The Public Company Accounting Oversight Board has approved a final standard outlining specific pieces of information that auditors are required to take to the audit committee, including whether the company is at risk of failure, significant unusual transactions, and the use of outside help to conduct the audit.
The PCAOB approved Auditing Standard No. 16, Communication with Audit Committees, to update existing standards and establish some new requirements intended to make communication between auditors and audit committees more relevant and timely. The standard submitted to the SEC will require auditors to address with audit committees the overall strategy of the audit, the timing of audit activities, and the significant risks that auditors plan to address, according to a PCAOB staff presentation to the board during its public meeting to adopt the standard.
The standard will require auditors address any significant accounting policies and practices, significant estimates that are key to financial statement assertions, significant unusual transactions that auditors discover as they examine the books, and any plans they have to rely on the work of internal auditors or outside audit firms to complete their work. It also will require auditors to discuss with audit committees whether they have doubts about the company's ability to remain in business as a going concern, and to inform the audit committee of any significant difficulties they encounter during the course of the audit.
The PCAOB originally proposed the standard in March 2010, then revised it and proposed it again in December 2011. Chairman James Doty said the board received “a wealth of advice” through the process that brought to light situations where more dialogue between auditors and audit committees might have led to better audits. “Indeed in my own experience as a counselor to boards, many an audit committee has wondered with regret, ‘why didn't the auditors tell us about this?'” Doty said. The new standard should “eliminate perceived constraints and foster robust communication” that will lead to better audits, he said.
The PCAOB intends for the standard to become effective in 2013, but it must be approved by the Securities and Exchange Commission first. The SEC also must decide if the new standard will apply to “emerging growth companies” as defined under the JOBS Act. ECGs are a new category of start-up public companies that are exempt from many of the usual reporting requirements for public companies, including all new standards adopted by the PCAOB, unless the SEC decides to apply them. The PCAOB conducted an analysis on whether the standard should apply to ECGs and recommended adoption to the SEC.