New edict should empower audit committees to ask for more information on PCAOB inspection by external auditors.
The Public Company Accounting Oversight Board Wednesday gave a boost to corporate audit committees that often try (but fail) to get access to the audit inspection results conducted by their outside auditors.
In its announcement, the PCAOB said that in many cases, the inspection results are given freely and in other cases, not at all. This was also the consensus of a similar discussion at The NeuGroup’s Internal Auditors’ Peer Group in March, in which several members said external auditors never reveal their results. However, at least a couple members said their auditors give them easy access. Now the PCAOB has weighed in in an attempt to help give all AC’s more access.
“The Board encourages registered public accounting firms to communicate openly, candidly, and effectively with audit committees about the results of PCAOB inspections, including discussing the problematic aspects of otherwise nonpublic information,” said James Doty, PCAOB Chairman, in a statement.
According to news reports, the subject of information access came up at the PCAOB’s March hearing on audit rotations. Audit rotations have been pushed hard by the PCAOB ever since Mr. Doty was named head of the agency. Rotation is seen as keeping audit firms honest and independent (see related story here).
Law intervenes.
By law, certain parts of the inspection reports cannot be made public by the PCAOB. These usually contain details about a company’s deficiencies in aspects of the business that raises doubts “that the system provides reasonable assurance that professional standards are met,” according to the PCAOB. However, the Board can release the results if company “fails to remediate these findings to the Board’s satisfaction within twelve months of issuance of the inspection report.” Interestingly, the PCAOB said audit firms themselves have copies of this part of the report “and are not prohibited by law from releasing this information at any time, though there may be other reasons they decline to do so.”
Mapping access.
The PCAOB’s announcement is basically a “how-to” in terms of going about gaining access to the report. It offers suggestions and questions AC’s “may wish to ask” audit firms in order to get information on the company.
Here are a few of the suggested questions:
- Was the company’s audit selected for PCAOB inspection? Committees may want real time updates about whether their audit has been selected, what is being looked at, and any deficiencies identified by the PCAOB in the audit. The release provides additional information about specific areas for possible further inquiry in this regard.
- Did the PCAOB identify deficiencies in other audits that involved auditing or accounting issues similar to issues presented in the company’s audit? Committees may wish to understand whether similar deficiencies exist in the company’s audit and, if so, what has been done in response.
- What were the audit firm’s responses to the PCAOB findings? Committees may want to understand whether the audit firm agreed with the PCAOB’s findings and, if not, why not. If the firm agreed, what did the firm do in response?
The third question the PCAOB acknowledges often gets the responses that companies should brush aside or treat with skepticism. However, it doesn’t give explicit instruction on how to reply to such answers.
The PCAOB report in fact doesn’t really make any law or determinations, but by acknowledging that there is an information gap and encouraging ACs to push for more information, it has given ACs new tools to argue their case.
“In the Board’s view, an audit firm’s candid discussion of its PCAOB inspection results with an audit committee can have value for an audit committee not only in relation to the audit committee’s oversight and evaluation of the audit engagement generally, but also in relation to the audit committee’s role in the oversight of the company’s financial reporting process.”