The Securities and Exchange Commission has given final approval to a new standard requiring auditors to have more frank and complete discussions with audit committees about what they do and what they find in the course of their work.

The SEC approved Auditing Standard No. 16, “Communications with Audit Committees” after its own four-month review of the rule, submitted by the Public Company Accounting Oversight Board for approval. The standard takes effect for audits of fiscal years ending on or after Dec. 15, 2012, so companies with calendar year-ends will see it in play immediately. The SEC said it received only five comment letters during its review, two of them offering nothing but support for the rule.

The new standard requires auditors to establish an understanding of the terms of the audit engagement with the audit committee and record the terms in an engagement letter. It also requires auditors to communicate with audit committees their own evaluation of the quality of the company's financial reporting and certain issues around the company's accounting policies, practices, and estimates. Auditors must provide the audit committee with an overview of their audit strategy and the nature or extent of any specialized skills that will be necessary, either within the company or audit firm or from third parties, that will be necessary to complete the audit.

Further, auditors must relate to the audit committee information about any significant unusual transactions that it spots, including the business rationale for those transactions, and any contentious or difficult issues that arise during the course of the audit. Auditors must discuss their evaluation of the company's prospects to remain in business as a going concern and any departures from ordinary findings that they expect to include in their auditor's report. They also must report any other matters that arise from the audit that would be significant to the audit committee's oversight of financial reporting.

Audit firms have told the PCAOB throughout its rulemaking process that they generally perform most of the required activities on a routine basis already, but the new rule will codify and formalize those activities to assure nothing falls through the cracks. 

When the PCAOB finalized the rule and sent it to the SEC in August, PCAOB member Jeanette Franzel said the standard will foster an exchange of information between auditors and audit committees that will allow audit committees to be well informed about accounting and disclosure matters and the auditor's own evaluation of important issues. “An informed and engaged audit committee will be better equipped to execute its oversight responsibilities,” she said.

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