September 19, 2012

Information for Audit Committees Relating to the PCAOB Inspection Process

By Mark Agulnik, Partner, Assurance Services and David Maggio, Senior, Assurance Services

Assurance

On August 1, 2012, the Public Company Oversight Board (PCAOB) issued release No. 2012-003. This release is the premise for Auditing Standard No. 16, Communications with Audit Committees, which was adopted on August 15, 2012 by the PCAOB, but still needs to be approved by the Securities and Exchange Commission (SEC). If approved, the standard will be effective for audits of fiscal years beginning after December 15, 2012. This release offers audit committees a roadmap of how a PCAOB inspection process is performed, what these inspection reports mean, and a guideline of how to get more information out of their auditors about inspection findings and implications. With the passing of President Obama’s “JOBS” (Jumpstart Our Businesses Startup) Act this year, it is more important than ever for audit committees to utilize all their resources and to gain as much information as possible to mitigate the increased risk of potential fraudulent activity that many of the opponents of the Act have pointed out.

A PCAOB inspection report is split into two findings sections. The first section describes audit deficiencies where inspectors document areas that the auditor failed to gather sufficient audit evidence to support their audit opinion. Historically, this section is public knowledge and is available anytime through the PCAOB’s web site.The second section addresses findings related to “deficiencies in the firm’s overall system of quality control such that the [PCAOB] has doubts that the system provides reasonable assurance that professional standards are met.” This second section is prohibited by law from being publically released by the PCAOB, although the results may be communicated voluntarily from the audit firm under review.

Many audit committees have expressed frustration with the lack of communication related to the non-public portion of the PCAOB’s regulatory inspection findings as it pertains to their auditors. In response to these complaints, the PCAOB has developed a framework of questions and strategies for initiating or enhancing the inspection related discussions especially with respect to the findings under Section 2 of an inspection report. “Open lines of communication between auditors and audit committees improve the quality of audits, and the final standard enhances the quality and relevance of those communications,” said James R. Doty, PCAOB Chairman.

The release details specific questions that audit committees should be asking their auditors to open up the lines of communication. These include, for example,

Was the Company’s audit selected for PCAOB inspection?
Did the PCAOB identify deficiencies in other audits that involved auditing or accounting issues similar to issues presented in the Company’s audit?
What were the audit firm’s responses to the PCAOB findings?
What topics are included in Section 2 findings?

Audit committees should regularly engage the Company’s auditors in order to open up the communication channel between the Board of Directors and the auditors. It will also give audit committees the opportunity to learn key information about the quality of the audits being provided.

For the full text of the release, please visit www.pcaobus.org

Michael Messina contributed to this article.

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