On May 31, the PCAOB staff issued guidance on PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, to address questions that have arisen in practice regarding application of Rule 3526(b) in certain circumstances.
Rule 3526(b) addresses the requirement for PCAOB-registered public accounting firms to, at least annually, (1) describe, in writing, to the audit committee all relationships between the firm and the audit client that may reasonably be thought to bear on independence, (2) discuss with the audit committee the potential effects of those relationships on the firm’s independence, (3) affirm to the audit committee, in writing, that the firm is independent in compliance with PCAOB Rule 3520, Auditor Independence, and (4) document the substance of the discussion with the audit committee.
PCAOB inspections staff has observed that firms have affirmed their independence under Rule 3526(b) in certain situations in which the firm had one or more violations of SEC and/or PCAOB auditor independence rules. After this issue arose in a number of inspections, numerous firms requested clarification of their obligations under Rule 3526(b) in circumstances when one or more violations of the applicable auditor independence rules had occurred, and the firm and the audit committee of the audit client had each determined that the engagement could continue. The PCAOB staff issued the guidance to address this issue and provide direction to firms on how to comply with Rule 3526(b).
The guidance explains that, when the circumstances that gave rise to the violation are not typically ongoing, the registered public accounting firm should consider the impact on the firm’s objectivity and impartiality. The firm should then communicate the violation and its analysis to the audit committee (which then makes its own determination as to whether the audit engagement should continue).
In circumstances when the firm and the audit committee determine that the audit engagement can continue, notwithstanding one or more violations, the guidance clarifies that the firm should not state in the annual written affirmation of independence required by Rule 3526(b) that the firm is independent. Instead, the firm should state that it would be independent except for the violation or violations that it has identified and discussed with the audit committee. In these circumstances, the guidance also explains that the title of the firm’s report remains “Report of Independent Registered Public Accounting Firm.”
The guidance only addresses the affirmation requirement under Rule 3526(b). It does not express a view on the applicability of independence requirements or address whether the SEC will accept financial statements with a report from a firm that has violated the applicable independence rules, but whose objectivity and impartiality have not been impaired. This is a question for the SEC, the audit client (including its audit committee), and the firm. The firm or audit client, including the audit committee, may decide to consult with the SEC staff concerning the firm’s or audit client’s analysis of applicable independence rules and their respective conclusions.
Rule 3526 protects the interests of investors by requiring PCAOB-registered public accounting firms to provide audit committees with sufficient information to understand how a relationship between the firm and the audit client might affect the firm’s independence. The PCAOB staff believes this guidance will promote robust communications between the firm and the audit committee consistent with the underlying principles embodied in, and the other communications required by, Rule 3526. In addition to providing direction to PCAOB-registered public accounting firms, this guidance also may be useful to other relevant parties, such as audit committees and investors.
The PCAOB staff guidance is effective immediately for engagements conducted pursuant to PCAOB standards. The PCAOB encourages audit committee members, investors, and any other interested parties to review the guidance.
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