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The new standard could level the playing field between CFOs and other less-informed members of audit committees, an audit regulator says.
Kathleen Hoffelder, CFO.com | US
August 15, 2012
The Public Company Accounting Oversight Board (PCAOB) today approved a standard on how to help auditors and audit committees communicate better. While Auditing Standard No. 16 (dubbed Communication with Audit Committees) still has to be approved by the Securities and Exchange Commission, the formal adoption of the rule shows the importance the PCAOB is placing on the need for better communication to improve thetransparency and integrity of financial reporting by U.S. companies.
Requiring better audit communication is expected to help smooth out any wrinkles that might arise in advance of a company's financial-reporting cycle. It is to the benefit of a company and its audit committee to hear upfront about concerns that might spring up over applying new accounting standards or about any unusual financial transactions that are outside of the normal course of business rather than when a company is about to release its earnings, according to Martin Baumann, chief auditor and director of professional standards at the PCAOB. "It's really putting them [companies] on notice that there's a risk around financial reporting that we see emerging here."
Under the new standard, an auditor would also be required to ask a company what plans it has to mitigate a particular issue before formulating his or her conclusion, which would mark a change from current practice. "This significantly puts the audit committee into the equation and consideration of what the auditor is doing," adds Baumann, who spent three years as CFO of Freddie Mac before he joined the auditor-oversight board.
The auditor would also have to tell the audit committee about significant risks he or she may have identified and update the audit committee about changes he or she may have to the overall strategy of the audit. If any departure from a standard auditor report is necessary, that would also have to be shared with the audit committee.
Some audit committees may find the new communication process more helpful than others. "Audit-committee members who have had backgrounds as CFOs [and] former auditors really know what information they want and what to ask for, but other audit-committee members may not. This in a way is leveling the playing field so that everyone would get the same type of information," says PCAOB associate chief auditor Jessica Watts.
The PCAOB does not have jurisdiction over corporate audit committees; instead, it would only oversee the way auditors will have to communicate with it going forward. If adopted by the SEC, AS 16 would go into effect for public-company audits of fiscal periods beginning after December 15, 2012.
The standard became a priority at the board because of a perceived need to improve transparency in the entire audit process, from the development of company financial statements to the deliberations of audit committees to PCAOB inspections. PCAOB board member Jay Hanson notes that the oversight body should share as much as possible about its insights into public-company auditing. "It's clear that at least some audit-committee members are doing an outstanding job, exactly what [the] Sarbanes-Oxley Act envisioned, and I think part of our job is to help other audit-committee members to get to that high level," he said at PCAOB's board meeting. Sarbanes-Oxley requires that the audit committee be independent of company management.
The board originally proposed the standard in March 2010, and then worked on a revision at the end of 2011. AS 16 also builds on previous interim PCAOB standards that became effective in 1989, including AU Section 380, the first "Communication with Audit Committees," and AU Section 310, called the "Appointment of the Independent Auditor."
The new standard focuses on "communication with the audit committee, not necessarily information sent to the audit committee," notes Hanson. "We're mindful of this standard potentially becoming just another checklist or boilerplate exercise of going through a list of requirements. We heard from commentators who didn't want that and we've been responsive to those comments," he adds.
One criticism of AS 16 lies in letting auditors communicate orally with audit committees, instead of just requiring written documentation. Despite the oral presentations, however, the auditor would still have to document what would have been in the report.
The cost to adopt the new standard, however, remains a low concern. The PCAOB says communication between auditors and audit committees can be scaled up or down to fit the size of a company.