Audit inspectors have uncovered instances where auditors have asserted independence after addressing violations of independence rules, prompting staff members to issue new guidance.
The Public Company Accounting Oversight Board issued guidance to auditors to explain how they should handle communication with audit committees under the board’s Rule 3526 when auditors have identified and resolved independence violations. In short, the staff expects auditors to take more ownership over historic violations in written communications with the audit committee.
The PCAOB guidance focuses on a specific fact pattern where auditors identify a potential independence issue and properly raise it with the audit committee, after which both parties determine the issue has not impaired independence and elect to continue with the engagement. To fully comply with Rule 3526, which governs auditor communication with the audit committee, auditors would be expected to do all of the following:
- summarize for the audit committee each violation that existed during the year;
- summarize the auditor’s analysis for how objectivity and impartiality are still intact despite the violation, taking care to address why they believe investors would agree;
- if multiple violations occurred, provide and additional layer of analysis addressing how independence is intact taking all of the violations together;
- discuss the analysis with the audit committee;
- document the discussion with the audit committee; and
- affirm in writing that the firm would be in compliance with the PCAOB’s independence rules except for the identified violations.
The guidance to auditors points out that they cannot claim to be in compliance with independence rules in their written communication with the audit committee when there was some violation of the rules during the audit year, even if the audit committee agrees the violation did not impair objectivity. Auditors would not be required, however, to alter the language in their audit reports regarding independence.
The PCAOB adopted Rule 3526 in 2008 to provide explicit instructions to auditors on how they are required to address independence issues with audit committees. Both the PCAOB and the Securities and Exchange Commission have increased their focus on auditor independence issues the past few years, including with a handful of enforcement actions.