Audit work done by firm other than ext auditor 2423
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Hi. I have a question related to Section 301 of the SOX Act:
‘The audit committee of each issuer, in
its capacity as a committee of the board of directors, shall
be directly responsible for the appointment, compensation, and
oversight of the work of any registered public accounting firm
employed by that issuer (including resolution of disagreements
between management and the auditor regarding financial
reporting) for the purpose of preparing or issuing an audit
report or related work, and each such registered public
accounting firm shall report directly to the audit committee.’
Currently our company obtains pre-approval from the Audit Comm for all services provided by our external auditor, which is clearly required. I am wondering if the language above would extend the requirement to audit reports (e.g. statutory audit, or any type of audit that results in an audit report) performed by other audit firms. For example, if we hire another firm to do a little audit in order to qualify for some government grant / rebate program in another country, I would think we also need to obtain Audit Committee pre-approval.
Thoughts? What is the practice in your company? Thanks.
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Section 301 of the Sarbanes-Oxley Act amends the Securities Exchange Act. The objective of both the Sarbanes-Oxley Act and the Securities Exchange Act is the protection of investors who invest in the securities of public companies (i.e. securities registered with the SEC).
As a consequence, I think that the SOA and the SEA are primarily concerned with audit services for auditing the consolidated financial statements that are filed with the SEC and of internal control over financial reporting. They do not care about audits of statutory financial statements (in the case of a foreign private issuer they may even be based on local GAAP) or specific audits required by other regulatory agencies or laws (e.g. banking or insurance supervisors).
The wording audit committee of ‘each’ issuer in conjunction with the wording ‘any registered public accounting firm
employed by that issuer’ suggests that the issuer may use more than one registered public accounting firm. But only audit firms that want to audit the consolidated financial statements of issuers that file them with the SEC need to be registered with the PCAOB.
I am based in Europe and currently do not work for a company whose securities are registered with the SEC that is thus subject to the SOA. So my answer is a purely theoretical legal analysis based on the intent of the law.
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Hi. After a year, I am still after this topic as it is still bothering me. I would like to see if there are any other thoughts out there. Thank you gmerkl for the feedback, and I do think it is very logical.
I have been looking for more guidance and saw the following that are not quite in-line:
I. Excerpt from SEC Final Rule 33-8220:
'B. Responsibilities Relating to Registered Public Accounting Firms- Scope of the Requirement
…Accordingly, we are adopting as proposed the requirement that the audit committee of a listed issuer will need to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the issuer , and the independent auditor will have to report directly to the audit committee. These oversight responsibilities include the authority to retain the outside auditor, which includes the power not to retain (or to terminate) the outside auditor. In addition, in connection with these oversight responsibilities, the audit committee must have ultimate authority to approve all audit engagement fees and terms.
II. Excerpt from SEC’s FAQ summary released in August 2007:
‘Question 2 (issued August 13, 2003)
Q: An issuer that is a listed company has foreign subsidiaries that are consolidated. The issuer’s ‘principal’ auditor is a member firm of a network of international accounting firms. Some of the foreign subsidiaries have statutory audits performed and, in some cases (depending upon location, size, etc.) the statutory auditor may be a firm outside the member firm’s network. Any statutory audits performed by member firms are subject to audit committee pre-approval requirements. Do the issuer’s pre-approval requirements run to the statutory non-network auditors for the foreign subsidiaries or should the issuer’s pre-approval requirements run just to the ‘principal’ audit firm?
A: The Commission’s rules relating to listed company audit committees (see Release No. 33-8220, ‘Standards Related to Listed Company Audit Committees’) require audit committees to approve all audit services provided to the company, whether provided by the principal auditor or other firms. Therefore, the issuer’s pre-approval requirements run to the statutory auditors for the foreign subsidiaries. However, failure of the audit committee to pre-approve audit services to be provided by another firm would not affect the independence of the principal auditor.’
The first quote would lead me to believe that any time we hire an accounting firm to do audit/attest/review services (basically anything that results in an opinion being rendered), we need the audit committee’s pre-approval. Then the second quote sounds to me that they are only concerned about audits and not reviews and attestation.
I am not trying to split hair but we do have situations where we hire other accounting firms to do minor attestation services (mainly in non-US countries) for local requirements. I would think the spirit of the SEC rules deal with US filings, but the Q-and-A (second quote) clearly states that foreign stat audits performed by ANY auditor need to be pre-approved. So I remain confused.
I tried looking for more clarification but just could not find anything and I have pretty much exhausted my resources. I tried checking with our legal counsel and external audit but neither was sure about this.
Any thoughts would be greatly appreciated. What is your company’s practice?
- Scope of the Requirement
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Keep in mind that the question in the Q and A was only asking about the pre-approval of statutory audits of foreign subsidiaries by other audit firms than the principal auditor.
As a consequence, the answer only refers to the question (i.e. they did not ask about review or attestation services). This does not mean that reviews and attestations do not need to be pre-approved.
You mention situations where you hire other accounting firms to do minor attestation services (mainly in non-US countries) for local requirements. There is a de-minimus exception for small services (amounts) that do not need to be pre-approved and that can be approved after they have already been performed. Look at this. It may reduce buerocracy by bundling their approval together ex-post.
The spirit of the rules around pre-approving non-audit services is to protect the independence of the principal auditor who audits the consolidated financial statements, who audits the effectiveness of internal control over financial reporting and who performs the reviews of quarterly financial statements (i.e. all audit services that are required by SEC rules and US Securities law). However, in the staff Q and A they seem to have the view that his also extends to other audit firms than the principal auditor although there is no risk of impairing the independence of the principal auditor.
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The spirit of the rules around pre-approving non-audit services is to protect the independence of the principal auditor who audits the consolidated financial statements, who audits the effectiveness of internal control over financial reporting and who performs the reviews of quarterly financial statements (i.e. all audit services that are required by SEC rules and US Securities law). However, in the staff Q and A they seem to have the view that his also extends to other audit firms than the principal auditor although there is no risk of impairing the independence of the principal auditor.
Since the rules were developed to cover public, audited financials filed with the SEC, I would take the position that audit work done for any other reason would not need to be pre-approved as long as neither the Company nor the auditor attesting to statements filed with the SEC rely on work performed by the auditor doing limited-scope audit work.