New research project to study auditor communication with audit committees about compliance with independence rule

The Public Company Accounting Oversight Board (PCAOB) recently added a project to its research agenda because of concerns related to audit independence issues, a board staff member said during a meeting of the Standing Advisory Group (SAG) on June 5, 2018, in Washington.

The new research project deals with auditor communication with audit committees regarding their compliance with PCAOB and Securities and Exchange Commission (SEC) independence rules under PCAOB Rule 3526, Communication With Audit Committees Concerning Independence.

“Our inspectors have identified situations where some accounting firms have violated SEC or PCAOB rules during an audit period, such as by having a financial interest or by performing prohibited procedures, yet they affirmed that they were in compliance with such rules as of the date of communication,” said PCAOB Acting Chief Auditor and Director of Professional Standards Barbara Vanich. “In those situations, the firms apparently were free from that interest, they were no longer performing that service on the date of communication to the audit committee.”

However, Vanich said PCAOB Rule 3526 requires auditors to discuss the effects of such violations with the audit committee and affirm their compliance with the rules throughout the audit period rather than on particular date.

“The staff is exploring whether guidance should be issued or whether there is a need for amendments to Rule 3526,” she added. “We are currently engaged in some outreach.”

The PCAOB puts emerging audit issues on its research agenda for further study. Not all research items will reach the standard-setting stage, the board said. While exploring an issue, the staff considers whether it needs to be put on its standard-setting agenda or if an issue can be resolved through interpretive guidance or other means.

Rule 3526 requires accounting firms at least once a year to describe, in writing to a client’s audit committee, all relationships among the firm, its affiliates and the client that could harm the firm’s independence. The audit firm must also discuss with the audit committee the relationships on the independence of the firm and document the substance of the discussion.

Rudolf Bless, Bank of America Corp.’s chief accounting officer, noted that audit committee members take their mandate seriously. But because audit committee members have a limited amount of time to do their work, he said he would prefer that audit committees focus on items that are truly significant.

“And I would say there is often discussions of items that are not really that meaningful,” Bless said. “Some of the comments about where you might have these independence infractions, where somebody somewhere at a firm holds a couple of shares in a company, and it somehow comes up, it happens to someone getting married ... To the extent these are not items of consequence to the audit, they are taking time away in the audit committee discussions from the more important matters. I would just give that to you as an observation of things you might want to be thinking about.”

In a related but separate matter, Bless said another less meaningful discussion that audit committees and auditors have is about “the single materiality level” on the balance sheet and the income statement.

He was making a reference to criticisms that the current definition of materiality may be too broad, and narrowing it may get rid of trivial items that are currently discussed between auditors and audit committees under Auditing Standard (AS) No. 16, Communications with Audit Committees. They argue the change will simply allow audit committees to better focus on financial reporting issues that truly matter.

Others, on the other hand, believe that changing the definition of materiality may end up reducing important discussions auditors have with audit committee members. While the items that will no longer be discussed individually may be immaterial, they argue that those items put together may amount to be material.

Provisions in AS No. 16 require the auditor to share the schedule of unadjusted differences with the audit committee. AS No. 14, Evaluating Audit Results, requires auditors to accumulate uncorrected errors unless they are clearly trivial and to evaluate and share the accumulated uncorrected errors with management.

PCAOB acting chief auditor Vanich responded that there had been some discussions about accumulating misstatements but not with the current board.

“We have done some research, and [it’s] probably a good thing to maybe put back on our agenda with them,” she added.

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