The Public Company Accounting Oversight Board has issued a release to provide information to audit committees about its inspection process and how they might use the inspection reports to question their auditing firms.

The goal is to better equip the audit committees on public company boards of directors to engage in a meaningful discussion with their companies’ audit firms about the results of inspections.

The release provides information about the meaning and significance of PCAOB inspection findings in the context of both engagement reviews and quality control reviews.  The document also suggests some specific approaches that an audit committee might consider for initiating or enhancing its inspection-related discussions with an audit firm.

“With today’s release, we want to make sure that audit committee members know how the PCAOB inspection process may assist them in their work,” said PCAOB chairman James Doty in a conference call Wednesday with reporters. “Whether an audit committee’s own company audit is being reviewed as part of an inspection, or whether it’s another company within the same industry, PCAOB inspection reports provide insight into areas of risk and audit quality that are of concern to all audit committees. Audit committees are a natural constituency for the results of inspections. The inspection reports we issue are a resource tool, the only place where they can find independent evaluations of their auditors.”

Doty noted that auditors sometimes mischaracterize the PCAOB's inspection findings, assuring audit committee members that the deficiencies in the reports merely consist of differences in professional judgment. Many auditors are also reluctant to discuss the nonpublic portions of the inspection findings.

"A review of PCAOB inspection reports can point audit committees to audit issues they may want to discuss further with their auditors," he said. "PCAOB inspections review portions of audits that relate to the most difficult or inherently uncertain areas of financial statements. Audit committees should understand that although the law restricts what the PCAOB can tell them about inspection results, the board encourages auditors to communicate effectively with audit committees about inspection matters. Unfortunately, some auditors characterize negative inspection findings as a difference in judgment or opinion, a 'mere documentation' or paperwork problem, or a matter that has been addressed. The PCAOB would disagree with these characterizations as report findings are serious matters."

The release highlights several areas that audit committees may wish to address with their auditors in inquiring about inspection reports. These include, for example, whether the audit overseen by the audit committee was selected by the PCAOB for an inspection and whether any findings were made; potentially relevant inspection findings on other audits performed by the firm; the firm’s response to the PCAOB inspectors’ findings; and the firm’s remedial efforts in response to any quality control deficiencies that may have been identified by the PCAOB.

“In its recent projects and outreach efforts, the board has received hundreds of comments that emphasized the importance of audit committees and support for board efforts to facilitate effective communications between the auditor and audit committees, including communications about PCAOB inspection results,” said PCAOB board member Jeanette Franzel. “Indeed, the PCAOB and audit committees have mutual interests through our respective roles in overseeing audits of issuers. Within this framework, the board is mindful of information from our oversight processes that would be helpful to audit committees in carrying out their oversight roles and is responding to what many audit committee members have said would be helpful to them. In issuing this release, the board hopes to assist audit committees and auditors in engaging in a constructive dialogue about PCAOB inspection results.”

The release is separate from a document that the PCAOB has also circulated on a proposed auditing standard on communications with audit committees. That document is intended for auditors at PCAOB-registered auditing firms, whereas Wednesday’s release is aimed at audit committee members on a corporate board of directors and what they might ask their outside auditors.

“In terms of the information this could entail, it could include information about the company’s own audit if in fact that audit had been inspected, which would be very important information for the audit committee,” said Franzel. “It could also include broader information about risks that are being detected in PCAOB inspections, in case some of those risks may also be applicable to that particular company to raise awareness on the part of the audit committees about trends and risks and whether they need to be mindful of that. In terms of investors, I think is clearly directed to audit committees and their oversight role in the model that we’ve described previously for overseeing financial audits.”

Apart from audit deficiencies and restatement issues in the inspection reports, Doty noted that audit committees might also want to question their auditors about whether any reference has been made to the Securities and Exchange Commission with respect to anything the PCAOB inspectors have found. Audit committees could also ask their auditors whether the audit of their company has been selected by the PCAOB for inspection, and if so, how the inspection is coming along and what the auditors are hearing from the PCAOB about the audit.

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