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Audit policy

Following the financial crisis and the ensuing recession, the audit profession, and its relationships with management and audit committees have come under intense scrutiny from regulators, policymakers, and some investors. Changes are being considered that would profoundly impact auditors and their clients.

The audit reform legislation recently finalized by the European Union mandates a 10-year rotation of the auditor for all public interest entities (PIEs), which is extendable through Member State decision to 20 years with retender at 10 years or 24 years with joint audit. The legislation also restricts the non-audit services that a PIE can procure from its auditor, including services relating to tax, management and decision-making, and finance. For non-audit services that are still permitted, the legislation caps the fees at 70% of the fee for the statutory audit. Meanwhile, the Netherlands enacted legislation imposing an eight-year rotation period effective January 2016 and restrictions on non-audit services.

In the United States, the audit profession's regulator, the Public Company Accounting Oversight Board (PCAOB), uncovered persistent problems during its audit firm inspections that raised its concerns about auditor independence and skepticism. In response, the PCAOB published proposed rules on the auditor's reporting model, and will publish a concept release on audit quality indicators.

Tapestry's audit committee networks play a constructive role, informing regulators and policymakers of their work and ensuring that the voice of audit committees is heard in the policymaking process regarding the audit profession. Many members have met with policymakers or expressed their views by writing comment letters.

EXPLORE THIS ISSUE:

  • Dialogue with the Committee of European Auditing Oversight Bodies

    EACLN members discussed the work of the Committee of European Auditing Oversight Bodies (CEAOB) with its chair, Ralf Bose. The CEAOB is a forum in which national regulators can cooperate on effective and consistent regulation, through information sharing and joint resolution of implementation issues. The CEOAB is reaching out to audit committees to understand their role in audit quality and how regulators can assist them. Mr Bose and EACLN members agreed that trilateral conversations among regulators, audit committees and audit firms would be beneficial for audit quality.

  • Dialogue on audit policy

    EACLN members discussed audit policy and regulation with Alain Deckers of the European Commission, Paul George of the UK Financial Reporting Council, and Tim Volkmann of the German Auditor Oversight Commission. They discussed the implementation of the EU audit legislation, including mandatory rotation and reporting on audit committee performance. The audit chairs also described how they evaluate their own performance, and the audit regulators described their efforts to assist audit committees. Participants agreed that the dialogue should continue.

  • A dialogue with Gary Retelny, president and CEO of ISS

    Faced with the task of voting on many companies’ proxies in a short period of time, institutional investors of all sizes continue to rely upon ISS and its competitors for both proxy voting advice and execution.ISS’s reach is only expanding as it grows beyond its proxy advisory services into a global governance company.In a meeting with ISS President Gary Retelny, EACLN members recognized the importance of developing a relationship with ISS, both to ensure that their voices are heard in its policy process and to serve as a check on the accuracy of its work.Mr. Retelny, for his part, encouraged board directors to play that role and participate in the process.

  • Oversight of special investigations

    Bart Friedman, a senior partner at the law firm of Cahill Gordon & Reindel, joined ACLN members for a discussion of how audit committees oversee special investigations. Mr. Friedman and the members discussed the decision to launch an investigation and reviewed the criteria for hiring outside counsel. They discussed communication with other board members, management, and the external auditor. They also addressed the issue of self-reporting to the government and to the broader public, including shareholders.

  • A dialogue with Gary Retelny, president and CEO of Institutional Shareholder Services

    Faced with the task of voting on many companies’ proxies in a short period of time, institutional investors of all sizes continue to rely upon ISS and its competitors for both proxy voting advice and execution. ISS’s reach is only expanding as it grows beyond its proxy advisory services into a global governance company. In a meeting with ISS President Gary Retelny, ACLN members recognized the importance of developing a relationship with ISS, both to ensure that their voices are heard in its policy process and to serve as a check on the accuracy of its work. Mr. Retelny, for his part, encouraged board directors to play that role and participate in the process.

  • The evolution of audit regulators

    Independent regulation of auditing is evolving as regulators address important challenges and forge stronger ties with stakeholders.  The PCAOB’s Lew Ferguson and Jay Hanson explained how the PCAOB and its counterparts internationally have improved their reporting and coordination of efforts, working on a bilateral and multilateral basis, increasingly through IFIAR, a growing international forum for audit regulation.  One priority for regulators has been to strengthen relations with audit committees, an area in which regulators in some nations have taken significant steps. 

  • Analytics, cybersecurity, and foreign affairs

    The Midwest Audit Committee Network, whose members are audit committee chairs drawn from leading public companies, met in Chicago on June 9, 2015. Rob Campanile, executive director in EY’s analytics performance improvement practice, joined members to discuss the use of analytics in auditing and financial reporting. In a second session, members discussed cybersecurity challenges with Matt Hynes, head of the cybersecurity practice for EY’s Central Region. Over dinner, members engaged in a conversation about the Middle East with Joshua Walker, vice president of APCO Worldwide. 

  • Audit committee performance, tax risks, and ACA implementation

    On May 12, 2015, members of the South chapter of the West Audit Committee Network met in Santa Monica, CA, to consider the characteristics of high-performing audit committees and ways to improve committee performance. In a separate session, members were joined by EY partners Jeff Kaufman, the firm’s Southern California tax leader, and Juliette Meunier, an employee benefits expert, to discuss emerging tax risks and implementation of the Affordable Care Act (ACA). 

  • Mandatory audit firm rotation: The Dutch experience

    Audit chairs from Europe and North America met with several Dutch audit chairs and auditors to discuss how they are coping with the recent audit reforms in the Netherlands, which impose audit firm rotation and restrictions on non-audit services. Managing the tender and transition process is best handled with a multiyear, multiservice strategy that includes sufficient overlap between audit firms. Both companies and auditors need to ensure that pressure on fees and staffing constraints do not undermine audit quality. 

  • Reassessing the content of the audit committee report

    Interest in enhanced audit committee reporting has increased in tandem with interest in improving overall board communication with shareholders. One way the audit committee can directly engage is to revisit the charter and report clearly on how they are fulfilling its mandates. Audit committee chairs address the proactive efforts to enhance understanding of the audit committee's work.  

  • Audit firm retendering and rotation

    Despite the intensive regulatory focus on how mandatory firm rotation could improve audit quality, there has been a lack of clarity on how this will be adopted by companies. With new requirements to rotate the audit firm spreading across Europe, audit chairs of European companies and leading experts and academics from Italy met to discuss emerging best practice around retendering the audit and managing the transition from the outgoing audit firm to the incoming firm. 

  • Enhancing the audit committee report: a call to action

    In collaboration with a number of nationally recognized governance organizations dedicated to enhancing audit committee performance, Tapestry Networks provides a report that encourages increased audit committee transparency. The “Call to Action” takes a practical approach to enhanced audit committee disclosures. It includes examples of emerging voluntary practices and cites studies that examine recent practice trends.

  • Enhancing audit committee reporting

    Audit committee chairs believe there is an incomplete understanding of how audit committees actually operate, based on discussions with policymakers on both sides of the Atlantic. Current reporting practices vary significantly from company to company. Could enhanced reporting from the audit committee become a vehicle for communicating more effectively about the work of the committee with policymakers and shareholders?

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