Summary: This article discusses the Public Company Accounting Oversight Board's new guidance to audit committees on the PCAOB inspection process and the PCAOB's new auditing standard on auditor communications with audit committees. These actions may significantly affect an audit committee's interaction with a company's external auditor and how the committee carries out its financial reporting oversight role.
The Public Company Accounting Oversight Board (PCAOB)1 has recently taken two actions that address the interaction between audit committees and their companies' independent auditors: First, it issued guidance for audit committees about the PCAOB's audit firm inspection process. Second, it adopted, subject to approval by the Securities and Exchange Commission (SEC), a new auditing standard on auditor communications with audit committees.
Even though the PCAOB's legal authority extends only to auditors, not their clients, these actions may significantly affect how audit committees carry out their financial reporting oversight role.
Guidance to Audit Committees About the PCAOB Inspection Process
On August 1, the PCAOB issued guidance for public company audit committees to assist them in understanding and using the PCAOB's reports on its inspections of registered public accounting firms. Under the Sarbanes-Oxley Act, the PCAOB is required to conduct a program of inspections of registered public accounting firms based on review of selected audit engagements. The largest accounting firms are inspected annually, others every three years. Sarbanes-Oxley requires the PCAOB to make public the results of its inspections, except for criticisms of a firm's quality control systems, which are not made public unless the firm fails to remediate the quality control deficiencies within 12 months after the issuance of the PCAOB's report.
The PCAOB's release on Information for Audit Committees About the PCAOB Inspection Process2 discusses how the inspection program is implemented in practice and what the inspection reports cover. The release emphasizes that inspections cover certain aspects of selected audits and are not designed to review all of a firm's audits or to identify every respect in which a reviewed audit may be deficient. The public portion of the report describes deficiencies in particular audits identified by the PCAOB during the inspection process. The non-public portion of an inspection report, according to the release, describes "deficiencies in the firm's overall system of quality control such that the [PCAOB] has doubts that the system provides reasonable assurance that professional standards are met."
Perhaps the PCAOB's most important message in the release is that it views seriously the...