Volume 6, Issue 12

December 2012

I. Audit Committee Annual Assessment of the External Auditor Tool Focus of “This Week in the Boardroom”

CAQ Executive Director Cindy Fornelli recently appeared on “This Week in the Boardroom” to discuss the Audit Committee Annual Assessment of the External Auditor tool released last October by leading governance organizations with support from the CAQ. “This Week in the Boardroom” is a production of Corporate Board Member, an NYSE Euronext Company, and one of the organizations that developed the tool.

In an interview with Corporate Board Member Chairman TK Kerstetter and Scott Cutler, NYSE Euronext Executive Vice President, Fornelli discussed the importance of resources that can support audit committees in their mandate to oversee the external auditor, including objectively evaluating the auditor’s performance on an annual basis in order to make an informed recommendation to the Board whether to retain the auditor.

Cindy Fornelli discusses new auditor evaluation tool on “This Week in the Boardroom."

While audit committees use a variety of approaches in assessing the performance of the external auditor, Fornelli said that the new tool is meant to provide a framework for a formal annual evaluation. The tool is organized into three broad topics: the services and resources provided by the independent auditor, communication and interaction between the audit committee and the auditor, and the auditor’s independence, objectivity and skepticism.

The tool is the first resource of an ongoing collaboration among the Association of Audit Committee Members, Inc., Corporate Board Member, Independent Directors Council, Mutual Fund Directors Forum, National Association of Corporate Directors, Tapestry Networks and the CAQ. These organizations share a commitment to enhance the effectiveness of audit committees.

In the interview, Fornelli discussed potential additional tools under consideration by the collaboration, including a tool to help audit committees evaluate and oversee the annual audit plan; opportunities to communicate the audit committee’s expectations for the audit to the external auditor; and vehicles to communicate with shareholders the ways in which the audit committee oversees the external auditor to provide a more robust view of its activities.

II. New CAQ Guide Describes PCAOB Inspections Program

The CAQ recently released the Guide to PCAOB Inspections, the latest in a series of informational publications on topics of interest to investors, public company auditors and others with a role in the capital markets. The Guide to PCAOB Inspections provides a high-level overview of the PCAOB’s process for inspecting public company auditing firms, including the selection and review of audits for conformance to audit standards, and the assessment of a firm’s audit quality control program.

“The Guide to PCAOB Inspections offers a straightforward introduction to the PCAOB inspections program, which has a significant impact on the quality of public company audits and investor confidence in the integrity of audited financial statements,” said Cindy Fornelli.

The release of the Guide to PCAOB Inspections, which introduces the PCAOB inspections program, follows recent inspections-related resources that offer a technical overview for auditors and audit committees. The CAQ’s Practice Aid for Discussions with Audit Committees About Inspections Findings and Quality Control Matters, released in October, is designed to encourage audit firms to proactively communicate with audit committees about inspections findings and quality control improvements. An October Webcast, “Communications with Audit Committees: Requirements and Leading Practices,” featured best practices for auditors and audit committees on holding candid conversations about PCAOB inspections.

The Guide to PCAOB Inspections is the latest in the CAQ’s series of Guides on auditing matters, including the Guide to Public Company Auditing and the In-Depth Guide to Public Company Auditing: the Financial Statement Audit.

III. AAA Webinar Spotlights New Auditing Standard on Audit Committee Communications

On November 9, Cindy Fornelli moderated a webinar on PCAOB Auditing Standard No. 16 (AS 16), hosted by the Auditing Section of the American Accounting Association (AAA). The webinar, “Communications with Audit Committees: What Changes with AS 16?”, featured Doug Prawitt, Glen Ardis Professor in the School of Accountancy at Brigham Young University, and Joe Ucuzoglu, the National Managing Partner of Regulatory and Public Policy for Deloitte LLP.

The AAA webinar focused the discussion on academic considerations of auditor-audit committee communications for an audience of accounting and auditing professors. The panelists provided their own unique perspectives on the topic.

As an audit firm partner, Ucuzoglu shared best practices to enhance the candor and quality of communications between auditors and audit committees regarding audit strategy, the auditor’s objectives, PCAOB inspections and audit firm quality control matters.

BYU’s Prawitt brought an experienced academic view to the webinar, sharing his thoughts on opportunities for new research on the auditor’s and the audit committee’s roles and responsibilities under the new standard. According to Prawitt, questions for academics to consider are whether audit committees will need to be more attentive to significant accounting and auditing issues, more challenging of management, and more attuned to significant business risks, and whether enhanced communications required by AS 16 will demonstrate an increase in audit committee effectiveness.

Prawitt and Ucuzoglu also discussed issues for auditors, regulators and academics to further consider, including whether there is a need for: more defined roles in the audit committee’s oversight of the financial reporting process; enhanced communication by the audit committee with the auditor, management and investors; and enhanced exercising of skepticism by the audit committee throughout the audit.

IV. CAQ and FASB Discuss Financial Statement Disclosure Effectiveness Forums

On November 16, Cindy Fornelli joined Marc Siegel of the Financial Accounting Standards Board (FASB) and Jan Hauser, Partner in PwC’s National Professional Services Group, in a recent discussion about two forums co-sponsored by the FASB and the CAQ on the FASB’s Disclosure Framework project.

The FASB’s Marc Siegel moderated the forums

An Invitation to Comment (ITC) on the FASB’s Disclosure Framework project issued last July presented possible approaches to improving the effectiveness of disclosures in notes to financial statements. The Financial Statement Disclosure Effectiveness Forums developed by the FASB and the CAQ were held to garner feedback from a broad range of financial reporting stakeholders on the various approaches in the ITC. A total of 54 participants, including investors, preparers, board and audit committee members, and representatives from the PCAOB and the U.S. Securities and Exchange Commission, attended the forums. Siegel, a FASB Board member, moderated the forums, held at Columbia University’s Center for Excellence in Accounting and Security Analysis on October 4, and at Stanford University's Graduate School of Business on October 8.

Fornelli told Hauser that the Forums “brought a whole host of stakeholders together to talk about not only the FASB’s Invitation to Comment, but about the whole framework with respect to what we should be doing about disclosure.”

Responses to the FASB’s ITC indicate a lack of unified view among investors and preparers as to whether and how disclosures should be streamlined to enhance their effectiveness. The forums provided participants with an opportunity to discuss potential changes and weigh the challenges and opportunities of various approaches.

What encourages Siegel “is the fact that every conference I’m at… this topic is being talked about,” noting that several companies have undertaken efforts to jumpstart the process. “If we are successful in encouraging more streamlined disclosures that are effective communication tools, when you sharpen the pencil to work on the disclosures, you will have reduced volume,” said Siegel. “There’s no way around it.”