audit firm’s independence, objectivity and professional skepticism hinges on good communication.