Auditor independence has long been a foundational element of audit quality, and recent findings from the Public Company Accounting Oversight Board (PCAOB) underscore the importance of auditor independence and the need to be vigilant in maintaining it.

In September 2024, the PCAOB published a Spotlight report highlighting auditor independence issues observed during the Board’s most recent inspections of PCAOB-registered public accounting firms. This Spotlight report follows the PCAOB’s 2023 revisions to its inspection reports that introduced a new section, Part I.C, to describe instances of noncompliance with PCAOB auditor independence rules and potential violations of SEC auditor independence rules.

Overall, the Spotlight report serves as a critical reminder for companies and their audit committees to do their part in maintaining the independence of their auditor.

The Spotlight report explains that auditor independence remains an area in which the PCAOB commonly identifies deficiencies in the course of its inspections.  Top deficiencies related to audit committee pre-approval of services, ineffective quality control systems around auditor independence and failures of individual auditors to disclose financial interests in their audit clients.  The Spotlight report also flagged concerns about situations in which audit firms provided prohibited non-audit services to their audit clients, potentially compromising their independence.  The PCAOB specifically described areas in which audit firms failed to sufficiently obtain pre-approval from audit committees for non-audit services or inadequately communicated the scope of such non-audit services prior to engagement.  Prohibited non-audit services observed in inspections include:

• Maintaining or preparing the client’s accounting records.
• Preparing source data underlying the financial statements.
• Drafting the client’s financial statements.
• Printing and assembling annual reports.
• Offering whistleblower services.
• Providing prohibited tax services to individuals in financial reporting oversight roles at the audit client.

In addition to highlighting potentially problematic areas to watch for, the PCAOB suggests several independence-related considerations for audit committees to bear in mind as they discharge their oversight responsibilities, including that audit committees should:

• Consider whether any services provided by the audit firm may impair the audit firm’s independence in advance and whether there are any prohibited financial relationships between the audit firm and the company.
• Consider whether the public company’s policies and procedures require that all audit and non-audit services are brought before the audit committee for pre-approval.
• Assess whether the company’s pre-approval policies and procedures are sufficiently detailed as to the particular services to be provided.
• Not approve contingent fee or commission arrangements with auditors.
• Assess the auditor’s processes for identifying prohibited relationships with the audit client.
• Consider whether the company has policies and procedures in place to proactively alert the auditors about proposed M&A activity that could affect auditor independence determinations.