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Corporate Governance

Overseeing the external auditor

The enactment of Sarbanes-Oxley in the United States, and similar laws elsewhere, required external auditors to report to the audit committee, rather than to management – fundamentally changing this relationship. Since then, Tapestry's audit committee network members have explored opportunities to enhance their relationships with their external audit firms.

Network members have engaged in continuous discussions about several potential points of tension in the relationship, including the regular rotation of the audit partner; audit scope, fees, and non-audit services; interaction with the audit firm's national office; evaluating the auditor; and managing overlaps with internal audit.

After the financial crisis, the audit profession came under scrutiny once again, with some observers charging that external audit firms are not sufficiently independent of management or that there is an issue with audit quality. In response to these pressures, Tapestry's audit committee networks have held several discussions focusing on evaluating audit quality and the external audit firm – including a tool developed by the Center for Audit Quality (CAQ) and the Audit Committee Collaborative, which includes Tapestry Networks – to assist audit committees in this process. 

EXPLORE THIS ISSUE:

  • As new regulatory standards take effect, audit committees formalize assessments of their external auditors

    Audit chairs agree that evaluating the work of the external auditor is a core responsibility of the audit committee, although there is no single set of metrics that universally indicates a high-quality audit. The relationship with the audit partner and team built on honest communication is a crucial variable in audit quality, and one that audit committees must gauge on a more intuitive level. As regulators and other external stakeholders pay greater attention to the audit committee’s responsibilities, reporting on the oversight of the external auditor will be increasingly important and will remain a focal point for audit chairs.

  • Audit chairs share effective strategies for evaluating the external auditor

    Evaluating the work of the external auditor is a core responsibility of the audit committee, although there is no single set of metrics that universally indicate a high-quality audit. Members of the Audit Committee Leadership Network agreed that the starting point is a relationship with the audit partner and team built on honest communication. Audit committee chairs find value both in determining what makes for a high-quality audit at their companies and how to best assess whether their auditors are meeting that standard. As external stakeholders pay greater attention to the audit committee’s responsibilities, reporting on the oversight of the external auditor will only increase in importance and should remain a discussion point for audit chairs.

  • Enhancing communication among investors, auditors and audit committees

    More than 40 representatives from audit committees, investment firms, and external auditors came together to discuss how audit committees oversee and evaluate the work of the external auditor. Investors asked for more information in auditor and audit committee reports on the tasks undertaken during the fiscal year, key audit matters, and how risk was prioritized. Some investors said enhanced disclosures could spur more engagement with audit committee chairs. However, several participants suggested legal and other impediments prohibit enhanced disclosure and engagement in many jurisdictions.

  • 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. 

  • Audit committee annual evaluation of the external auditor

    The Center for Audit Quality (CAQ) led the development of a new tool audit committees can use in their annual auditor assessment. The tool provides a brief, scalable approach to objectively evaluating auditor performance, making an informed recommendation to the board on whether to retain the auditor, and improving communication about external auditor oversight to bolster investor trust and confidence. Members of Tapestry's audit committee networks provided feedback to the CAQ during the development of the tool.

  • Evaluating the audit and the external auditor

    Scrutiny of the auditing profession by policymakers and regulators has raised the question of whether and how audit committees can use their evaluations of their companies' external auditors to improve the audit. ACLN members and Cindy Fornelli, executive director of the CAQ, explored how leading audit committees perform audit evaluations and discussed the importance of strong relationships with the auditor.

  • Evaluating audit quality and the external auditor

    European audit chairs discussed the auditor evaluation process, the specific criteria applied, and the trade-off between cost and quality.

  • The audit committee's relationship with the external audit firm

    Canadian audit chairs believe a constructive, open relationship between the audit committee and the external auditor is critical to an effective relationship.

  • The audit committee's relationship with the external audit firm

    Southeast audit committee network members discussed audit scope, audit fees and fees for non-audit services, strengthening working relationships with their audit firms, and evaluating their performance.

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