When Audit Standard (AS) 16 was released, Public Company Accounting Oversight Board (PCAOB) Chairman James Doty noted that many audit committees have wondered with regret “Why didn’t the auditors tell us about this?” He expressed the hope that the new standard would eliminate perceived constraints on auditor communications and foster more robust communications.
At Mayer Hoffman McCann P.C., we agree that any steps taken to improve the content and timeliness of communications between auditors and audit committees will help in the production of high quality audits. If your audit committee has a better understanding of matters of concern to your auditors it will be better equipped to meet its responsibilities to oversee the auditor’s work, resolve disagreements and decide whether the audited financial statements should be included in the company’s annual report. But more robust two-way communications will not succeed without a determined effort on the part of audit committees to be knowledgeable about specific areas that may expose investors to risks.
Your audit committee should consider taking these eight steps now to get the maximum benefits from two-way communications:
- Know what communications are required from auditors under current auditing standards. Appendix B of AS 16 provides a good starting point for audit committees of public companies. (See appendix to MHM Messenger 19-12)
- Monitor current accounting, auditing and regulatory developments.
- Compile a list of probing questions for the executive sessions held by your audit committee. Depending on the company’s structure and organization, these sessions may be held periodically with key members of the executive management team, leaders of the financial management team, and the head of internal audit, as well as the independent auditor.
- Keep the list of questions current by considering the dynamics of the industry in which the company operates, the current economic climate, any potential changes in the competitive, legislative, or regulatory environments, and any new risks or uncertainties.
- Develop threshold criteria for defining the types of issues, estimates and judgments about which your committee wants to receive issue reports from management.
- Establish a format and system for tracking the status of any complaints or tips received.
- The audit committee chair should take steps to ensure that he/she and other committee members are receiving adequate training on topics ranging from accounting and financial reporting developments to corporate governance and legal developments.
- Make time to build your knowledge of the company by visiting company plants and facilities, meetings with business unit leaders, and listening to management’s calls with analysts.
More information about what the PCAOB’s AS 16 requires relating to audit committee and auditor communications can be found in the latest issue of the MHM Messenger, available on our website.