29 February 2012

ICGN commented to the PCAOB on the Re-proposed Auditing Standard related to communications with audit committees

The ICGN published its comment letter on the Re-proposed Auditing Standard, Communications with Audit Committees, issued by the PCAOB. The ICGN provided general comments as well as comments on some of the specific issues raised in the document.

A key audit committee role is to uphold audit quality and to protect the interests of investors. Robust and open communication between the external auditor and the audit committee supports and promotes this confidence.

The International Corporate Governance Network (ICGN) believes the audit committee of the board has an important role in ensuring the integrity of financial reporting and ensuring quality oversight of financial reporting on behalf of shareowners. Communications that serve to enhance their role are important and helpful to shareowners. The auditor, on the other hand, issues the audit report for the benefit of shareowners and the capital markets, not only for the benefit of the audit committee. It is in the course of undertaking the audit that the auditor may glean information useful to the audit committee as well as to shareowners and future investors.

The ICGN also believes it is most important that the specific roles of the auditor, the audit
committee and management are clearly outlined within the standard, so there can be no confusion in this respect.  No one party should encroach on the legitimate role of the others.

The ICGN is particularly interested in any auditor communications and information that may be material to the market price of the company shares. In particular, this could include:

• key business, operational and audit risks which the auditor believes exist, and which the auditor has considered when conducting the audit;
• the auditor's perspective on what are the key assumptions used in judgements that materially affect the financial statements, and whether those assumptions are at the low, most likely, or high end of the range of possible outcomes;
• the appropriateness of the accounting policies adopted;
• changes to accounting policies that have a significant impact;
• the methods and judgements made in valuing assets and liabilities;
• any unusual transactions;
• accounting applications and practices that are uncommon to the industry;
• identification of any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit;
• key audit issues and their resolution which the audit partner documents in a final summary audit memo;
• quality and effectiveness of the governance structure and risk management (including internal controls);
• evaluation of whether there is a substantial doubt about the company's ability to continue as a going concern for a reasonable period of time; and
• a view on how the entity compares to its peers in the effectiveness of its internal controls and financial reporting practices.

The ICGN would like to see robust communications between the auditor and the audit committee that are not formulaic nor adopt a checklist approach. Further, the ICGN would like to avoid a compliance approach to these communications. Minor manors should not be included unless they are indicative of higher level issues and risks. The dialogue should be a two-way, meaningful exchange on important matters and not clouded by minutiae. However the ICGN also believes that a record of the exchange should be kept in order to avoid misunderstandings. Ultimately, the ICGN would like to see a robust, substantive exchange between the parties, aimed at helping to ensure effective communications in promoting transparent and reliable information in the conduct of the audit.

Whilst it seems that the new standard does not impose any new requirements on auditors, it does helpfully clarify the nature and style of the communications between the auditor and the audit committee. The ICGN is pleased to see references to a number of specific manors, not necessarily placed here in order of importance, which should be discussed with the audit committee, including:

• the audit strategy and structure and timing of the audit;
• auditor liability;
• the auditor's assessment of risk areas, including fraud risks;
• the auditor's use of external experts and other auditors;
• difficult and contentious issues that arise in the course of the audit;
• significant unusual transactions;
• significant accounting policies, judgements and estimates; and
• going concern evaluation and issues and other manors.

To ensure high-quality audits, the ICGN also believes audit committees should not agree to limit the liability of outside auditors and ensure this is clearly expressed in its communications with the external auditor and shareowners.

Full paper

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