Monday, August 02, 2010

Corporate Secretaries Society Has Concerns with Proposed PCAOB Auditor-Audit Committee Communications Standard

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 assumed 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.

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