PCAOB Hosts Roundtable on Communications with Audit Committees

The PCAOB held a roundtable on September 21 to obtain additional insight from investors, audit committee members, auditors and management about communications with audit committees. The Board proposed a new standard on communications with audit committees on March 29, 2010. The standard emphasized the importance of effective two-way communications between the auditor and the audit committee. The comment period closed on May 28. During the roundtable, the Board solicited additional views on some of the key issues that were raised in the comment letters. The Board has reopened the comment period on the proposal until October 21.

Acting Chair Daniel Goelzer noted that some of the commenters urged the Board to conduct additional outreach in connection with the proposed standard, and particularly with members of audit committees. Some commenters said the proposal relied too heavily on the auditor's perspective and did not represent the audit committee's perspective. Dennis Beresford, a professor at the University of Georgia, said there were more audit committee members at the roundtable than had submitted comment letters in response to the Board's proposal.

The proposed standard would require communications beyond those required in AU Sec. 380, both on audit issues and on significant accounting matters. Most of those who submitted comment letters thought the proposal would be an improvement over the existing standard since it incorporates the SEC's communication requirements and reflects current best practices. Other comment letters said the proposed standards were too broad. Board member Charles Niemeier said that, based on inspection reports, he is concerned that auditors are not standing up to management.

Beresford, who serves on the board of various public companies, said he wants to hear from the auditor about what is new or unusual. He also wants to hear the auditor's assessment of the tone at the top at the company, including an assessment of the quality of financial management and the internal audit.

Lynn Turner with the forensic audit firm LECG, said all of the topics in the Board's proposal are relevant. There is nothing in the proposal that an audit committee would not want to know, in his view. If the audit firm does its job right, he said its presentation to the audit committee is never turned into a boilerplate checklist. Turner agreed with Beresford about the wish to know the auditor's view about the tone at the top and the quality of financial management.

J. Michael Cook, a director on the boards of various public companies, said he opposes additional significant new requirements that would take time away from audit committees' other responsibilities. Cook would prefer a people-oriented best practices approach rather than mandated communications. He said that information about the tone at the top is some of the most important information he receives, but if the Board tried to include that in its standard, it would have to define the term with great precision. It is preferable to make it a best practice because to institutionalize it would be to kill it, in his view.

Robert Dohrer with McGladrey & Pullen, LLP cautioned that when there is a principles-based approach, the response is a hue and cry for guidance which results in a lengthy list of things to consider which turns into a checklist. That in turn leads to boilerplate and over-communication, he said.

The proposed standard adds new issues which the auditor must communicate to the audit committee if management has not adequately done so. The standard also would add a requirement for the auditor to communicate to the audit committee any consultations outside the engagement team related to significant accounting matters, such as discussions with the national office or industry specialists. The Board said there appeared to be a consensus that the audit committee benefits from the auditor's insight about the strengths and weaknesses in the company's financial reporting.

Cook was troubled by the proposal to require the auditor to communicate certain information to the audit committee if management fails to do so. The Board has no authority to dictate communication responsibilities for management, but it would do so through a backdoor auditor communication process, in his view. He said a judgment framework would be a superb addition to the proposal. Write the principle and let the auditor decide what is important to communicate to the audit committee, he urged.

Some of the comment letters suggested that the two-way communication should not be limited to the auditor's inquiry of the audit committee about the risks of material misstatement, particularly if further information becomes available to the audit committee or the audit committee believes the auditor's assessments or conclusions might be incomplete or incorrect. Since the Board does not have oversight of audit committees, it sought views about other ways to promote effective two-way communications without being able to impose any requirements on the audit committee.

Robert Kueppers, the deputy chief executive officer at Deloitte LLP, said there should be no more than a handful of "absolute musts" in the standard. Related party matters, which is not in the current draft, should be among the musts, in his view. The Board is trying to mandate what the auditor should do, but it has authority over only one corner of the triangle, he said. PCAOB Chief Auditor Martin Baumann said a more principles-based standard might work for experienced people like those around the table, but asked about the need for more precise standards for less experienced people.

Turner said the idea of a checklist for less experienced auditors is not a bad idea. Investors want to know that auditors have asked all of the right questions, he said. He said that a principles-based approach has not worked all that well and the track record for assessing the tone at the top is not very good. Donald Nicolaisen, a former chief accountant at the SEC, said there are endless resources for best practices.

The comment letters contained mixed views on the proposed requirement that auditors document all communications in sufficient detail that an experienced auditor with no previous connection with the engagement could understand the communications. The Board sought additional views on the risks of allowing some communications to be made orally.

The proposed standard also would require the auditor to communicate directly to the audit committee its views on the company's accounting policies, practices and estimates or other communications as required by the SEC. Beresford recommended that the Board delete a paragraph on critical accounting estimates, which he said was a matter for the SEC to consider in connection with MD&A. This is not an area on which the Board should ask auditors to focus.