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Keeping Pace with Your Audit Committee: Communication is Key

Audit committees are becoming more proactive in managing relationships with external auditors and in evaluating auditor performance—think quality of services, adequacy of resources and ensuring the audit firm’s independence. And recently there has been an increased focus on how audit committees manage external auditors, especially when it comes to communication.

Two documents recently issued by the Public Company Accounting Oversight Board (PCAOB), which oversees the audits of public companies and inspects audit firms, highlight this increased focus on communication. The first, AS 16, Communications with Audit Committees, is aimed at increasing the relevance and quality of communication between audit committees and external audit firms.

The second, Release No. 2012-003, Information for Audit Committees about the PCAOB Inspection Process, provides guidance on conversations that audit committees may wish to have with their external auditors.

A little background may be helpful. Each year, the PCAOB conducts inspections of audit firms. These inspections ascertain how the firms under review conducted their audits—in essence, whether their audit opinions were sufficiently supported by the facts. They also determine how committed the firms are to quality control—basically, whether they meet professional standards.

Release No. 2012-003 suggests some questions for an audit committee to ask its external auditor, including the following:

Has my audit been selected for a PCAOB review?

Have other companies similar to my business been selected for review?

What issues did these reviews raise?

What were the review findings?

If deficiencies were uncovered, how is the audit firm remediating them, and how will those efforts affect our company?

A benefit of talking with your auditor about the PCAOB inspection results is to gain more insight about issues the PCAOB is seeing across the profession, and to learn how you might be impacted by those issues and ways to get a leg up on proactively addressing them.

Before areas of potential concern are raised with the audit committee, management should be proactive and address them. Issues to think about and be proactive about include addressing new areas of risk, hot spots other companies are facing, and any changed focus in areas of audit scrutiny.