We acknowledge the insight and assistance of Gary J. Previts, Distinguished University Professor Emeritus, Case Western Reserve University  

As the regulator of public company auditors, following the Sarbanes-Oxley Act of 2002, the Public Company Accounting Oversight Board (PCAOB) aims to safeguard investors’ interests. The PCAOB establishes auditing standards, reviews audit firms’ performance, and holds them accountable for complying with its rules and the securities laws.

Although the PCAOB does not have direct oversight of board audit committees, its auditing standards and enforcement actions influence their expectations and actions at times.  Lately, the PCAOB has deliberately leveraged its enforcement powers to target audit committees in a “sweep” program.

The PCAOB uses sweeps to investigate a specific type of potential violation across multiple firms simultaneously.  Sweeps involve gathering information from various sources to identify and address common deficiencies.  The latest sweep focused on auditors who failed to communicate properly with audit committees, as required by PCAOB standards.

As a result, nine audit firms faced disciplinary actions and agreed to settle charges.  Their audit committee clients also learned a valuable lesson.  PCAOB Chair Erica Williams stressed the importance of audit committee communication:  “Audit committees are vital for promoting audit quality and protecting investors, and they deserve to be informed in accordance with our standards.  Sweeps help us enforce our rules and deter practices that put investors at risk.”

The Board’s rules require audit firms to communicate certain information to audit committees of their clients.  The recent settlements, all involving non-big four firms, revealed breaches of these rules.  The violations varied in severity–from not documenting audit committee approval that was given to not informing audit committees of significant audit risks in key financial statement areas.  The PCAOB imposed sanctions from $30,000 to $80,000 on the firms.

The PCAOB sanctions may seem mild for such large firms, but they are not the main objective. As the PCAOB chair indicated in her remark, the intended indirect effects on audit committees are clear:  audit committees should be aware of the kinds of information their auditor is obliged to communicate and should inquire if they do not receive it.  Some practical tips for how audit committees should respond:

  • Compare the auditor’s engagement letter, audit plan, and report with PCAOB standards and rules for communicating with audit committees.
  • Set a regular and clear agenda for audit committee meetings, and require the auditor to send the appropriate information and documents beforehand.
  • Have the auditor justify and support their audit opinions and decisions, and question them if needed.
  • Assess how well and promptly the auditor performs and responds, and give them feedback and recommendations for enhancement.
  • Ensure the auditor follows the PCAOB’s ethics and quality control standards, and alert the PCAOB or other authorities of any problems or issues.

For 20 years, the PCAOB has used its legal power over auditors to influence audit committee conduct, though usually subtly in the name of education and professional development.  The current PCAOB takes a more overt position, aiming at auditors to induce audit committee attention.