As a former audit committee chair for several public companies, I’ve been delighted to see the great increase in educational materials made available to those committees by the Public Company Accounting Oversight Board in recent years. PCAOB chairman William Duhnke and the rest of the “refreshed” board members obviously see the importance and benefits of working closely with audit committees. The materials have included staff observations on such matters as issues related to COVID-19 and results of discussions with audit committee chairs during the inspection process.
Through 2018, the PCAOB’s inspections staff reached out to a sample (10 percent or so) of audit committee chairs for companies whose audit was included in an accounting firm’s inspection. Beginning with the 2019 inspection cycle, the PCAOB spoke to almost all of the audit committee chairs for the U.S. issuers inspected. This amounted to about 400 companies in 2019 and 300 in 2020. As noted in a report on the 2019 interviews, those outreach efforts were designed “… to make the PCAOB more transparent and accessible to relevant stakeholders (emphasis added).”
In 2020 the conversations focused on:
- Auditor communications with the audit committee;
- New accounting and auditing standards; and
- Emerging technologies.
No doubt those conversations were very useful to the audit committee chairs — and probably to the PCAOB inspectors as well. However, I believe inspected companies’ financial executives may also be relevant stakeholders in those conversations and PCAOB/audit committee chair communications could be improved by including those executives in such conversations. Many corporate financial executives already view the PCAOB as an indirect regulator. For example, the PCAOB auditing standards on internal control over financial reporting greatly impacted corporate accounting systems and documentation requirements. And there are at least a couple of reasons why these conversations may be directly relevant to financial management in a particular situation.
First, corporate executives have the principal responsibility for the proper presentation of financial statements and related internal controls. After all, both the CEO and the CFO must sign quarterly and annual attestations to that effect pursuant to Sarbanes-Oxley legislation. Therefore, discussions of matters such as whether new accounting standards were applied properly and how emerging technologies were used by the company in preparing its financial statements should include knowledgeable and responsible company executives.
Second, while audit committee chairs are well intentioned, not all are true financial experts in the sense of having a deep knowledge of generally accepted accounting principles or generally accepted auditing standards. Thus, they may not be fully able to grasp certain detailed comments from the PCAOB or respond appropriately on behalf of the company. For example, the report on 2020 results noted that over three-quarters of audit committee chairs had not discussed new requirements for audits of the very important area of accounting estimates with their auditors. This could lead to comments about the respective companies’ development of those critical estimates, which may benefit from company executives’ responses.
The PCAOB has greatly improved communications with audit committees in recent years, but taking the further step of including corporate financial executives in inspection discussions would assure that all relevant parties are fully informed. Perhaps many or even most of those conversations would not raise issues requiring direct management attention. There may be good reasons for management not to participate in certain cases. But allowing management to participate would ensure full transparency of this process and that its benefits are realized by all relevant stakeholders.
