Audit Committees: PCAOB Reproposes Auditing Standard Related to Communications Between Auditors and Audit Committees

Sullivan & Cromwell LLP - March 1, 2012

The Public Company Accounting Oversight Board is reproposing a new auditing standard addressing communications between auditors and audit committees that is intended to enhance the relevance and quality of these communications throughout the audit. The reproposed standard would require the auditors to communicate, among other things, the following to the audit committee:

  • the overall audit strategy, including significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;
  • significant transactions that are outside the ordinary course of business or unusual and the auditor’s understanding of the business rationale for such transactions;
  • difficult or contentious matters for which the auditor has consulted outside the engagement team;
  • complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention;
  • the process management used to develop critical accounting estimates, including the significant assumptions underlying highly subjective estimates;
  • information about other accounting firms or accountants involved in the audit, and the basis upon which the auditors can serve as principal auditor if significant parts of the audit will be performed by affiliates or other auditors; and
  • other matters arising out of the audit that are significant to the oversight of the company’s financial reporting process.

The reproposed standard also seeks to encourage effective two-way communication between the auditor and audit committee and, in this regard, requires the auditor to inquire of the audit committee whether the audit committee is aware of matters that might be relevant to the audit, including its knowledge of violations or possible violations of laws or regulations and complaints or concerns raised regarding financial reporting matters.

Subject to SEC approval, the new standard would apply to audits of financial statements for fiscal years beginning on or after December 15, 2012.