Sullivan & Cromwell has issued a helpful summary of a new auditing standard regarding communications between the audit committee and auditors. They note that while the new standard is directed at auditors, not issuers, audit committees may wish to evaluate the extent to which their agendas and, potentially, their charters should be updated to take into account the new required communications. Under the new standard, the auditors must communicate, among other things, the following to the audit committee in a timely manner and prior to the issuance of the auditor’s report:
an overview of the overall audit strategy, including the timing of the audit, significant risks the auditor identified, and significant changes to the planned audit strategy or identified risks;
significant transactions that are outside the ordinary course of business or unusual and the auditor’s understanding of the business rationale for such transactions;
difficult or contentious matters for which the auditor has consulted outside the engagement team;
complaints or concerns regarding accounting or auditing matters that have come to the auditor’s attention;
a description of the process management used to develop critical accounting estimates, including the significant assumptions underlying highly subjective estimates;
information about other accounting firms or accountants involved in the audit, and the basis upon which the auditors can serve as principal auditor if significant parts of the audit will be performed by affiliates or other auditors; and
other matters arising out of the audit that are significant to the oversight of the company’s financial reporting process.
The new standard will be effective for audits and quarterly reviews for fiscal years beginning on or after December 15, 2012.