Volume 6, Issue 11

November 2012

I. CAQ Issues Practice Aid on Communications with Audit Committees about PCAOB Inspections

The CAQ, which supports transparent, candid communication between auditors and audit committees, recently issued a Practice Aid intended to encourage audit firms to proactively communicate with audit committees about inspections findings and quality control improvements.

Many audit firms engage in discussions with audit committees about PCAOB inspections and quality control matters. The CAQ developed the CAQ Practice Aid for Discussions with Audit Committees About Inspections Findings and Quality Control Matters to provide a framework that incorporates best practices across the CAQ’s member firms.

“Proactive engagement by auditors with audit committees regarding inspections and firm quality control improvement initiatives should provide audit committees valuable insights into the firm’s quality control program,” said CAQ Executive Director Cindy Fornelli. "Auditors can share robust information with audit commmittees without sharing the confidential portions of the inspection report."

The Practice Aid offers insights on several topics so that auditors may tailor such communications to the needs of each audit committee, including:

• Whether the issuer’s audit was selected for inspection by the PCAOB and, if so, the status of the progress of that inspection as deemed necessary
• Information about the firm’s responses to the PCAOB findings with respect to the issuer’s audit
• Whether any of the matters described in the public portion of a PCAOB inspection report on the firm, including matters not involving the issuer’s audit, involve issues and audit approaches similar to those that arose in the audit of the issuer’s financial statements
• What steps the firm is taking to address issues identified with respect to its system of quality control
• Whether issues described by the PCAOB in general reports summarizing inspection results across groups of firms relate to the audit of the issuer’s financial statements and internal controls over financial reporting, and how the firm is addressing those issues

II. CAQ Webcast Advises Auditors on Audit Committee Communications

On October 24, the CAQ hosted “Communications with Audit Committees: Requirements and Leading Practices,” a Webcast focused on the PCAOB’s recently-adopted Auditing Standard 16, Communications with Audit Committees, as well as the CAQ Practice Aid discussed above.

Moderated by Cindy Fornelli, the Webcast featured PCAOB Board Member Jay Hanson; Joe Ucuzoglu, National Managing Partner of Regulatory and Public Policy with Deloitte LLP; and Michele Hooper, President and CEO of the Director’s Council, member of the CAQ Governing Board and audit committee chair.

Proactive communication between auditors and audit committees is essential to the audit committee’s responsibility to oversee a company’s financial reporting process and to serve a company’s investors. “Your client, if you’re the auditor, is the audit committee representing the company’s investors,” said Ucozoglu. “When you have a client, you want to not just meet but exceed their expectations. You want to bring issues to them proactively [and] you want to be very candid and transparent.”

Noting that candid and robust communications requires two parties, Hooper shared her belief that it’s important that audit committees determine the types of information about inspections they need from the external auditor and be prepared to ask questions to gather that information. “This issue of being proactive is paramount…,” Hooper posited. “There’s a huge responsibility on the part of audit committees and audit committee chairs in making [proactive communication] happen. It is not solely the responsibility of the external auditors.”

Cindy Fornelli (left) discusses audit committee communication with (from left) Joe Ucozoglu, Michele Hooper and Jay Hanson

During discussion about PCAOB inspections findings and quality control matters, Hanson talked about the PCAOB’s Information for Audit Committees About the PCAOB Inspection Process. Noting that the PCAOB has no oversight responsibilities vis-à-vis audit committees, Hanson said that with the recently-issued release and other activities, the PCAOB is trying to do more to “equip audit committees with as much information so that [they] can do the best job [they] can.”

The PCAOB’s release, along with the CAQ’s Practice Aid on communications with audit committees about PCAOB inspections and quality control matters, were designed to encourage candid conversations around what PCAOB inspection findings and any issues identified by the PCAOB with a firm’s quality control programs.

III. CAQ and Profession Participate in Third PCAOB Public Meeting on Firm Independence and Rotation

On October 18, Cindy Fornelli and audit firm executives were among those appearing before the PCAOB during a public meeting on Firm Independence and Rotation in Houston, TX. Consistent with two previous meetings held in Washington, DC (March 20-21, 2012) and in San Francisco (June 28, 2012), the PCAOB heard from a variety of audit quality stakeholders regarding its concept release to enhance auditor independence through mandatory audit firm rotation.

During her testimony, Fornelli summarized ongoing efforts within the audit profession to improve objectivity, professional skepticism, and audit quality, and urged the PCAOB to focus the global dialogue on enhancing auditor independence on ideas that have a direct and demonstrable nexus to audit quality.

Also addressing the PCAOB in Houston was Ken Daly, President and CEO of the National Association of Corporate Directors (NACD). Daly shared his perspectives on the role of the audit committee in enhancing auditor independence. Daly pointed to the “Audit Committee Annual Assessment of the External Auditor,” a new tool developed by the NACD, the CAQ and other leading governance organizations, as an example of collaborative efforts undertaken to support audit committee effectiveness.

The PCAOB issued a concept release in August 2011 that asked whether mandatory audit firm rotation is a possible means of enhancing auditor independence, objectivity and skepticism. In response to the concept release, the PCAOB has received some 700 comment letters that are overwhelmingly opposed to the proposal. In addition to soliciting views through comment letters, the PCAOB has heard from approximately 100 witnesses during the three open meetings.

IV. Anti-Fraud Collaboration Skepticism Webinar Series Concludes

The Anti-Fraud Collaboration – collectively, the CAQ, Financial Executives International, The Institute of Internal Auditors and NACD – recently issued the final three episodes in the Skepticism Webinar Series developed by NACD.

The webinars focused on the practice of skepticism among audit committees, financial executives and internal auditors. The latest episodes followed the release of the introductory webinar on “The Etiquette and Ethics of Skepticism” and “Skepticism and the External Auditor.”

Each of the webinars included executives from members of the Anti-Fraud Collaboration, as well as additional subject matter experts. The Skepticism Webinar Series attracted more than 2,700 visitors as of mid-November. NACD will publish a white paper on the webinar series and resources relevant to participants in the financial reporting supply chain in the coming months.