Redefining standard communications from auditors.

• Author: Grimaud, Stephen
• Position: FINANCIAL REPORTING

In December 2011 the Public Company Accounting Oversight Board (PCAOB) proposed changes in the way that auditors communicate with companies and what they will communicate. When auditors do their work, nobody ever really knows what they will say about a business. Will the auditors propose adjustments, make recommendations for improving controls, express concern over business risks or simply sign-off on the audit as of a date or during a period? Both the current and proposed standards offer significant guidance, but the new standard would be much more comprehensive.

Looking back to April 1988--before there was a communication standard--the American Institute of Certified Public Accountants (AICPA) issued nine new audit standards to help bridge what was commonly referred to at the time as an "expectation gap." Essentially, the AICPA tried to address the difference between what auditors believed they were responsible for, and for what the public seemed to believe auditors should be responsible.

Areas addressed in the nine standards included illegal acts by audit clients, how to audit accounting estimates, things to consider when evaluating a company's ability to continue as a going concern and communicating internal control matters. One of the standards even updated the wording in the standard auditor's report.

The last of the nine standards to address the expectation gap was Statement on Auditing Standard (SAS) No. 61, Communication with Audit Committees, which established minimum requirements for what auditors should communicate to companies as part of an audit.

The 1988 standard was superseded in December 1999 by SAS 90 Audit Committee Communications to provide for communicating the auditor's judgments about the quality--not just the acceptability--of the company's accounting principles and to encourage three-way discussion among the auditor, the company management and the audit committee.

Prior standards were superseded again in December 2006 by SAS 114 The Auditor's Communication with Those Charged with Governance. The updated standard requires a variety of communications that, though novel when issued, have become routine.

Since 2007, anybody responsible for a company's governance should have heard the auditor's views on the qualitative aspects of their accounting practices, what the auditor viewed as significant risk areas for the audit, whether disagreements with management, significant issues or significant difficulties were...