On October 20, the PCAOB’s Investor Advisory Group met to consider the business model and incentives of audit firms; how to improve audit quality and the relevancy of the audit; and the relationship and role of the auditor with the audit committee. SEC Chair Mary Jo White attended the opening phase of the meeting and indicated in her introductory remarks that the SEC staff is “actively engaged” in work on a concept release on audit committee reporting. She said the release would be issued “early in the new year.”
While Chair White was not specific about what new disclosures audit committees might be asked to make, she commented generally that the staff was looking at many of the same issues as is the Investor Advisory Group’s Working Group on the Relationship and Role of the Auditor with the Audit Committee. In its presentation to the full Advisory Group, the Working Group proposed that audit committees “could become a more transparent part of the disclosure framework – reporting on the processes they oversee within the same documents that contain the outcomes of those processes.” In that context, the Working Group raised four questions –
Should the audit committee report on its role alongside the CEO, CFO and audit firm?
Should auditors be required to assess and report on the duties and operational effectiveness of the issuer’s audit committee? Or should some other party?
Should the auditor’s evaluation of the audit committee’s role be reported privately (to the full board) and/or publicly?
Should the auditor be required to assess the objectivity of the audit committee and expect that auditor independence will be protected by the audit committee?
Comment: As noted in the November-December 2013 Update, there is increasing interest in expanded audit committee reporting, and the Center for Audit Quality has urged audit committees to broaden their disclosure voluntarily. Many audit committees are already experimenting with reports that go beyond the basics of the existing requirements (see September 2014 Update).
Chair White’s comments foreshadow the likelihood that the SEC will join this movement by proposing to expand the audit committee report. While the SEC has announced a major initiative to streamline and simplify public company disclosure, audit committee reporting is one area in which more, rather than less, is likely to be required. Several ongoing PCAOB initiatives – particularly, audit firm rotation, engagement partner identification, and reporting on critical audit matters – raise issues that might be better addressed through SEC disclosure rules, rather than PCAOB auditing standards. The Advisory Group’s idea of mandating disclosure of the auditor’s evaluation of the audit committee seems more problematic and probably less likely to be included in the SEC’s proposals.