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As 2013 dawns, spare a moment to consider the additional responsibilities being piled on the shoulders of audit and compensation committees by the Securities and Exchange Commission and its cohorts. Needless to say, in-house counsel will shoulder much of the burden.
As activist shareholders demand a say on pay, compensation committees will face fresh regulatory pressure to intensify their scrutiny of the people who advise them to ensure they are completely independent and not subject to conflicts of interest.
But the burden on audit committees may be worse, made heavier by the baggage left over from the mudslinging between Hewlett-Packard Company and the former management of its 2011 acquisition, Autonomy Corp. plc., which HP accused of "accounting improprieties and disclosure failures" that forced HP to take an $8.8 billion impairment charge in the fourth quarter of 2012. Autonomy's former managers immediately denied the charge, citing the army of legal, accounting, and financial talent that HP hired to perform due diligence over the deal.
Whether a new auditing standard that requires auditors to probe an audit committee's knowledge of its accounting policies and any unusual transactions could have made a difference in the HP case is uncertain.
But that is what the Public Company Accounting Oversight Board has put in place as part of an effort to create "robust" communications between both groups that also encourages audit committees to dig into the quality of their auditors by investigating how they performed in inspections by regulators.
The PCAOB has no authority over audit committees. So it took a roundabout route to stimulate their activity, requiring auditors to pose questions to the audit committee through Auditing Standard No. 16, Communications with Audit Committees, adopted in August 2012 following two years of hearings and comment.
If approved by the SEC, which has oversight of the PCAOB, it will apply to audits of public companiesincluding emerging growth companies under the JOBS Actfor fiscal periods after December 15. It was adopted in August by the PCAOB following two years of hearings and comment, and builds on the Sarbanes-Oxley Act, which gave audit committees a stronger role in overseeing the work of external auditors.
"The standard moves the auditor's communication with the audit committee away from compliance checklists, and decisively in the direction of meaningful, effective interchange," says PCAOB chairman James R. Doty.
The auditor's report will now have to spell out findings on the company's accounting policies, the quality of its financial reporting, and any accounting or auditing issues about which it has concerns. The auditor must ask the audit committee whether it is aware of any violations or possible violations of laws or regulations, as well as any other matters relevant to the audit. These inquiries may relate to material misstatement and fraud risks, and to issues the auditor might not have had to disclose before, such as information about unusual transactions, says Paul M. Rodel, a partner in Debevoise & Plimpton's securities group.
Finally, the auditor must give the audit committee an evaluation of the company's audit strategy and identify any risks the auditor discovers, as well as its view of the company as a going concern.