The Society of Corporate Secretaries &
Governance Professionals is concerned that
the proposed PCAOB standard on auditor-audit
committee communications will create a new
auditing expertise test for audit committee
members. The Society cautioned that the new
proposed requirements may, when taken as a
whole, imply a mandate that audit committee
members must have expertise in auditing
beyond the current financial literacy
requirement. Presently, listed companies
must have audit committees composed of
financially literate members, with at least
one member having accounting or related
financial management expertise. Even
financially literate directors do not
necessarily have expertise with respect to
an auditor’s performance of the annual
audit, said the Society, which urged the
Board to clarify that it did not intend to
create a new audit expertise criteria for
audit committee members. Imposing such a
requirement, cautioned the Society, could
subject audit committee members to increased
liability if they do not have such audit
expertise.
The Society also said
that the proposed requirement that an
auditor tell the audit committee about any
significant accounting matters for which the
auditor consulted outside an engagement team
is too broad and could have unintended
consequences. The Society said that the
requirement should be limited to material
matters discussed with external parties and
that communications between the engagement
team and other individuals at the audit firm
should be exempt. When it approves the
engagement of an audit firm to audit the
company’s financial statements, reasoned the
Society, the audit committee assumes that
the engagement team will consult with other
appropriate professionals at the firm. Thus,
the Society urged the Board to limit this
requirement to material consultations
outside the audit firm.
The Society also asked
the Board to eliminate the proposed
requirement that the auditor evaluate the
adequacy of two-way communications. Audit
committees already perform annual
self-evaluations, noted the Society, which
usually includes consideration of how well
the committee communicates with the outside
auditor. If the Board decides to adopt the
requirement, the Society requests that the
Board provide guidance on the parameters
that the auditor should consider in
performing the evaluation, as well as
specific guidance on the implications if the
auditor determines that communication has
been inadequate and whether a negative
evaluation creates potential liability for
the audit committee. The Board should also
address whether the audit committee has the
ability to challenge the auditor’s
determination. More broadly, the Society
fears that the proposed auditor evaluation
process could create the potential for
conflict between the audit committee and the
auditor.