The PCAOB’s reopened comment period on its proposed standard on auditor communications elicited concerns about a checklist approach to such communications. On March 29, 2010, the Board proposed a new standard to enhance the relevance and effectiveness of the communications between the auditor and the audit committee. The proposed standard is intended to emphasize the importance of effective two-way communications between the auditor and the audit committee. The comment period for the proposed standard ended on May 28, 2010. After a September roundtable on the proposed standard, the Board reopened the comment period until October 21, 2010 so that interested parties could provide comments on topics discussed during the roundtable.
The proposed standard incorporates the SEC requirements for the auditor to communicate directly to the audit committee critical accounting policies and alternative accounting treatments, The proposed standard would also require the auditor to communicate some new matters to the audit committee if management has not adequately communicated the matters, including the anticipated application by management of accounting or regulatory pronouncements that have been issued but are not yet effective and may have a significant effect on financial reporting, how management monitors critical accounting estimates subsequent to their development, and management's significant assumptions used in critical accounting estimates that have a high degree of subjectivity. Other proposed subjects of communication are any significant changes to assumptions processes made by management to the critical accounting estimates in the year under audit, a description of the reasons for the changes, the effects on the financial statements, and the information that supports or challenges such changes.
In its comments, Deloitte agreed with those at the roundtable who cautioned the PCAOB against creating several new requirements with respect to auditor communications with the audit committee. In Deloitte’s view, this sentiment is aptly expressed by Dennis Beresford’s statement at the roundtable that expanded requirements for auditor communications could easily lead to a checklist approach, whereby routine matters tend to drive out more substantive issues.
Deloitte believes that the objective behind communications between the auditor and the audit committee is to provide the audit committee with sufficient and relevant information so that it can carry out its oversight duties in an effective and efficient manner. Thus, Deloitte said that creating more required auditor communications does not necessarily make the communications to the audit committee more effective. But there are several matters that are of such importance that Deloitte feels they should result in required discussions with the audit committee in all instances. These topics are significant disagreements with management, material written communications from the auditor, uncorrected misstatements, and related-party transactions.
The applicability and importance of other proposed communications would depend on company circumstances. Deloitte urged the Board to revisit some of these communications and determine if they should be required in all cases, and if others should be communicated dependent upon the facts and circumstances of the engagement based on the auditor’s judgment and the importance of the particular issue for a particular audit engagement.
In its post-roundtable comments, Deloitte also shared the concerns expressed by some during the roundtable regarding varied expertise and commitment of audit committee members. The firm agreed with the sentiment that communications between the auditors and the audit committees need to be very flexible to reflect those very different skill sets. Deloitte posited that the effectiveness of audit committees and the appropriate expertise by audit committee members will not be enhanced by creating more required auditor communications. To help improve the effectiveness of audit
committees, said Deloitte, the PCAOB should consider teaming with the National Association of Corporate Directors and the SEC to issue practice aids or hold workshops on best practices for audit committees, which would be a more effective way to help audit committees improve their performance.