Last month the PCAOB adopted new Auditing Standard No. 16, Communications with Audit Committees (and related rule amendments), which upon approval by the SEC will replace its interim standards AU sec. 380, Communication With Audit Committees, and AU sec. 310, Appointment of the Independent Auditor. The PCAOB adopted the new standard “to improve the audit by enhancing communications between auditors and audit committees.” Like the interim communication standard it replaces, the new standard requires the auditor of an SEC reporting company to communicate certain matters to the company’s audit committee about the audit and the company’s financial statements, but updates these requirements. While retaining and enhancing existing requirements, it also “adds new communication requirements that are generally linked to performance requirements in other PCAOB standards.” For example, Standard No. 16 requires the auditor to inform the audit committee about the overall audit strategy and the results of the audit prior to issuance of the audit report, whereas the current standard requires only “incidental” communication with the audit committee related to, and only after issuance of, the report. Among other new requirements, auditors will be required to discuss with audit committees significant transactions outside the normal course of business, including “[t]he auditor’s understanding of the business rationale for [such] transactions.” All such communications may be made either orally or in writing, and as indicated above, must be made prior to the issuance of the audit report.

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