Regulators and others have been increasing their focus on audit
committee performance, noting the importance of the committees to
the credibility of financial statements. This means it is
imperative for committee members to make sure they are overseeing
the financial reporting process, including auditors'
activities, and fully discharging their responsibilities.
Paul Beswick, chief accountant in the SEC's Office of the
Chief Accountant, indicated in a speech at the American Institute of CPAs'
December 2013 Conference on Current SEC and PCAOB Developments that
it is important for audit committees to assess the quality of the
audit, including when deciding whether to hire or retain an auditor
rather than simply focusing on auditor fees and selecting the
low-cost provider. In this regard, he noted that, "if the
audit committee is solely fee hunting and if there was a subsequent
audit failure, beyond the obvious problems for the auditor and the
company, this may raise questions about the diligence of the
members of the audit committee in fulfilling their
Brian T. Croteau, deputy chief accountant in the SEC's
Office of the Chief Accountant, also discussed the responsibilities
of audit committees in a speech at the same conference. He noted that
management and audit committees have a responsibility to ensure
auditor independence and observed that, "[d]epending on the
facts and circumstances of [an auditor independence] violation, it
can call into question the reliability of the company's
financial reports and the effectiveness of the audit
committee's oversight of the auditor." He suggested that
improvements in procedures may be appropriate to ensure audit
committee preapproval of audit and non-audit service offerings in
accordance with applicable requirements. Croteau also suggested
that audit committees review the PCAOB's information about
inspections and quality control remediation determinations.
In this regard, in December, the PCAOB issued a report on Engagement Quality Reviews that suggests
questions for audit committees to ask the engagement quality
reviewer given the findings by the PCAOB's inspection staff of
deficiencies in these reviews. The PCAOB recommends that audit
committees ask the reviewer about, among other things, (a) the
nature and timeliness of, and the number of hours devoted to, the
review and (b) the most significant matters identified that needed
additional audit procedures or follow up.
The PCAOB has focused on audit committees since it identified
audit committee outreach as a near-term priority in its November
2012 Strategic Plan. The PCAOB's 2013–2017 Strategic Plan, issued in
November 2013, discusses its progress in implementing that
priority, including through the issuance of additional materials
related to inspections and discussions with audit committees. One
of the PCAOB's goals in its outreach is to assist audit
committees in their oversight of auditors and the financial
reporting process. As the PCAOB provides more guidance to audit
committees—such as by identifying questions that committee
members should consider asking auditors—best practices for
audit committee performance are apt to evolve, which will likely
result in heightened expectations of investors and regulators as to
how audit committees should oversee auditors.
For additional observations on the increasing focus on audit
committees, read Linda L. Griggs's August 2013 article prepared
for the Practising Law Institute's 45th Annual Institute on
Securities Regulation, “The Evolving Responsibilities of Audit
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The European Parliament and the EU member states recently reached a preliminary agreement on auditor reform. The agreement includes a provision mandating auditor rotation every 10 years for listed companies, banks, and insurance companies, with extensions for 10 years, if the engagement is put out for public bid, and 14 years, if the audit is conducted by multiple firms.
The Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB") are proposing dramatic changes to lease accounting rules that would virtually eliminate operating lease accounting treatment.
On July 8, 2013 the full House of Representatives passed by a large, bipartisan margin the bill (previously reported on June 20) to prohibit the Public Company Accounting Oversight Board from requiring mandatory auditor rotation.