Here’s a note from Lynn Turner: Have you looked at this guidance from the PCAOB Staff? It essentially “guts” the auditor independence rules. It states that if an auditor has violated the independence rules:
- It must communicate that to the audit committee. No communication of that is required to be made to investors who believe the auditor has complied with such rules.
- The auditor must have fixed the violation, or alternatively, even thought the violation still exists, must put a plan in place to fix it.
- The PCAOB Staff still permits an auditor to say in their report they were – and are – independent during the audit engagement time period, even though in fact they are not. This is, at best, misleading to investors. Some might say it’s lying.
This is particularly troublesome because the process relies on an audit committee. Nearly all the audit committees that I have known have scant expertise when it comes to the auditor independence rules. In fact, I can say I have never known an audit committee member who was truly knowledgeable in this area. Even most auditors are not well-versed on the independence rules, although they should be. That is why the SEC required audit firms – back in 2000 – to establish internal quality controls.
However, recent enforcement cases illustrate how these controls are not effectively working inside the big audit firms, as the firms continue to do whatever is necessary to hang onto their audit clients. It is my understanding that auditors do not have to rotate off – or inform any of the investors in – the companies for which their audit independence has been compromised as noted in these enforcement actions.
Today, an auditor can operate under the policy of “It is better to beg forgiveness than to ask for permission.” Investors should be asking if there really are any independence rules.
Meanwhile, two Senators have sent a letter to SEC Chair Clayton asking what is going on with the PCAOB, including why Commissioner Peirce received such a new prominent role overseeing the PCAOB and why the PCAOB’s General Counsel and Enforcement Director positions have been vacant for so long…
-Broc Romanek, TheCorporateCounsel.net October 22, 2019