Harrish & Co. is an SEC issuer audit client with an
Audit Committee Charter that outlines use of the ad-hoc
pre-approval method. Tiffany, an audit manager on the engagement
identified that the team did not appropriately obtain
Audit Committee pre-approval for the tax services that were
provided to Harrish & Co. during the prior year. The Audit
Committee chair, who is the committee’s delegate for pre-approval
of services, pre-approved the services, but they
were not then presented to the full Audit Committee at their
next scheduled quarterly meeting. Let’s listen to Tiffany
discuss the findings and next steps with Brody, the lead
audit engagement partner.
Tiffany: After our second quarter Audit Committee meeting, tax
compliance services were provided to Harrish & Co.
Because these services popped up after our regular quarterly
meeting, we didn’t obtain full Audit Committee pre-approval for them.
Brody: I remember that request. Didn’t we receive the Audit
Committee’s pre-approval before the team engaged in the services?
Tiffany: We received the Audit Committee chair’s pre-approval, but it
looks like we didn’t present the services to the full Audit
Committee at its next meeting.
Brody: That’s not good. We’re required to timely report services
pre-approved by the delegate to the full Audit Committee, to
provide full transparency. So, we definitely should have
informed them about these services already. These were tax services, right?
Tiffany: Yes, tax compliance services.
Brody: Oh… Then on top of the Audit Committee pre-approval issues,
because this was a tax service it looks like PCAOB Rule 3524
comes into play.
Tiffany: We did provide appropriate information to the delegate to
satisfy the Rule 3524 requirements. Isn’t that sufficient?
Brody: We need to describe the services in writing to the full
Audit Committee, including fee structure details. We need to
discuss those services with them and then document the
discussion in the audit workpapers.
Tiffany: So, because we didn’t go to the full Audit Committee,
Rule 3524 was violated?
Brody: That’s right. Addressing all required steps with just the delegate
is not enough.
Tiffany: That makes sense now. But boy I can’t believe one small
oversight can turn into multiple issues. What steps do we
need to take now?
Brody recognizes that both the SEC and PCAOB pre-approval
rules were violated as the team did not present and discuss
the tax services to the full Audit Committee. Let’s see what he decides to do.
Brody: Okay, I have reported what happened to Independence and
they informed me that we must request retroactive approval
of the tax services and communicate the violations in
writing to the Audit Committee.
Tiffany: Ok. I’ll reach out to Independence. We’ll draft the
communications in preparation for our next meeting.
Brody: Thank you. Please be sure to include a request for
confirmation that our objectivity, impartiality of judgement
and professional skepticism were not impaired as a result of these violations.
Tiffany: Will do. Is there anything else we need to do internally
regarding the violations?
Brody: Yes. We have to work with Independence to prepare a memo to
include within the audit workpapers. It will document the
substance of the discussion with the Audit Committee
regarding the impact that the tax services had on the firm’s independence.
Brody reported the violations to the Independence Group and
took necessary action to address the Audit Committee pre-approval
and PCAOB Rule 3524 violations. By raising the issue,
Brody gave voice to the firm’s values and built trust
with the client that we will inform them when issues arise.