PCAOB Issues Staff Guidance on Audit Committee Communications Related to Independence

The Public Company Accounting Oversight Board (PCAOB) has published a new staff guidance document, Rule 3526(b) Communications with Audit Committees Concerning Independence. In addition, the PCAOB  issued a companion document, Overview of Staff Guidance of Audit Committee Communications Related to Independence.

The new Staff Guidance provides assistance to practitioners concerning how to comply with certain provisions of PCAOB Rule 3526, Communication with Audit Committees Concerning Independence. It includes background on Rule 3526 and technical guidance for auditors on the independence-related communications required by the rule when an auditor has identified one or more violations of applicable auditor independence rules. The Overview provides a one-page summary of the Staff Guidance.

PCAOB Rule 3526(b) Requirements

Under PCAOB Rule 3526(b), auditors must at least annually provide audit committee members with sufficient information to understand how a relationship between the auditor and the audit client might affect the auditor’s independence. Specifically, the audit firms must:

  • Provide a written description of all relationships between the firm and all relationships between it or any affiliates and the audit client or persons in financial reporting oversight roles at the audit client may reasonably be thought to bear on independence;
  • Discuss with the audit committee of the audit client the potential effects of the relationships;
  • Affirm to the audit committee the firm’s compliance with PCAOB Rule 3520, Auditor Independence (Rule 3520); and
  • Document the substance of its discussion with the audit committee of the audit client.

PCAOB inspections staff have observed independence violations in some situations in which firms have affirmed their independence but have also identified one or more violations of applicable auditor independence rules. These situations have occurred in situations where auditors have (a) addressed the underlying reasons for the violation, (b) the firm communicated the matter to the audit committee, (c) the audit committee separately evaluated the firm’s determination; and (d) the audit committee and the firm agreed to continue the audit engagement.

Staff Questions & Answers

The guidance includes five Staff Questions & Answers that:

  • Provide detailed information on how firms should conduct its annual communications when the firm described the above-described fact patterns;
  • Answer “no” on the issue of whether, when a violation is addressed by the date of communication, the audit firm may simply affirm to the audit committee of the audit client that the firm is independent, rather than provide the communications set out in the first question;
  • Advise that the a firm’s communication of all the required elements and analysis that objectivity and impartiality have not been impaired does not “cure” the independence violation in Rule 3520;
  • Advise that the firm need not include prior-year violations that were previously addressed properly in its communications in the current year; and
  • Indicate that when the audit firm has followed the processes described in the Staff Guidance, it is not required to alter the language in the auditor’s report for purposes of the new auditor’s reporting requirements in PCAOB Auditing Standard 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.

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