Regarding the SEC staff’s recent FAQs on auditor independence, Gibson Dunn just put out an alert regarding the need to tweak pre-approval policies of audit and non-audit services. The alert specifically addresses Questions 22 through 24 of the FAQs that contain guidance on whether, in the view of the SEC’s Office of the Chief Accountant, particular practices would satisfy the SEC’s pre-approval rules. Gibson Dunn’s analysis follows:
These rules, as set forth in Rule 2-01(c)(7) of Regulation S-K, provide that: (1) a pre-approval policy must be detailed as to the particular service to be provided; (2) the audit committee must be informed about each service; and (3) the policy must not delegate audit committee authority to management. The FAQs state that, although the level of detail that is appropriate in a pre-approval policy depends on a company’s facts and circumstances, the establishment of monetary limits alone is not sufficient because these limits do not, without more, provide sufficient detail or adequately inform the audit committee.
Similarly, policies that use “broad, categorical approvals” (the FAQs use “tax compliance services” as an example), or that call upon management to make judgments about whether proposed services fit within categories of services that the audit committee has pre-approved, are not sufficiently detailed as to the particular services to be provided. In general, a pre-approval policy must be “designed to ensure that the audit committee knows precisely what services it is being asked to pre-approve.”
According to the FAQs, if the audit committee is presented with a schedule or cover sheet describing services to be pre-approved, that schedule or cover sheet must be accompanied by “detailed back-up documentation” regarding the specific services to be provided by the outside auditor. In light of the guidance in the FAQs, Gibson Dunn recommends that companies take a fresh look at their pre-approval policies and particularly, the categories and/or descriptions of pre-approved services included in their policies.
For TheCorporateCounsel.net subscribers, we have posted the transcript of last week’s webcast, “Designing Reporting-Up and Complaint Procedures.”