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 work with 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.