PCAOB Amends Proposal on Supervision of Other Auditors and Division of Responsibility

SEPTEMBER 26, 2017  RECENT DEVELOPMENTS

The Public Company Accounting Oversight Board (PCAOB) held an open meeting this morning to consider certain clarifications and refinements to the "Proposed Amendments Relating to the Supervision of Audits Involving Other Auditors and Proposed Auditing Standard—Dividing Responsibility for the Audit with Another Accounting Firm".  These changes were driven by comments received on the proposed standard, which was issued back in April 2016. Click here to view the docket for these proposed standards, including the supplemental request for comment. 

Part of the supplemental request addressed the way in which a lead auditor would address the independence and ethics compliance of other auditors participating in the audit.  In a nutshell, the original proposal required the lead auditor to obtain an understanding of each other auditor's knowledge of independence and ethics and experience in applying those requirements, and obtain written confirmation of compliance with the requirements. The NEW proposal would require the lead auditor to understand the other auditor's process for determining compliance with ethics and independence requirements and their experience in applying those requirements, which according to the discussion in the release, would allow the lead auditor to identify any gaps in process and therefore, compliance. The Board is also considering whether to add a requirement that the lead auditor get written confirmation from each other auditor regarding all relationships between the auditor and the audit client or persons in financial reporting oversight roles at the client that may bear on independence. Obtaining that information in writing from other auditors would not only facilitate independence compliance but also the lead auditor's reporting under Rule 3526, Communication with Audit Committees Concerning Independence. Lastly, the amended proposal would also require the other auditors to confirm whether or not they (the firm) is in compliance with applicable rules, and if not, explain the noncompliance. 

The Board's amended proposal does not prescribe how a lead auditor should obtain an understanding of other auditor's processes and applies whether or not the other auditors are part of the same network of firms (despite comments from firms suggesting that they should be able to rely on their networks' quality control systems).  The release suggests that any inconsistencies between what the lead auditor knows about the other auditor's processes, noncompliance, etc. (which may include public sources) and its representations should be investigated.  

The amendments also clarify that a firm may issue representations about its compliance with the rules and relationships that  may impact independence on behalf of all applicable individuals in the firm (that is, individual team members need not provide separate representations). 

Comments on the supplemental request (which addresses other matters besides ethics and independence) are due November 15, 2017.