On December 5, 2016, Wes Bricker, the SEC’s Chief Accountant, delivered an insightful keynote address before the 2016 AICPA Conference on current SEC and PCAOB developments. The speech was entitled, “Working Together to Advance High Quality Information in the Capital Markets.” The speech covered a number of diverse topics, including an update on the Office of Chief Accountant, internal control over financial reporting, revenue recognition implementation, non-GAAP reporting, valuation practices, auditor independence, the PCAOB, IFRS and audit committees, among others. The full speech is linked here. Below is an excerpt of Mr. Bricker’s comments directed to audit committees, which included questions from audit committee members that he found helpful during his time as an audit engagement partner in generating dialogue:
“Turning now to audit committees, you as committee members are a critical gatekeeper in the chain responsible for credible, reliable financial reporting.
Audit committees must stay current on emerging issues, whether financial, control, or disclosure related, through continuing education and other means. In addressing certain important issues, some audit committees may need expert advisors as they carry out fully their responsibilities.
Audit committees of listed companies have clear oversight authority and responsibility over the external auditor, which promotes auditor independence and greater alignment of the auditor’s interests with those of investors.
The audit committee helps set the tone for the company’s relationship with the external auditor. Auditors are in a unique position to provide feedback to the audit committee about management, the company’s processes, accounting policies, and internal control over financial reporting, among others. This oversight of management’s activities is crucial for investor protection, and it is important for both auditors and audit committees to keep and maintain the direct relationship they share.
While I was an audit engagement partner, in addition to addressing the communications required by the auditing standards and audit committee charter, I found the following types of questions from audit committee members helpful in generating a dialogue:
- If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
- If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
- Is the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
- Are there any recommendations that you as the auditor have made and management has not followed?
Audit committees should not underestimate the importance of their role overseeing the external auditor. Auditors are accountable to the board of directors through the audit committee, not to management.
The audit committee responsibilities include the authority and responsibility to directly oversee auditor engagement terms and compensation. In doing so, audit committees should work with other board committees as needed to monitor that important corporate objectives, such as cost reduction plans, are not unintentionally implemented in ways that would be at cross purposes with management meeting their financial reporting responsibilities or the external auditor’s appropriate audit scope, engagement terms, and compensation. The design and operation of some of management’s procurement policies and processes may be inappropriate if applied to the auditor selection, retention, and compensation decisions.
I encourage audit committees to be proactive in providing voluntary disclosures in the audit committee report, especially in describing how they execute their oversight responsibilities. I am encouraged by the trends in audit committee voluntary reporting. For instance, in a recent survey 82% of audit committees of Fortune 100 companies disclosed in 2016 that the audit committee is responsible for appointment, compensation and oversight of the external auditor.* This has increased significantly from 42% just four years ago.”