Requiring the auditor to ask the audit committee about possible violations of law should raise a red flag for general counsel, says Thomas W. White, partner and general counsel of Wilmer Cutler Pickering Hale and Dorr, and cochair of the American Bar Association's audit response committee. "The issue for the GC is making sure that while the audit committee appropriately responds to this question, it does so in a way that does not imperil the company's attorney-client privilege," White says. "The committee should be careful to speak to the facts, and not about any legal advice it has received on the matter."
How much extra work will the new standard require? Rodel says it does not impose new performance requirements on the audit committee or the external auditors other than greater communication back and forth, and should not significantly affect costs.
On the other hand, Raina Rose Tagle, head of risk advisory and internal audit services with Baker Tilly Virchow Krause says the GC can facilitate the committee's work by preparing members for potential questions and for issues they traditionally do not explore, such as "significant unusual transactions" and "critical accounting estimates" that make assumptions about future events.
Separately, the PCAOB is also nudging audit committees to delve into the results of PCAOB inspections of deficiencies in audit firms' reporting quality.
The PCAOB has suggested four questions audit committees ask their auditors about the inspections:
- Did the PCAOB select the company's own audit for inspection?
- Did the PCAOB find similar deficiencies in other audits conducted by the auditor?
- How did the audit firm respond to the PCAOB findings?
- What topics are included in Part II findingsconcerning defects in the auditor's quality controlsand what changes is the firm making to address any quality control issues?
Any efforts by the auditor to sugarcoat its responses or give boilerplate answers"it was a documentation problem" or "there was a difference in professional judgment"should be shot down, the PCAOB advised.
Compensation committees and boards face a different set of challenges. Effective for the 2013 proxy season, they will have to comply with a new SEC rule intended to ensure the independence of compensation committee members and their consultants and advisers, and prevent conflicts of interest. Both the New York Stock Exchange and Nasdaq have proposed rulessimilar but not identicalto comply with the SEC's new rule, itself mandated by the Dodd-Frank Act.
Companies that don't meet these standards will not be able to continue trading on the exchanges.
Fortunately, according to James Barrall, global cochair of Latham & Watkins's benefits and compensation practice, most U.S. companies already have strict independence standards for their compensation committees and will have to make few changes. However, companies listed on Nasdaq, which have not been required to have separate compensation committees, will now have to do so, he notes.
Companies also will have to disclose in their proxy statements whether the compensation committee hired a compensation consultant, whether any conflict of interest existed, and if so, how it was addressed.