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Audit Committees and Auditor Independence Brochure

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relationships with the company, its officers, directors or significant Change of Independent Auditors shareholders. Thus, audit committees should consider whether the company The auditor generally must be independent for has implemented processes that identify the entire engagement period and the period such prohibited relationships. covered by the financial statements being audited. Once this relationship is terminated, z Certain Financial Relationships. Audit there is no continuing requirement for the auditor committees should be aware that certain to remain independent. The auditor may financial relationships between the generally re-issue its former opinions on the company and the independent auditor company’s financial statements. However, if a are prohibited. These include creditor/ restatement of the financial statements becomes debtor relationships, banking, broker- necessary, the auditor must be independent to dealer, futures commission merchant audit the restatement adjustments and re-issue its accounts, insurance products and opinion. Further, if the Board is contemplating or interests in investment companies. plans a change in auditors, the audit committee Communications Between the Audit must consider whether the prospective firm will be independent during the audit engagement period. Committee and the Independent Auditor That is, the prospective firm must cease all Independence Standards Board Standard No. 1 prohibited services and/or sever all prohibited AUDIT COMMITTEES AND requires that the auditor disclose to the audit relationships with the issuer prior to the beginning AUDITOR INDEPENDENCE committee in writing all relationships between of the audit engagement period. Therefore, the the audit firm and the company that may audit committee should consider these issues reasonably be thought to bear on the audit firm’s before hiring a predecessor auditor or a independence. Standard No. 1 also requires the prospective auditor to provide non-audit services auditor to confirm and discuss its independence to the company or its affiliates. Prospective firms with the audit committee. The audit committee can not audit financial statements of years that should consider discussing the following issues they were not independent. with the auditor in regards to the firm’s OFFICE OF THE independence disclosure: Addressing Independence Issues CHIEF ACCOUNTANT The audit committee should discuss and z Processes the audit firm uses to ensure thoroughly investigate any potential complete disclosure of all relationships independence impairments or issues. The audit with the company and its affiliates committee should also consider seeking z Relationships the audit firm may have guidance from legal counsel, the auditor and the with officers, board members and Office of the Chief Accountant (OCA). significant shareholders Guidance on Consulting with OCA z Relationships not included in the communication because they were Guidance on consulting with OCA is available at The U.S. Securities and Exchange Commission deemed immaterial http://www.sec.gov/info/accountants/ has not approved this pamphlet and has ocasubguidance.htm expressed no views on its contents. (a) creates a mutual or conflicting interest (i.e., tax services, comfort letters, statutory audits Introduction with their audit client; or other). The Commission rules include certain The Sarbanes-Oxley Act of 2002 mandates that (b) places them in the position of auditing pre-approval requirements that the audit audit committees be directly responsible for the their own work; committee must follow. In addition, the audit oversight of the engagement of the company’s (c) results in their acting as management or committee should be informed about the independent auditor, and the Securities and an employee of the audit client; or services expected to be provided by the audit firm to understand whether the audit firm’s Exchange Commission (the Commission) rules (d) places them in a position of being an independence will be impaired. are designed to ensure that auditors are advocate for the audit client. independent of their audit clients. The purpose The audit committee should consider whether The Commission rules also address specific of this brochure is to highlight certain company policies and procedures require that all auditor independence issues, some of which Commission rules and other authoritative audit and non-audit services are brought before are: pronouncements relevant to audit committee the committee for pre-approval. oversight responsibilities regarding the auditor’s Specific Prohibited Non-audit Services independence. More information on this topic is Also, listing company standards require audit available in the Commission’s rules and on the The auditor is prohibited from providing the committees to pre-approve all audit, review and Commission’s web site at www.sec.gov/about/ following non-audit services to an audit client attest services regardless of whether the firm offices/oca/ocaprof.htm including its affiliates: performing the services is the company’s principal auditor. Audit committees should also be aware that the z Bookkeeping PCAOB has Ethics and Independence Rules Prohibited Relationships z Financial information systems design and Concerning Independence, Tax Services, and implementation Certain relationships between audit firms and the Contingent Fees. z Appraisal or valuation services, fairness companies they audit are not permitted. These include: General Standard of Auditor opinions, or contribution-in-kind reports Independence z Actuarial services z Employment relationships. A one-year cooling off period is required before a z Internal audit outsourcing services The Commission’s general standard of auditor company can hire certain individuals independence is that an auditor’s independence z Management functions or human formerly employed by its auditor in a is impaired if the auditor is not, or a reasonable resources financial reporting oversight role. The audit committee should also consider investor with knowledge of all the facts and z Broker-dealer, investment adviser, or whether the hiring of personnel that are circumstances would conclude that the auditor is investment banking services not, capable of exercising objective and impartial or were formerly employed by the audit judgment on all issues encompassed within the z Legal services and expert services firm might affect the audit firm’s audit engagement. To determine whether an unrelated to the audit independence. auditor is independent under this standard an In addition to the specific prohibited services, z Contingent Fees. Audit committees audit committee needs to consider all of the audit committees should consider whether any should not approve engagements that relationships between the auditor and the service provided by the audit firm may impair the remunerate an independent auditor on a company, the company’s management and firm’s independence in fact or appearance. contingent fee or a commission basis. directors, not just those relationships related to Such remuneration is considered to reports filed with the Commission. The audit Pre-approval of Permitted Services impair the auditor’s independence. committee should consider whether a Subject to certain limited exceptions, the audit relationship with or service provided by an z Direct or material indirect business committee must pre-approve all permitted auditor: relationships. Audit firms may not have services provided by the independent auditor any direct or material indirect business.
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