AS 2610: Predecessor and Successor Auditor Communication

When a public company changes its independent auditor, a structured communication process is set in motion to ensure a smooth transition. This process is governed by the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard 2610. The standard facilitates an exchange of information between the outgoing (predecessor) auditor and the incoming (successor) auditor. Its primary goal is to equip the successor auditor with knowledge from the predecessor that could influence the decision to accept the new audit engagement, promoting the integrity of the audit process and the quality of financial reporting.

The Successor Auditor’s Communication Responsibilities

The responsibility to open the lines of communication is on the successor auditor. Before formally accepting an engagement to audit a new client, the successor is required by AS 2610 to contact the predecessor auditor. This initial contact is a mandatory procedural step designed to uncover information that might not be readily apparent from public filings or initial discussions with the prospective client. The entire process is contingent on the prospective client’s consent; the successor must obtain permission from the company’s management to have a discussion with the predecessor.

If the prospective client refuses to grant this permission, the successor auditor must carefully consider the reasons for the refusal and its implications on whether to accept the engagement. The successor must ask about matters that could bear on the integrity of management, any disagreements with management concerning accounting principles or auditing procedures, and the predecessor’s understanding of why the company decided to change auditors. A significant area of inquiry involves communications the predecessor may have had with the company’s audit committee related to fraud, illegal acts by the client, or significant deficiencies in internal controls. The responses received are a component of the successor’s risk assessment and decision-making process.

The Predecessor Auditor’s Response Obligations

Upon receiving an inquiry from a potential successor, the predecessor auditor has a professional obligation to respond. The general expectation under auditing standards is that the predecessor will provide a prompt and complete reply to the successor’s reasonable questions. The predecessor’s ability to share information is, however, bound by confidentiality. The predecessor auditor cannot disclose confidential client information without first obtaining specific consent from their former client. If the former client provides consent, the predecessor should be candid in their responses.

In situations where a predecessor’s response is limited, perhaps due to ongoing litigation or other unusual circumstances, they are not permitted to simply ignore the request. Instead, the predecessor must clearly state that their response is limited. This signal alerts the successor auditor that they are not receiving a complete picture, which is a significant factor in the successor’s decision to accept the engagement.

Reviewing Predecessor Auditor Workpapers

Beyond the initial required inquiries, the successor auditor may determine it is necessary to review the predecessor’s audit documentation, commonly known as workpapers. This review is a distinct step that typically occurs after the successor has accepted the engagement. The purpose is not to re-audit the prior periods but to gain a deeper understanding of the client’s accounting and financial reporting to plan the current year’s audit effectively.

Reviewing the workpapers allows the successor to obtain evidence related to crucial areas such as the opening balances of accounts at the beginning of the new audit period. It also provides insight into the consistent application of accounting principles over time and helps identify areas that the predecessor deemed to have high audit risk. Similar to the initial communication, the predecessor must obtain consent from the former client before allowing the successor to review these documents, and the predecessor should ordinarily make their workpapers available.

Handling Newly Discovered Information

The communication channel established by AS 2610 remains important even after the initial audit work begins. A specific protocol is triggered if the successor auditor’s procedures uncover information indicating a possible material misstatement in the financial statements that were audited by the predecessor. Upon finding such information, the successor auditor’s first step is to inform the appropriate level of client management. The client is then expected to arrange a meeting between all three parties—the successor auditor, the predecessor auditor, and management—to discuss the matter. The client is responsible for formally notifying the predecessor auditor of the potential issue.

If the client refuses to inform the predecessor or fails to arrange the necessary discussion, the successor auditor has further obligations. In this scenario, the successor should evaluate whether to resign from the engagement. This procedural safeguard ensures that potential misstatements in previously issued financial statements are not ignored and that all parties are made aware of information that could impact their respective responsibilities.