Public / Emerging Growth Companies May be Subject to New Auditing Communication Standards Later this YearIf you are a public company required to file reports with the SEC (or if you are contemplating becoming a public company in the near future), you are familiar with the requirement to have your financial statements audited by an independent public accounting firm and rules regarding communications that are made between the outside auditors and the audit committee of your board. Effective communication between your audit committee and your auditors is critical to the effective filing of your required reports.
Recently, the Public Company Accounting Oversight Board (PCAOB) issued a new standard aimed at enhancing the relevance, timeliness, and quality of the communications between the auditor and the audit committee. The new standard is designed to foster a dialogue between the committee and the auditor to assist the committee in its responsibilities and aims to achieve improved financial reporting, thus benefiting public company investors.
Under the new standard, the independent auditors are required to communicate to the committee the following, in a timely manner and prior to issuing any annual report or quarterly review of financial statements:
- an overview of the overall audit strategy;
- significant transactions that are outside the ordinary course of business;
- difficult or contentious matters encountered during the audit process;
- complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention; and
- a description of the process and significant assumptions underlying critical accounting estimates.
The PCAOB anticipates that the new communications standards will go into effect for audits and quarterly reviews for fiscal years beginning on or after December 15 of this year, if the SEC approves the new standard. The SEC has published the standard for comment, and the comment period ends October 9, 2012; if the SEC follows past practice, the standard could be adopted within the next few months. This being the first new auditing standard adopted since the enactment of the JOBS Act, the SEC may apply this communications standard to the audits of “emerging growth companies”, defined under the JOBS act as those public companies with total annual gross revenues of less than $1 billion dollars.
Public companies should review their audit committee charter to determine whether it should be revised to reflect this new communications standard, and should communicate with audit committee members to review the key communications that are anticipated to occur going forward in annual audits and quarterly reviews of financial statements. If you have any questions please contact Brian Lloyd or Matthew Tenney of Parr Brown Gee & Loveless, PC, at (801) 532-7840.