At the 2012 annual meeting of the Association of Audit Committee Members,1 James R. Doty, the Chairman of the PCAOB, spoke on recent PCAOB initiatives designed to enhance the relevance, credibility and transparency of the audit for the sake of investors.
Mr. Doty, with history degrees in his background, connected the dots for the audience to the development of the modern audit committee, tracing the history from William Penn, through 18th century Quaker Philadelphia and the B&O Railroad to the present.
He noted that the PCAOB had recently adopted Auditing Standard No. 16, Communications with Audit Committees, that will require the auditor communicate to the audit committee, among other things:
- complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention during the audit; and
- difficulties encountered during the audit, including significant delays by management, the unavailability of company personnel, or an unwillingness by management to provide information needed for the auditor to perform audit procedures.
Mr. Doty also discussed PCAOB’s recently released guidance on what audit committees can learn from PCAOB inspections of their auditors. He noted that although the PCAOB is limited in what it can disclose to audit committees, the inspected audit firm is not so limited and may disclose nonpublic information about the PCAOB inspection report to the audit committee. He suggested that audit committees probe an auditor’s response that the firm’s reported failures merely represented a failure to adequately document work performed or a difference of professional judgment. In both cases, the PCAOB inspection staff have considered and rejected such responses. How an audit committee addresses these issues affects the tone of the audit: an audit committee that expresses concern about the auditor’s responses to noted deficiencies tells the auditor that quality matters.
Mr. Doty said that the PCAOB has received 37 comment letters on its proposed auditing standards on related party transactions, which it is now evaluating.
Mr. Doty noted that the PCAOB has released a concept release on the form and content of the standard audit report. Although he did not offer predictions on what the final PCAOB outcome would be, he offered that he is interested in “a better, more transparent reporting model that will align auditors with investors, that will make the audit more relevant, less commoditized, and that will function to more consistently require auditors to demonstrate the requisite skepticism and provide true insight.”
He also discussed the PCAOB’s concept release on auditor independence and audit firm rotation. Mr. Doty believes that some form of term limits must be explored as a “blunt instrument” to develop a customized, scaled approach to independence concerns.
Finally, Mr. Doty commented on the global nature of auditing today, with engagements often requiring the coordination of audit firms in many countries. Mr. Doty expects that the PCAOB will act in the near future on its proposed requirements to disclose how a multi-firm, international audit was accomplished.