How Audit Committees Assess Auditors

Increased professional representation on boards of directors influences cooperation and the assessment of auditor performance.

Handelszeitung Article, 7 February 2019

The audit committees are assuming an increasingly important position in the corporate governance of listed and larger companies. Audit committees are usually composed of non-executive and independent board members, most of whom have experience in finance and accounting. Initially intended primarily to prevent corporate scandals, these days audit committees are an important element when it comes to the appraisal of annual reports and the announcement of results, the internal control system and, not least, the work of internal and external auditors. But how exactly is the auditor's performance assessed?

A number of mandatory indicators have already been specified for measuring the quality of the audit. For example, the International Trade Association IAASB has developed a general concept for the quality of audits, known as the Audit Quality Framework. Likewise, the Public Company Accounting Oversight Board (PCAOB) defined various indicators that enable audit committees to assess audit quality. Likewise, in Switzerland, the Swiss Federal Audit Oversight Authority (RAB) has developed the Audit Committee Guide, a guideline designed to assist audit committees in their cooperation with auditors. In practice, it is evident that three areas make a significant contribution to the high-quality work of external auditors.

Possible audit quality indicators

Close cooperation

It surely comes as no surprise that the first of these is the interaction between the audit committee and the auditor. Both are answerable to the shareholders: the audit committee as the supervisory body and the statutory auditors as the inspection body. Thus a relationship of trust must exist - in particular between the chairman of the audit committee and auditor management. In addition to the essential technical expertise and independent approach, it is important that both sides should work closely together and trust one another. Deloitte takes things one step further here: The assignment manager and audit team are very carefully selected for each company using the internally developed Deloitte Business Chemistry approach. This differentiates between different working styles and personality traits.

Secondly, the periodic assessment of audit performance, based on qualitative and quantitative evaluation criteria, is a key element in the quality of the audit. It is recommended that an audit committee should define so-called audit quality indicators to measure how the statutory audit meets expectations (see table). Such indicators could include, for example, the audit team's industry experience, the level of involvement of specialists, or the results of regulatory inspections. It is important that the indicators are developed in accordance with the expectations of the audit committee. In particular, it is necessary to ensure that management is aware of what the audit committee expects from the audit and that it assists the statutory auditors appropriately during the audit. This approach also promotes clear lines of communication between the audit committee, management and auditors.

Regular exchange of information

Thirdly and finally, the exchange of information between the audit committee and the statutory auditor over the course of the year is extremely important. Exchanges with the audit committee, for example during so-called private sessions, serve to correctly record expectations and report on them at a later point. In practice, it has also proven effective for the auditors regularly to attend the meetings of the audit committee. The audit plays an essential part in building trust. Thanks to innovative technologies, huge amounts of data can now be collected and evaluated. In addition, improved reporting methods provide completely new insights and opportunities for intervention in a company. Likewise, a high-quality final audit also requires well-trained professionals with a great deal of practical experience. Finally, the audit committee also plays a key role in ensuring that the auditors can work in a targeted manner and carry out their duties as effectively as possible in a measurable way in the context of corporate governance.

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