One of the key responsibilities of the Audit
Committee is to appoint and oversee the auditor and ensure
they remain independent. For SEC issuer audit clients and
their consolidated entities, Audit Committees are required
to pre-approve all services before KPMG is engaged.
Additionally, the new IESBA standards require us to obtain
concurrence from the Audit Committee for proposed non-assurance
services for public interest entity audit clients
(which include SEC issuers), and any entities controlling or
controlled by the audit client. This means services for
incremental entities now require concurrence in advance from
the Audit Committee – namely upstream controlling entities
and downstream controlled entities that are not consolidated.
IESBA requires the Audit Committee to be informed of and
concur that each non-audit service does not impact the
firm’s independence before KPMG is engaged. To help the
Audit Committee fulfill their responsibility, we must
provide them with sufficient information about the services
and their potential impact on our independence.
There are a number of steps that need to be taken to be in
compliance with the SEC’s Audit Committee pre-approval rules,
the additional requirements associated with PCAOB Rules 3524
and 3525 and IESBA’s new concurrence requirements.
Adhering to these rules, requires that professionals fully
understand the requirements.
SEC rules permit two methods of obtaining pre-approval for
services provided to SEC issuer audit clients and their
subsidiaries: the policies and procedures approach and the
ad-hoc approach. We can identify which pre-approval method
is used by checking the proxy statement or the Audit
Committee Charter. We should also discuss with the Audit
Committee to ensure there is a common understanding of the
expected approach. IESBA provides flexibility in how
communication requirements are met. Procedures for obtaining
concurrence may be established under a general policy, on an
individual engagement basis, or on any other agreed basis.
When the Audit Committee uses the policies and procedures
method of pre-approval, SEC rules require that we
subsequently notify the Audit Committee on a timely basis,
usually at the next scheduled meeting, when a previously pre-approved
service is being provided. In addition, if a
proposed service is not approved under the Audit Committee’s
policies and procedures, separate ad-hoc pre-approval would
need to be obtained prior to beginning the service.
A similar approach under the IESBA standards would be the
general policy approach, but unlike the SEC, IESBA does
not require subsequent reporting of services that have been
engaged pursuant to concurrence under a general policy.
When employing the SEC’s ad-hoc method of pre-approval, each
specific service requires approval by the Audit Committee in
advance of the service being provided.
If the Audit Committee allows for pre-approval by an Audit Committee
member delegate, the team must then present the service to
the full Audit Committee on a timely basis – usually at the
next scheduled meeting. IESBA’s individual engagement basis
method is similar to SEC’s ad-hoc method, where concurrence is
required for each specific non-audit service in advance of
the service being provided. There are various templates
available on Alex to help teams comply with pre-approval methods.
The slides in the Audit Committee presentation
templates should be tailored to describe the relevant services,
as well as considerations specific to the client.
There are additional requirements in PCAOB Rules 3524
and 3525 that audit engagement teams must comply with when
seeking pre-approval to perform permissible tax
services and non-audit services related to internal control
over financial reporting for an SEC issuer audit client or
its subsidiaries.
To comply with part “a” of PCAOB Rules 3524 and 3525, complete
written descriptions need to be provided by the audit team
to the Audit Committee for all related tax and non-audit
internal control related services, including fee structures
when tax services are proposed. Fee arrangements should be
based on a fixed fee or on actual time incurred and must be
described to the Audit Committee as such. Written
descriptions provided by the client’s management or other
client teams, such as internal audit, would not satisfy the
requirement for the audit team to provide the written description.
To comply with part “b” of PCAOB Rules 3524 and 3525, we must
discuss with the Audit Committee the nature and scope of
services and their potential effects they may have on our
independence. The sufficiency of the written descriptions
that are provided play an important role when having the
discussion with the Audit Committee. When written
descriptions are incomplete, for example, if they do not
include all components of the service or required
information on the fee structures, for tax services, there’s
usually a domino effect, resulting in incomplete discussions
with the Audit Committee. Because these two requirements go
hand in hand, extra attention and scrutiny of written
descriptions is warranted.
Remember, to fulfill part “c” of PCAOB Rules 3524 and 3525,
we are required to document the substance of the discussion
with the full Audit Committee. Be sure not to miss this step
because all elements must be addressed to satisfy rule requirements.
Our audit documentation should include both
the written description provided to the Audit Committee AND
the documentation of the discussion.