An auditor owes the audit committee more than an opinion

The record

PCAOB Auditing Standard 1301, Communications with Audit Committees, requires a registered auditor to communicate specified matters to an issuer's audit committee. The standard's own text, published on PCAOB's standards page, states its objectives as establishing an understanding with the audit committee of the auditor's responsibilities, obtaining information relevant to the audit, providing an overview of audit strategy and timing, and providing timely observations significant to financial reporting. Required communications include critical accounting policies and practices, management's significant estimates and assumptions, and significant unusual transactions, none of which appear in the auditor's public opinion itself.

What the documents establish

The standard's text is explicit that these are communications to the audit committee, not public disclosures, and that they exist alongside, not instead of, statutory obligations. Sarbanes-Oxley Section 204, codified at 15 U.S.C. 78j-1(k), already required a registered accounting firm to report to the audit committee all critical accounting policies used, alternative GAAP treatments discussed with management, and other material written communications. AS 1301, adopted by PCAOB Release No. 2012-004 and listed among the PCAOB's auditing standards, builds on that statutory floor with more specific requirements, naming significant unusual transactions and the auditor's evaluation of the quality of the company's financial reporting as matters the statute itself does not spell out by name.

The operating read

As an editorial matter, a founder serving on or reporting to an audit committee should not expect AS 1301 communications to surface in the audit report an investor reads; they are a separate channel, and a clean audit opinion is not evidence that no significant unusual transactions or critical accounting judgments were discussed with the committee. Conversely, an audit committee that never receives these communications in a documented form has a process gap independent of whatever the public opinion says.

What to check before you decide

Before treating a public audit opinion as the complete record of auditor-committee communication, check the following against the company's own governance practices:

• Does the audit committee have a documented record of receiving critical-accounting-policy and significant-unusual-transaction communications each audit cycle?
• Is the engagement letter, which AS 1301 requires be executed annually, current and on file?
• Were any alternative GAAP treatments discussed with management disclosed to the committee, and is that distinct from what appears in the notes to the financial statements?

AS 1301 governs a private conversation the statute already required in outline; its value to a founder is knowing that conversation exists and asking whether it is actually documented.