In June 2022, the AICPA released Statement on Auditing Standards (SAS) No. 147, “Inquiries of the Predecessor Auditor Regarding Fraud and Noncompliance With Laws and Regulations.”
Once SAS No. 147 is in effect, any AICPA member who's considering accepting an auditing engagement will be required to get authorization from a predecessor auditor's management to disclose any identified or suspected fraud or noncompliance with laws and regulations, also known as NOCLAR.
Predecessor auditor inquiries are designed to help AICPA members determine whether to accept an auditing engagement. Inquiries should focus on identified or suspected fraud involving management, employees who have significant roles in internal control or others when the fraud resulted in a material financial statement misstatement. Noncompliance or suspected noncompliance with laws and regulations that are more than clearly inconsequential should also be asked about.
Once an AICPA member agrees to an auditing engagement, they should carefully document their inquiries and the predecessor auditor’s full response. The AICPA’s “Code of Professional Conduct” requires members to cooperate with each other, including predecessor auditors. After the successor auditor asks the predecessor auditor's management to respond fully to their inquiries, the predecessor auditor is required to respond in a timely manner. The predecessor auditor’s responses to inquiries should be based on known facts, absent unusual circumstances, unless prohibited by applicable law.
In rare cases, predecessor auditors may not be able to fully respond to a successor auditor’s inquiries due to impending, threatened, or potential litigation; disciplinary proceedings; or other unusual circumstances. In these instances, the predecessor auditor should clearly state why they cannot fully respond.
If management does not authorize the predecessor auditor to respond to inquiries, or if they limit the predecessor auditor’s responses, the successor auditor is required to evaluate the reasons and weigh the pros and cons of accepting the engagement.
Agreeing to an auditing engagement is a big decision, and SAS No. 147 can help AICPA members gather the information they need to make an informed decision. SAS No. 147 will take effect for financial statement periods starting June 30, 2023.
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