The SEC has approved PCAOB Auditing Standard No. 16, Communications with Audit Committees, and related amendments to PCAOB standards that were designed to help external auditors communicate effectively with audit committees during public company audits.
All U.S. public companies, including emerging growth companies as defined in the Jumpstart Our Business Startups (JOBS) Act, will be required to comply with the standard.
The standard is designed to facilitate effective two-way communication, and is aimed at external auditors because the PCAOB has no authority over audit committees. It requires auditors to:
- Establish the terms of the audit engagement with the audit committee and record them in an engagement letter.
- Give audit committees an overview of the audit strategy, including the timing of the audit, significant risks identified, and significant changes to the planned audit strategy or risks.
- Reveal the identities of others involved with the audit, including internal auditors or other independent auditing firms.
- Provide information regarding the company’s accounting policies, practices, estimates, and significant unusual transactions.
- Give an evaluation of the quality of the company’s financial reporting, including conclusions about critical accounting estimates and the company’s financial statement presentation; difficult or contentious matters for which the auditor consulted outside the engagement team; the auditor’s evaluation of the company’s ability to continue as a going concern; and difficulties encountered in performing the audit.
The standard is effective for audits of financial statements with fiscal years beginning on or after Dec. 15, 2012.
Just five comment letters were received by the SEC during its review of the standard, which received PCAOB approval in August. One of those letters was submitted by the Center for Audit Quality (CAQ), which is affiliated with the AICPA.
CAQ Executive Director Fornelli said in the letter that the standard will contribute to investor protection because it should improve audit quality and audit committees’ oversight.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.