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 responsibilities."
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 Committees”.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
