On May 31, 2019, the PCAOB released staff guidance, Rule 3526(b) Communications with Audit Committees Concerning Independence, which provides background and direction for auditors on applying Rule 3526 when the firm has identified one or more violations of auditor independence rules. The staff's guidance, in the form of Staff Q&As, clarifies rules 3526 and 3520, Auditor Independence, and is based on inquiries the PCAOB received from firms.
In an overview of the new guidance, the staff noted, "The Board adopted Rule 3526 in 2008. In adopting the rule, the Board stated that the purpose of Rule 3526(b) is for a Firm to “provide the audit committee with sufficient information to understand how a particular relationship might affect independence and to foster a robust discussion between the firm and the audit committee.”
The guidance indicates that PCAOB inspectors have noted various situations in which a firm that has violated independence have affirmed their independence, that is, the firm typically:
- analyzed the facts and circumstances related to the violation and concluded the firm was still capable of exercising objective and impartial judgment in performing the audit
- the violation had been fully resolved or was in the process of being resolved;
- the firm communicated the matter and its analysis to the audit committee;
- the audit committee evaluated the information presented and agreed with the firm's conclusion; and
- the audit committee and the firm agreed it was appropriate to continue the audit engagement.
The Staff Q&A no. 1 clarifies that firms should follow a similar process as outlined above, but should also:
- evaluate violations in the aggregate in a separate analysis that is communicated to the audit committee;
- document the substance of its discussion(s) with the audit committee;
- affirm in writing to the audit committee that, except for the violation(s) expressly identified, the Firm would be independent in compliance with Rule 3520. (The guidance provides language the firms may wish to consider.)
The last item represents a departure from the manner in which firms typically affirm independence under this scenario.
The guidance also clarifies that following the process outlined in Q&A no. 1 does not "cure" the violation of Rule 3520, which only addresses the communication of the violation to the audit committee.
Q&A no. 4 indicates that a violation addressed with the audit committee in a prior year need not be included in a subsequent year's communication with the committee if no new facts have come to light that would change the resolution of the prior violation. In those instances, the firm may affirm independence in the current year, if as of the date of the communication, the firm is independent in accordance with Rule 3520. (This presumes the violation was fully resolved and no new instances have occured in the present period.)
Lastly, Q&A no. 5 clarifies that following the process outlined in Q&A no. 1 allows the firm to include in its audit report the title, "Report of Independent Registered Public Accounting Firm" as it does not constitute a specific assertion about compliance with Rule 3520.