Perhaps in early 2015, the Securities and Exchange Commission is expected to issue a concept release exploring possible avenues to elevating the work of public company audit committees, according to SEC Chair Mary Jo White.
In brief remarks to the Investor Advisory Group of the Public Company Accounting Oversight Board, White said the staff is working on a concept release that will address “many of the same issues” that one particular working group of the IAG explored with respect to the relationship between the audit committee and independent auditors. “I can’t overstate the importance of the audit committee functioning at the highest possible level,” she said. The staff’s concept release will address many of the issues explored by the working group, she said. We are quite actively engaged on them.”
The working group presented a report to the PCAOB lamenting some weaknesses in the relationship between auditors and audit committee. Audit committees have fiduciary and statutory duties, for example, but their work is not appreciated or even seen by investors. Audit committees play a part in controlling financial reporting, but no report of their work is contained in the financial statements. Audit committee members may have less training or experience than the auditors they are expected to oversee and scrutinize. “The work of the audit committee could be more transparent, and the evaluation of the auditor’s work could be more specific,” said Robert Tarola, a member of the IAG and president of consulting firm Right Advisory. “The independence of each could be made more clear. We seek ways for audit committees and auditors to seek more effectiveness of their inter-related roles.”
The group asked the PCAOB and the SEC to consider whether the audit committee should report on its role in the financial reporting supply chain along with the CEO, CFO, and audit firm, and whether auditors or someone else should be required to assess and report on the duties and operational effectiveness of the audit committee. The group also posed questions about whether an evaluation of the audit committee should be reported privately to the board or publicly to shareholders, and whether auditor should be assess the objectivity of the audit committee. A group of governance organizations has issued a similar call for audit committee reporting to be upgraded.
The PCAOB has no regulatory authority over audit committees, but White and SEC Chief Accountant James Schnurr attended the session along with other SEC staff members to hear what the PCAOB’s investor advisors are recommending. In addition to recommendations on the auditor-audit committee relationship, the various working groups offered numerous suggestions with respect to the relevance and quality of the audit and the business model and incentives under which audit firms operation. Perhaps most radical, IAG member Lynn Turner, former chief accountant for the SEC, said the SEC should do away with the requirement of public companies to secure an audit and allow shareholders to decide for themselves if they want an audit. He surmises investors will demand audits, which would make them the clients of the audit firms, perhaps redirecting auditors to put investor interests foremost when conducting the audit.
White’s schedule prevented her from hearing all the presentations, but she promised to do her homework later “This has been enormously useful,” she said. “I will catch up on all the topics. I am mightily interested in all of them.” In her opening remarks, White said she’s especially interested in the relationship between auditor and audit committee. “I do think the PCAOB and audit committee and audit committee chairs should be linked arm in arm and have the same objectives. The more we can do in that space the better.”