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Accounting Horizons Vol. 21, No. 2 June 2007 pp. 165–187

Auditor Communications with the Audit Committee and the Board of Directors: Policy Recommendations and Opportunities for Future Research Jeffrey Cohen, Lisa Milici Gaynor, Ganesh Krishnamoorthy, and Arnold M. Wright SYNOPSIS: To contribute to the Public Company Accounting Oversight Board (PCAOB) project on auditor communications with audit committees and boards of directors, we present in this paper a review of relevant academic literature. We also identify promising future research opportunities for the academic community. We specifically focus on how the communication process may affect overall financial reporting quality, internal controls, control environments, and external auditors’ performance, as well as matters that potentially impact financial reporting and should interest the PCAOB (e.g., in the area of management discussion and analysis). We specifically link the findings from academic research to the discussion questions posed by the PCAOB in its 2004 briefing paper. Several potential implications of the findings should also interest standard-setters and regulators addressing issues related to corporate governance and financial reporting quality. Keywords: communication between audit committees and external auditors; financial reporting quality; corporate governance; board of directors; internal control reports.

Jeffrey Cohen is an Associate Professor at Boston College, Lisa Milici Gaynor is an Assistant Professor at the University of South Florida, and Ganesh Krishnamoorthy is an Associate Professor and Arnold M. Wright is a Professor, both at Northeastern University. We acknowledge the research assistance of Emily Cunningham, Chris Jones, and Elizabeth Parsons, and the helpful comments received from Jean Bedard, Joe Carcello, Dana Hermanson, Lori Holder-Webb, Gary Holstrum, Linda McDaniel, and Greg Scates. Professor Gaynor also thanks the McDonough School of Business, Georgetown University for funding. Note: The views expressed in this paper are those of the authors and do not reflect an official position of the American Accounting Association (AAA) or the Auditing Standards Committee of the AAA’s Auditing Section. In addition, the paper does not necessarily reflect the views of the PCAOB or its staff, and the author team was not selected or managed by the PCAOB.

Submitted: April 2006 Accepted: February 2007
Corresponding author: Arnold M. Wright Email:



Cohen, Gaynor, Krishnamoorthy, and Wright

INTRODUCTION n 2004 the Public Company Accounting Oversight Board (PCAOB) began considering a standard to improve guidance on the communication process between external auditors and audit committees. Historically, many have considered the extent and the effectiveness of the communication between external auditors and audit committees to be limited (e.g., Cohen et al. 2002). However, the Sarbanes-Oxley Act of 2002 (SOX, U.S. House of Representatives 2002) expands and emphasizes the role of audit committees in ensuring the quality of reported financial results. This increased responsibility requires improved and expanded dialogue between audit committees and external auditors.1 The PCAOB’s Standing Advisory Group (SAG) has discussed this communication process and has considered a list of PCAOB-developed discussion questions (DQs) about the existing process and the need for changes (see Exhibit 1). In this paper, we review the extant academic literature to address relevant issues pertaining to communications between external auditors and audit committees on matters relevant to the integrity of the financial reporting process as well as to the DQs.2 Specifically we examine literature regarding communications pertaining to overall financial reporting quality, internal controls, the external auditor’s job performance, the form of communications (oral or written), and communications pertaining to the Management’s Discussion and Analysis...
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