The Public Company Accounting Oversight Board voted to approve a new Auditing Standard No. 16, Communications with Audit Committees. The SEC has to approve the Standard before it becomes effective, and it only applies to fiscal years beginning on or after December 15, 2012. Nonetheless, mutual fund boards should prepare now for the changes adoption of the new Standard will bring.
The biggest changes for mutual fund audit committees are:
- The Standard requires communications to be made to the audit committee in a timely manner and before the audit report is issued. This may affect the timing of the audit committee meetings.
- The Standard requires the auditor to establish an understanding of the terms of the audit engagement with the audit committee, rather than management. This will require the audit committee to be more engaged in the details of the audit with the auditors.
- The Standard requires the auditor to inquire of the audit committee whether it is aware of matters relevant to the audit, including, but not limited to, violations or possible violations of laws or regulations. This will put on the committee increased urgency for overseeing compliance at the company.
There are new subjects that need to be expressly discussed with the auditors. Specifically, the Standard requires discussion of:
- Certain matters regarding the fund’s accounting policies, practices, and estimates
- The auditor’s evaluation of the quality of the fund’s financial reporting
- Information related to significant unusual transactions, including the business rationale for such transactions
- The auditor’s views regarding significant accounting or auditing matters when the auditor is aware that management consulted with other accountants about such matters and the auditor has identified a concern regarding these matters
- An overview of the overall audit strategy, including timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy, or identified risks Information about the nature and extent of specialized skill or knowledge needed in the audit; the extent of the planned use of internal auditors, company personnel, or other third parties, and the involvement of other independent public accounting firms or other persons not employed by the auditor during the audit
- The basis for the auditor’s determination that he or she can serve as principal auditor, if significant parts of the audit will be performed by other auditors
- Situations in which the auditor identified a concern regarding management’s anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting
- Difficult or contentious matters for which the auditor consulted outside the engagement team
- The auditor's evaluation of going concern
- Departures from the auditor’s standard report
- Other matters arising from the audit that are significant to the oversight of the company’s financial reporting process, including complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention during the audit
As for current action items for mutual fund boards, audit committees should:
- Discuss with the auditor the anticipated timing of the required communications and whether changes to meeting agendas will be necessary to accommodate the additional communication requirements
- Prepare for the possibility of increased auditor requests for formal representation letters from the audit committee or audit committee chair, and assess whether it is appropriate to provide such representations
- Re-evaluate the audit committee’s processes for receiving information about investigation and compliance matters, to determine if any changes are advisable
- Once the Standard is adopted (in case there are changes), the audit committee charter and annual calendar should be reviewed and updated as appropriate