TheCorporateCounsel.net

Almost every PCAOB statement on auditor responsibilities is something that’s worth sharing with audit committees, and the PCAOB staff report issued earlier this week on auditors’ responsibilities for detecting, evaluating and communicating illegal acts is no exception. This excerpt from the intro summarizes those responsibilities:

Under federal securities laws, auditors have a longstanding responsibility to (1) detect illegal acts; (2) evaluate information indicating that an illegal act has or may have occurred; (3) determine whether it is likely that an illegal act has occurred, and, if so, to consider the possible effect of the illegal act on the financial statements of the company; and (4) make appropriate communications about illegal acts, unless “clearly inconsequential,” to management, the audit committee, and possibly the United States Securities and Exchange Commission (SEC). PCAOB standards include similar requirements. These responsibilities also inform the auditor’s obligation to plan and perform the audit to obtain reasonable assurance that the company’s financial statements are free of material misstatement, whether due to error or fraud.

The report goes on to provide detail concerning the kinds of procedures that auditors should perform in order to appropriately discharge each of these enumerated responsibilities.  The report also addresses the circumstances in which an illegal act may require the auditor to issue an adverse opinion on the financial statements, disclaim an opinion altogether, or withdraw from the engagement.

– John Jenkins